IFRS 16: Leases

Question 1

Definition

Answer 1

Keywords: Contract, right to control use, identifiable asset, consideration.
Contract contains a lease if :
- Conveys the right to control/use an identifiable asset for a period of time in exchange for consideration.

Question 2

Recognition criteria

Answer 2

Right to control:
In sequence: 
- Identifiable asset 
- Substantially all economic benefit 
- Right to direct the use of asset

Question 3

Substantive rights to substitute (SRS)

Answer 3

It is not a lease contract when:

• It contains terms that grant the lessor substantive rights to substitute with an alternative asset throughout the period of the lease (no control)
• Supplier benefit economically from substituting assets

Question 4

Contract with multiple components

Answer 4

Contracts are combined with different PO when identified assets are not distinct, which are:

1. Assets where the customer can benefit individually or together with other resources
2. The components are not interrelated with one and another in the contract

Components identified are accounted for separately (lease & non lease) and its consideration payable are allocated based on the relative SASP.

Question 5

Combination of contracts

Answer 5

An entity shall combine two or more contracts as a single contract if one or more of the following criteria are met:

• Contracts are negotiated as a package
• Consideration paid depends on the price and performance of the other contract
• RouA conveyed in the contracts form a single lease component

Question 6

Lease term as the non-cancellable period of a lease

Answer 6

Both criteria must be met:

• Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option
• Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option

through significant economic incentive to exercise purchase option.

Question 7

Initial measurement

Answer 7

Dr: Rou Asset

• Including amount of any outstanding lease liability
• Lease payments made before or on commencement (deposits) (-) any incentives
• Initial direct cost and established site reconstruction and dismantling cost.

Cr: Lease Liability
PV of lease liability not paid at commencement date (discounted @ EIR)
- Fixed payment (less any incentives)
- Variable payment (index or rates @ commencement date)
- Payable amount to pay by lessee under residual value guarantees
- Exercise price of purchase option (if RC)
- Payment of penalties for terminating

Question 8

Exemption from the initial measurement

Answer 8

• Lease term is <1 year
• Underlying value is low (new)

Expense to SOPL (SLM, Systematic Basis)

Question 9

Re-measurement of Lease Liability

Answer 9

When changes in lease payment due to:
S1: Original contract: Variable payment and GRV
- Revise LL using original disc rate to calculate PV

S1: Original contract: Purchase order or change in lease term
- Revise LL using revised disc rate to calculate PV

S2: Revised LL - Current Liability (LL), and adjust to Rou A

When changes in lease payments due to:
S1: Not in original contract (modification) due to:
- Increase or decrease in scope or increased consideration at SASP.
Yes: Treat as a separate contract
No: Re-measure the PV of LL @ modified date using revised disc rate.
S1: Reduce the scope of the lease liability
- Dr LL
Cr Rou A
Cr SOPL

S2: Revise LL (PV)
Dr RouA
Cr LL

Question 10

Lessor

Answer 10

1. Lease transfers all Risk and Reward to lessee = Finance Lease 
Measurement @ commencement: 
Dr Lease Receivable = PV of LP + PV of UGRV
Cr PPE (Derecognize Asset)

Subsequent Measurement:
Dr Lease Receivable
Cr Finance income (SOPL)

Upon payment:
Dr cash
Cr Lease receivable.

2. Lease that does not transfer all Risk and Reward of asset
   Accounted for as rental income on (SLM/Systematic Basis)
   - Recognize and depreciate over EUL
   - Credit rentals to SOPL. SLM over lease term
   - Both Lessor and Lessee recognize the same asset in FS.

Question 11

Sales and Leaseback

Answer 11

Step 1 = Check if the transaction makes a sale (IFRS 15) 
Answer: Not a sale
Lessee: Continue to recognize asset and;
Dr: Cash 
Cr Finance liability 

Answer: Is a sale

• Derecognize asset transferred
• Account for Right of Use Asset at proportion of previous Carrying Amount (CA) = Rou retained
• G/L recognized on transferred rights only

If SP > FV = Additional financing (split at btw loan payment and market rate)
If SP < FV = Prepayment of LP & Rou A