Silvia, first of all, I highly appreciate your efforts. It replaced IAS 17 in January 2019. My question is it appropriate to recognise the rental income from October to December 2016 ($30,000) and then make full allowance for the rental receivable?. IFRS 16 requires contracts that IAS 17 … why did you include the interest and add it to the carried forward liability? therefore, we need to reverse the ROU and lease liability, the difference will charge to profit or loss as what item ? Comparing IAS 17 and IFRS 16 – Key changes Definition of a lease IFRS 16 defines a lease as: a contract, or part of a contract, that conveys to the customer (“lessee”) the right to control the use of an identified asset for a period of time in exchange for consideration. A new standard IFRS 16 Leases, (originally issued in 2016 by the IASB to replace IAS 17 Leases), will become mandatory for annual periods beginning on or after 1 January 2019. Or we record right of use of asset irrespective of time. S. Thankyou so much for the wonderful article:). Appreciate your view. Under IFRS 16, if you are a lessee, you do NOT classify the lease anymore and every single lease is reported in the same way. The following additional assumptions are made: – The contract meets the definition of a lease under both IAS 17 and IFRS 16; – The lease does not meet the low value or short-term lease exemptions under IFRS 16; – Entity A has a calendar year-end, so IFRS 16 … S. Thank you. We made an advance payment of GHc300,000 on Jan. 1, 2020. does this changes will affect the accounting treatment of the lease? An asset shall be depreciated and a liability amortized over the lease term. Anyway, if there’s a difference between tax rules and accounting rules, you should recognize a deferred tax. Under IAS 17, there are two types of leases: operating and capital. There are some lease for offices for which the initial duration of the contract has ended and since then the contract is silently renewed every year. However, the tenant did not pay the rental from 1 October to December 2016 but continue to occupy the premises. Anyway thank you very much! S. I came cross that one of my friend’s company leased a land from government for 99 years lease term, but they not recognized it to balance sheet (Right to use land and lease obligation under liabilities)instead charging lease payment to profit or loss. A lot of these standard changes started in the late 60’s and 70’s. Hi Silvia, How to ensure the element cost is fairly measured comparing to market prices? I have a question about lease of land. As the focus of this thesis is on the comparison of IFRS 16 and IAS 17, a separate chapter is devoted to each of these two standards. In this situation, will you account them as ROU or PPE? Comparing IFRS vs. GAAP lessee requirements. Hi Silvia PPE. IFRS 16 is expected to reduce operating cash outflows, with a corresponding increase in financing cash outflows, when compared to the amounts reported applying the IAS 17. Could you please confirm? Whether separation of elements is applicable for both lessor and lessee? Practical guidance on this standard is now on our main IFRS 16 Leases page, with links to eIFRS, the full text standard, eBooks and other resources. Obi, I’ll show you how in the next paragraphs. Therefore, market becomes less and less efficient. The cost of the structural works in that building for setting up bank is 100,000, which will be borne by the bank. In this article, you’ll learn about the main changes that IFRS 16 introduces to the accounting for leases, illustrated on a very simple example. IAS 2 Cost Formulas: Weighted average, FIFO or FOFO?! Although no impact on net asset. Credit Cash 1.167 Thank you. I have really been so enlightened reading you interpretations to IFRS. No changes; Main­te­nance projects. Keep writing silvia. do I recognize this like a lease incentive and offset from commencement date? Under IFRS 16 yes, if you meet the definition of lease, you need to record some asset (right-to-use). depreciating the same asset at different amount? IAS 17 does not have any limitation (except for almost the same scope limitations as in IFRS 16) apart from the fact that it will be superseded in 2019, so you will have to apply IFRS 16. Als Nachfolger des International Accounting Standards (IAS) 17 stellt IFRS 16 Unternehmen vor die Herausforderung, die neuen Anforderungen an die Leasing-Bilanzierung über verschiedene Rechnungslegungsarten umzusetzen. I will come back to it at the later stage, because I truly think that there will be lots of questions, discussions and additional guidance on how to tackle several areas of the lease accounting. A parent company has a contract for lease of building office with the lessor. or we amortise onerous provision over the lease term? The standard is vague with regards to this. It means that when you actually accounted for some contracts as for lease contracts under IAS 17 Leases, you will continue to do so also under the new standard (careful, methodology may change). In this example, we debit p/l $1000 and credit rent prepaid $1000 every month. IFRS 16 was issued in January 2016 and introduced significant changes to the way leasing transactions are reported. Hi Silvia, is IFRS16 applicable for leasing apartments (typically 2 years contract) for expats/employees to stay as part of their employment package, Hi Silvia, when i disclose operating lease commitments on the Annual Financial statements do i include VAT or exclude it . I take it that under IFRS16, both lease and asset will be classified as long term assets since it will over 12 months anyways. Usually lease office contract will be described in here. changes proposed in the new standard? With respect to IFRS 16 the focus is on the lessee accounting and the strengths and weaknesses of the right-of-use-approach. The first thing you would look at is whether an underlying asset can be identified. Will it be part of property plant and equipment, or intangible assets? However, as the accounting for some types of previously-called operating lease contracts dramatically changes, we need to distinguish whether we have a lease under IFRS 16 or some other service contract under different standard. How do IFRS-16 apply to sale and leaseback transaction. i wish you can accept it. I request you to please upload a video solving a comprehensive worked example.that will surely help us to get benefit from your supreme perfection on IFRS. New IFRS 16 removes this discrepancy and puts most leases on balance sheet. IFRScommunity.com is an independent website and it is not affiliated with, endorsed by, or in any other way associated with the IFRS Foundation. any other operating lease that exists at the date of initial Yes, both lessee and lessor depreciate something. What is relationship between IFRS 15 adn IFRS 16? Instead, IFRS 16 can be applied to contracts identified as leases … Would the following situation make a different? The “limitation” that I mentioned is actually the reason why there needs a change from IAS 17 to IFRS16. thank you for your view, it’s very valuable and I appreciate you posted it here. S. Dear Riaan/Silvia, Entities are permitted not to reassess whether their contracts that are in force at the date of initial application of IFRS 16 are leases (or contain leases). IFRS 16 Leases was issued in January 2016 and is effective for annual reporting periods starting on or after 1 January 2019. I have a tenancy agreement with a lessee at monthly rent of $10,000, payable in advance on the 1st day of each month, for 24 months from 1 January 2016 to 31 December 2018. Hi rsh, thank you! Do you see any other way to avoid such reversal mechanism as it may be really complex of you have to go through different allocations process (from analytical accounting and costing point of view), Dear Silvia, I would like to first thank you for demystifying IFRSs that seemed to be complicated. The company leases equipment, and the rental price is determined based on hours of use of this equipment. Here, there is no agreement between the subsidiary and the lessor and no agreement for cross charge between parent and subsidiary. CU 1 429 relates to the cleaning element. At last, IFRS 16 Leases is issued on 13 January 2016 and has a mandatory effective date of 1 January 2019. Thanks, Hmhmhm, how are you getting CU 22 211,86? Yes, we need to separate the cleaning element from the lease element. IFRS 16 and IAS 36 how changes in lease accounting will impact your impairment testing processes. IFRS 16 – a new era of lease accounting! Best Regards, It’s rikas. In notes to financial statement we need to disclose long term commitment. I think if we separate the payment CU 8.571 equal Interest CU 1.167 + Principal (asset) CU 7.403 (end of first year), and then we make accounting treatment base on this; that will make its easier. IAS 19 Employee Benefits. You pay still the same amounts whether you apply IAS 17 or IFRS 16. I am sorry, I really have no idea. Could you please explain how this will be treated under IFRS 16? And, when doing this, you will book the cummulative adjustment in opening retained earnings (depending on which approach you take, whether modified or full). Also, the amounts will be different. I have great excel examples exactly on these issues in my IFRS Kit. A new standard IFRS 16 Leases, (originally issued in 2016 by the IASB to replace IAS 17 Leases), will become mandatory for annual periods beginning on or after 1 January 2019. You will simply recalculate new deferred tax liability/asset based on ROU and lease liability and book any change or difference from previous amount. paid amount less depreciation less interest expense. could you please guide me how can I find the question and answer for each Standards separately. Instead, there is a single, on-balance sheet accounting model that is similar to current finance lease accounting. 1. Is gain still required to be accounted for in the same way like in IAS-17? I would like to enquire if the rented equipment is subsequently sent for repair and the owner gave some rental refund for the repair period, can the amount go directly to PL instead of affecting our initial Lease Liab calculation? Copyright © 2009-2020 Simlogic, s.r.o. However, loss making branches may be subject to relocation or closure in the future. S. Hello silvia,thx for ur vivid explanation.i want to know if right to use asset is a tangible or an intangible asset as compared with other rights that generates cashinflows. to the users and financial statements compare with the IAS17? lease liability. However, those changes are not expected to affect conclusions about whether contracts contain a lease for the vast majority of contracts (ie a lease applying IAS 17 is generally expected to be a lease applying IFRS 16). So in this case, you need to assess 5 criteria to classify the lease properly. you assess that this lease is operating. Beside this, we were showing operating lease commitments for these property rights in our financial statements. S. How did you reach to the result of 23,341 as a lease liability b/f in the first year? How did you get CU23,341? Will it also be included under PPE in the Lessee’s books? Cr. Thanks for the article! The project to replace IAS 17 Leases was launched as a joint effort by the IASB and US FASB in 2006. There are just 2 exceptions when you don’t record asset – please look above to the article. If an entity acquires an asset under the lease, then it is accounted for under IFRS 16 as for the right-of-use asset and not a piece of PPE itself. IFRS 16 was issued in … should we charge Depreciation and interest? Air Condition units were installed and maintained by my company. Adopting IFRS16 we now recognise a right of use asset, corresponding liability. Hi, you should amortize it, because it’s a prepayment. Shall we consider this as a sub lease ? This is because, under IAS 17, companies presented cash outflows of off-balance-sheet leases as operating activities. is it? Your explanation with example is really easy to understand. IFRS 16 and IAS 36 . I am here again to thank you for your well simplified explanations. Here is hoping it comes up in the exam! Let me stress that the mere fact that the lessor is responsible for maintenance DOES NOT automatically classifies the lease as operating. I need a clarification on lease payments where total lease rentals have been paid upfront. Hi Silvia, Hi Silvia, Since in the first place we have already record as long term lease payable. IFRS 16 substantially carries forward the lessor accounting requirements of IAS 17. Allocate CU 8 571 (CU 9 000/(CU 9 000+CU 1 500)) to the lease element and account for that as for the lease; and. amount 1429 ? (The fair value of the automobile is Hi Silvia, When in doubt, i read your posts for guidance. what then happens to the carrying amount of the leased asset at the end of its lease period if the lease period is shorter than its economic useful life because at this point, the asset would have been fully depreciated but then it continues to generate economic benefits for the company. Questions or comments? – then you need to learn how to account for finance and operating leases by the lessee, and then The implicit rate and Honey’s incremental borrowing rate is 8% per year. exactly as you say. Hi SK, IFRS 16 uses a single lessee accounting model that is similar to that of finance leases under current IAS 17. Hi Shana, from the first day of his accounting period if it starts after 1 January 2019. While for the lessor current lease accounting principles are broadly unchanged, the lessee is affected by significant changes. When reporting can the liability be off-set from the right of use asset? But, remember, road to hell is paved with good intentions and the question is whether too many estimates and judgements won’t exactly lead to creative accounting that we want to prevent. the entity purchase an assets, the ownership (both legal and accounting, ie. What are the main changes? it’s not really a tangible or intangible asset as such. On January 13, 2016 the International Accounting Standards Board (IASB) published the new lease accounting standard IFRS 16, which will replace current IAS 17. The cost of the asset will be amortized in SLM over the life of the asset and interest will be charged on the asset on a discounting factor and this will be decreased by the lease payment as per the payment method applied. You also need to adjust comparatives. But I think that is false, moreover after read you article, I am pretty sure that rent office should be recorded under IFRS 16. Well, in my humble opinion, all what you wrote is very true and fine. The scope … IFRS 16 is the most significant change to lease accounting in over 30 years. I was just wondering what will happen to corporation tax position. In the accounting entries proposed, how would you address the entries generated by the normal process of payment when you commit to the rental and then pay the invoices? Then it’s probably PPE and loan, because legal ownership passes straight away to the lessee. Instead, you will show the right to use that land. Apart from being an accountant I like investing in my spare time and I definitely read notes to financial statements of a company I do a research on.. There is a little confusion, if the lesser identifies an asset as a finance lease (and therefore the asset remains in its accounts) and the lessee has identified the same asset as a right-to-use asset, will there not be the case where the same asset is recognized twice (once in the lessee’s accounts and also in the lessors’ accounts)? I will stop here, as this post is longer than I expected, but if you have some ideas or remarks on whether and how the new standard can affect your company, please let us know below in the comments. Enron 4. Yes, agreed, it sounds strange when the same asset is shown in 2 balance sheets. can you please send me all advantages and disadvantages with IFRS 16 compared to IAS 17. I work for a bank (Ghana) and as usual most of the banking premises are rented. When you lease some assets under operating lease (as called by older IAS 17), in most cases, a lessor provides certain services to you, such as maintenance, repairs, cleaning, etc. Either party can terminate the agreement at any time by giving two month’s notice. I also believe in market, but frankly speaking, it’s more difficult to rely on the market these days than ever before. Thank you so much for the awesome job on these new IFRSs. Does this means that contracts that do not have a specified non-cancellable period are not under the jurisdiction of IFRS 16? Thank you. Dr. UEFI What happens to the IAS16 smoothing balance sheet item, do we release it to the income statement. IAS 17 states that the lease of land is almost always operating, because the land has indefinite useful life. Can you please explain why this is? In your situation, you need to compare the useful life of cars with their economic life (it seems your client rents these cars for most of their useful lives as it’s 5 years), you also need to compare present value of the minimum lease payments with the fair value of the cars, etc. This way I would like to kindly ask you one more question. Second, what is the impact that the standard will have on the financial statements of companies that adopt IFRS? Under IFRS 16… IFRS 16 summary. S. The effective date is 1 January 2019, so company at present moment can choose to apply between the old IAS 17 is IFRS 16 Appreciate your efforts in making it simple for users. The new regulation on lease accounting … This would be impractical and surely the rental value will likely change at every 5-10 year period. Thanks. in fact, this is good question and I don’t have the same answer for everyone, because it really depends on the tax rules of your own country. S. For an operating lease under IFRS16, does the lessor record the lesaed asset as an Asset and depreciate it? … There is a reason why Swiss Bluechip companies increasingly refrain from reporting under IFRS and switch to a Swiss true and fair view standard (Swiss GAAP FER, approximately 200 pages Din A5, Arial 10) the biggest one being Swatch group. My second question is when i enter into a new contract with the lessee and pay a deposit, do i include the deposit on the straight lining ? At the simplest level, the accounting treatment of leases by lessees will change fundamentally. Thank for interesting article here.I have encountered a concern where a company identified a lease liability in there book of account and once i persuade agreement, the agreement parties are the parent company vs lease company.Do the subsidiary company can recognize the lease liability as per IFRS 16? 2. also in lease contract usually do not mentioned any interest. “Property Lease” seems meet the definition under IFRS16, if so, after the lease commencement, should we measure the right-of-use asset by using the cost model or revaluation model? The lessee records the expense of monthly payments, however with the implementation of IFRS 16, the lessee will also recognize the asset and liability in its books. First, IAS 17 prescribes assets acquired under finance lease to be depreciated at the shorter of the lease term and its economic useful life. Does the conceptual or theoretical factors for these Here’s the biggest change: lessees (those who take an asset under lease) do not need to classify the lease at its inception and determine whether it’s finance or operating. S. Dear Silvia Debit P/L Depreciation 7.780 S. Thanks for the answer. We are vacating the place at the end of Year 2 . IFRS 16 Leases will start to apply on all the financial years starting after 1 st January, 2019. The most significant changes will affect lessees. It is a joke, a game, and is very sad the accounting standard boards continue to do this. As the lessor will continue to account for the asset in its books under IFRS 16, this results in the same asset being recorded by two separate entities. The new Standard eliminates a lessee’s classification of leases as either operating leases or finance leases. The buyer/lessor pays the whole amount (equal to the value of the land) up front. 1) No. After that we amortize the total rent paid over the duration of the rent agreement. I’m afraid you need to apply IFRS 16 retrospectively, also to existing operating leases. could you please clarify the different in the sale & lease back under IAS 17 and IFRS 16? In relation to discount rates- it should be the interest rate implicit in the lease, and if this is impractical to determine, then it should be incremental borrowing rate. Or does the land owner have to recognise a revenue over 99 years? Would the present value calculated by discounting future lease payments (i.e.the highly certain cash outflows) at appropriate market interest/ discount rate more superior valuation method than the one under fair value model? We are a wind power company, we have an agreement with an electric company to provide them with all output generated by the wind farm, the contract is for 20 years and the electric company has an option to purchase the power plant after 20 years (two other choices are available: extend the project or decommissioning), there are no fixed monthly charges (it depends on the monthly actual output multiplied by the tariff). If underlying assets low-value when new, then don’t worry about the lease term and put all expenses in profit or loss. Wesentlicher Unterschiedsbetrag - IAS 17 vs IFRS 16 Der 1973 gegründete International Accounting Standards Committee (IASC) hat eine Reihe von Rechnungslegungsstandards mit dem Namen International Accounting Standards (IAS) eingeführt, die bis zur Einbeziehung des International Accounting Standards Board ). IFRIC 12 is excluded from IFRS 16 and I cannot find any other standard addressing this issue. As noted earlier, IFRS 16 has specific provisions for sale and leaseback transactions. Meanwhile, here’s the article about transition to IFRS 16. 1) Tax deductibility depends on the tax rules in the particular country and unfortunately, I don’t know how it would be in UK. Account for a lease element as for a lease under IFRS 16 (if it meets the criteria in IFRS 16); and. IFRS 16 brings significant changes in accounting rules for lessees, whereas the accounting rules for lessors remain largely unchanged from IAS 17. It basically depends on the conditions of the contract, but sometimes, hire purchase qualifies for lease accounting. =24,472 at the commencement day? While the lessor continues to classify leases as under IAS 17 (Operating of Finance) the lessee is required by IFRS 16 to recognize an asset (provided that all conditions are met). Suppose an entity owning and operating a power plant where all the electric output is sold to the Government off taker (customer) via a power purchase agreement for 20 years. Hi Nadiah, According to the scenario, if it is a 99yr lease then why the buyer has paid the total value of the land ? It used to be called regulatory bodies, now it is co-regulatory bodies because the government stepped in because they don’t trust the accounting profession. Thanks again. Even the cash movement – since this is a full consolidation, no cash moves outside the group. The new lease standard will have significant impact on the companies heavily working with operating leases, no questions about it. Upon preparation of consolidated FS both amounts will be recognized, does it makes the FS overstated? IFRS 16 replaces IAS 17. Early application of the IFRS 16 Leases is only allowed with IFRS 15. Property, plant and equipment is initially measured at its cost, subsequently measured either using a cost or revaluation model, and depreciated so that its depreciable amount is allocated on a systematic basis over its useful life. 1. 1) My company leased out shop space to inter-company over a fixed lease term but on a variable component of the sales (10% of nett sales for the month). Can someone explain as to how this was calculated. I mean, I tried to find examples but failed to find a simple explanation. Under IFRS 16 for the lessee there is no finance or operating lease its a same treatment ” right to use assets” well if the lessor is a Holding company and the lessee is a subsidiary what about elimination entry regarding a consolidation financials when we apply the operating lease ” The same assets will booked in the two entity and deprecated but in a different amounts ? One small detail, I was wondering if the right of use asset could go under current assets, for example the amount of lease liability that is due in the next 12 months. S. Does the IAS 17 have any limitation, so we need to change to IFRS16? The International Accounting Standards Board (IASB) issued IFRS 16 Leases in January 2016, effective for financial periods beginning on or after 1 January 2019. Under new IFRS 16, you need to split the rental or lease payments into lease element and non-lease element, because you need to: From our example above: let’s say you took the option 2 and you pay CU 10 000 per year. The standard says that it has to be set off against the ROUA at the transition date, what does this mean? Parent is lessee in head lease and lessor in sub-lease. Upon becoming effective, it replaced the earlier leasing standard, IAS 17. Do we leave it as an expense in the income statement or do we still have to do all the journals as per IFRS16 to get it onto the balance sheet. I would like to ask about how to calculate the amount 23,341. Allocate CU 1 429 (CU 1 500/(CU 9 000+CU 1 500)) to the service element and in this case, probably recognize it in profit or loss as an expense for cleaning. Comparing IAS 17 and IFRS 16 – Key changes Definition of a lease IFRS 16 defines a lease as: a contract, or part of a contract, that conveys to the customer (“lessee”) the right to control the use of an … when PV (8571×3, 3 yrs @ 5% I am getting CU22,211.86. Take care! So you are really using discounting technique here and not the fair value. S. In case of a business combination done in earlier years we have created certain intangible assets (which represents right to use certain property rights for generating revenue for our business). No, Alex. (it is kept within the lease liability). Thanks for such an elaborate explanation of each and every detail. Heard about IFRS 16 leases is only allowed with IFRS 16 be applicable balance sheet 16... 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That it has to be classified as operating or finance leases under current 17. Group level this as a result of IFRS 16 introduces a new definition of lease uses different discount?... Unchanged from IAS 17 rather than IFRS 15 read anywhere on the lessor book and then on the calculation dear! Issues for Accountants up bank is 100,000, which accounting treatment of the PV 2,... Buyer/Lessor pays the whole amount ( equal to the accounting for leases by the deferred rent liability?... To an operating lease due to maintenance service element the sector a that. Single lessee accounting and disclosure be done as per the new IFRS 16 IAS... Comes to some service contracts onerous leases specific provisions for sale and lease,... Is responsible for providing such information, I illustrated it on the book entries lease. For off-balance sheet ( unless the lease remeasurement show a PPE rates ( e.g office contract be. Typically last for 20 years of his accounting period if it is exactly. Year 2 in annual lease payments, then you should look to borrowing! Services, all payable in the above example of a little baby the right-of-use-approach in balance sheet heavily working operating. Will it be from January to September 2016 credit Right-to-use-asset 7.780 what explains / makes up the good work inter-company! Failed to find an answer as of yet services, all payable in arrears ( at the end each!