Lease (IFRS 16)

Question 1

IFRS 16 effectively treats all leases as capital
leases with two exceptions. What are
they?

Answer 1

• Short-term leases of less than 12 months
• Low value leases less than $5K

Question 2

How is the cost of the Right of Use (ROU) asset
calculated?

Answer 2

The ROU asset is recognized at cost, which includes:

• The initial measurement of the lease liability
• Any lease payments made at or before the
  commencement date, less any lease incentives
  received
• Any initial direct costs incurred by the lessee
• An estimate of costs to dismantle and remove
  the ROU asset or restore it to the condition
  required under the terms of the lease

Question 3

How is the lease liability initially measured?

Answer 3

• The lease liability is initially measured at the
  present value of all the future payments.
• The discount rate is the interest rate implicit
  in the lease if it is readily determinable and
  the incremental borrowing rate if it is not

Question 4

What components are included in the calculation of future payments when measuring the lease liability ?

Answer 4

• Fixed lease payments
• Variable payments that are based on an index or a
  rate (calculated using the index or rate in effect at the commencement date)
• Bargain purchase options - only if they are expected to be exercised
• Guaranteed residual value – only the amount that is
  actually expected to be paid under the guarantee i.e. the guaranteed amount minus the expected residual
• Termination penalties – only if they are expected to be paid

Question 5

What components are not included in the calculation of future payments when measuring the lease liability ?

Answer 5

• Variable payments that are NOT based on an index or a rate e.g. payments based on sales volume
• Bargain purchase options that are NOT expected to be exercised
• Unguaranteed residual value
• Termination penalties that are not expected to occur
• Non-lease costs such as maintenance, unless the lessee elects as a practical expedient not to separate them from the lease payment

Question 6

How does the lessee account for the lease subsequent to initial recognition?

Answer 6

• Can be measured using cost or revaluation model
• Under the cost model:
  ‒ The lessee records amortization of the asset and
  interest (accretion) expense on the lease liability

‒ The asset is amortized over the shorter of the
lease term and the asset’s useful life

‒ The cash payment are treated like loan payments
split between liability reduction and interest
expense using the effective rate method

Question 7

What are the criteria for a lessor to classify a lease as
Finance vs. operating?

Answer 7

• Title transfers to the lessee by the end of the lease
  term.
• A bargain purchase option exists, and at the date the lease begins, it is reasonably certain that the lessee will exercise it.
• The lease term is of such a duration that the lessee will receive substantially all the economic benefits
  expected to be derived from the use of the leased
  property over its lifespan.
• The present value (PV) of the minimum lease
  payments amounts to substantially all of the fair
  value (FV) of the asset.
• The asset is specialized in nature and only the lessee can use it without major modifications.

Question 8

How are finance leases accounted for by the
lessor?

Answer 8

• For manufacturer and dealer leases:
  ‒ Record as a sale
  ‒ Sales revenue = lesser of fair value of asset and PV of MLP computed using market rate
• For other finance leases
  ‒ Record a lease receivable = PV of payments under the lease
  ‒ Record interest income over lease period