First of all, thank you for your amazing contribution to the understanding of IFRS. Broadly speaking, a lease modification is accounted for in one of two ways: 1. Thanks for your article This is the sixth in a series of webcasts that the International Accounting Standards Board is providing to support the implementation of IFRS 16. But! Hi Silvia, if a company as a lesse lease a car, and the least contract specifies that the lessee will pay salary for the driver on a periodical basis, which is provided by lessor; does the RoU should include the driver expense? So if we use first 5 year lease term, and then in year 3 we are sure enough to add extension. This rent free is deducted from the purchase price of 30 Mio GBP at the moment of the payment. thanks in advance and waiting for your cooperation $105,309: Liability after scope decrease. For each payment, the discount factor is calculated in order to determine the total present value of the lease liability. Where does the additional £30k get debited, and when? Broadly speaking, a lease modification is accounted for in one of two ways: 1. I think that there is a small “consistency hole” in IFRS 16. Can you please provide a reference or is there any provision in IFRS 16 regarding this issue? IASB Webcast: IFRS 16—Lease Modifications: Lessee Mar 27, 2017. Hi Silvia, Thank You Silvia Hi Silvia Thank you Silvia, nicely explained. (assuming Company doesnt want to exercise the recent amendment of IFRS 16 relating to COVID 19, Hi, May I clarify something. We are renting an office space in a condominium hotel. Hi, please assist Your feedback will be highly appreciated. on basis of 50 or 45 years? I'm thinking "Substance over form". why is it treated as operating lease? Those are the leasehold improvements and are NOT a part of ROU asset. What will the Journal entries be for the initial recognition on Company X books? thank you Silvia. Hi Paul, well, your own costs can be capitalized as a separate asset under IAS 16 PPE (“leasehold improvements”). You can capitalize them as a separate item of PPE and depreciate over their useful life (which is max. is it a financial lease? Thank you Silvia Finance income shall be recognized based on a pattern reflecting constant periodic rate of return on the lessor’s net investment in the lease. Initial measurement of the right … Operating Leases Any modification to a lease contract that was classified as an operating lease results in the modified contract being accounted for as a new lease from the date of modification. Is this a finance or operating lease for Y Company? The lease liability is remeasured when (IFRS 16.40,42): there is a change in the assessment of a lease … Presumably there would be no impact to the depreciation hitting the p&l on the asset restoration piece as it is not discounted the same way with present value of future lease payments ? Hi Silvia, 2- Considering there are no land depreciation as per IFRS, how we will account for it under the IFRS16? Hi Silvia, if we purchased a software, naturally we can apply IAS 38. GBU. If a lessee elects to apply this Standard in accordance with paragraph C5 (b), for leases that were classified as finance leases applying IAS 17, the carrying amount of the right-of-use asset and the lease liability at the date of initial application shall be the carrying amount of the lease asset and lease liability immediately before that date measured applying IAS 17. It is treated as a separate lease (IFRS 16.44); or 2. Amounts paid for the first time against the rental of a building Hi.. The annual lease payments are $50,000 payable at the end of each year. (A) on 31.12 the previous year, or For example, if you rent a warehouse and rental payments include the fees for cleaning services, then you should separate these payments between the lease payments and service payments and account for these elements separately. This is illustrated in the following scheme: Accounting treatment of sale and leaseback transactions depends on the whether the transfer of an asset is a sale under IFRS 15 Revenue from contracts with customers. Kindly upload some illustratives on sale and lease back transaction when the transaction is a sale as per IFRS 15. This definition of lease is much broader than under the old IAS 17 and you must assess all your contracts for potential lease elements. In the bigger picture, if we have quite stable big rents, should their BSvalues go down near to 0 through depreciation, and then suddenly they go back to full value when the new contract starts? Am I right? It analyses the standard and discusses the implementation issues. Question on Restoration costs. Also, the lease payments are recognized as a reduction of the lease liability: If there is a change in the lease term, lease payments, discount rate or anything else, then the lease liability must be re-measured to reflect all the changes. – who has these rights? Hi Eric, well, I am aware of the fact that there is too many estimates and forecasts to use when applying IFRS, and leases is one area of them. A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (IFRS 16.Appendix A). I have two questions. In this article, I’d like to sum up the main requirements of the new IFRS 16 and you’ll find a video in the end. Hi Sylvia ! However, the lessee can apply also IAS 40 Investment Property (if the right-of –use asset is an investment property and fair value model is applied), or using revaluation model under IAS 16 (if right-of-use asset relates to the class of PPE accounted for by revaluation model). The lease assets and liabilities are recognized on the statement of financial position, which may result in a significant increase in the amount of assets and liabilities many companies report. At the inception of each contract and entity should asses’ whether the contract contain lease or not. here is a query.please do respond Access IFRS 16 and covid-19. Can you please share information of accounting entries at lease modification level ? 1. If the error is not material, then you don’t have to touch equity, but all entries that would be correcting equity can be done in profit or loss. the scope is increased by additional 1,500 sq m, the lease term is shortened from 10 to 8 years, annual payments are increased to $150,000. How it should be settled? »The cost of the right-of-use asset shall comprise: • Lease term 3 years Please i need some clarity, I have a question. By using our website, you agree to the use of our cookies. As it is not logical that two leased assets – one with refundable purchase taxes, one with non refundable pruchase taxes – that have the same lease payment schedule should have the same ROA-cost amount I think (my opinion) that IFRS 16 art. All Rights Reserved. Let’s now assume that a lease modification is made on 1 January 20X6 and both parties agree to lower annual lease payments amounting to $95,000. Does it come under purview of ifrs 16. How about if you are an intermediate lessor in a building where you lease office space and you sublet a portion of the space. I have 1 query. If this is the case, you made an error and you should correct it retrospectively as written in this article. Hi Rizny, thank you – it is all explained in the IFRS Kit – this is too elaborate to explain it in the comment. • Any refund for loss of customer parcels are paid by XYZ and amount deducted from subcontractor payments, if the latter is found at fault. The seller (lessee) keeps recognizing transferred asset and accounts for the cash received as for a financial liability under. All calculations are available for download in this excel file. Also, the standard IFRS 16 is mandatory for all periods starting on or after 1 January 2019. Hi Juliette, was the amendment in place on the first application and you forgot to include it? Thanks Entity A calculates a gain in P/L as follows: $184,002: Right-of-use asset before modification One question: Yes, Atul, you are right. How these leases should be recognised by lessee? You can simply account for all payments made directly in profit or loss on a straight-line (or other systematic) basis. But, why is there a new lease standard when we had an older IAS 17 Leases? For the sublessee, will it recognize in its books the right-to-use asset as a lessee? Hi Silvia Thank You. Copyright © 2009-2020 Simlogic, s.r.o. The standards do not really tell you how you should evaluate or assess, because each situation is specific, but in your assessment, you need to be in line with IFRS 16. Operating lease contract under IFRS 16. 4) Rent already paid. It does not change, remove, nor add to, the requirements in IFRS Standards. Well, I don’t quite understand the issue here. This would be a service component of a contract and here you have 2 options as a lessee: either account for it separately, or account for the whole contract as for the lease. Yes, it is. Example: Operating lease in the lessee’s accounts under IFRS 16 ABC, the manufacturing company, needs to adopt the new standard IFRS 16 Leases in the reporting period ending 31 December 2019. The discount rate is revised to 5% at the modification date. IFRS 16 permits two exemptions (IFRS 16, par. Lease liability and the right-of-use asset are equal at initial recognition and amount to $736,009 as shown below. The contract agreement is for 6 months. Each year we need to renew the contracts. Commencement of Lease under IFRS 16 Leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and li­a­bil­i­ties for all leases unless the lease term is 12 months or less or the un­der­ly­ing asset has a … IFRS 16 Leases contains detailed guidance on how to account for lease modifications. If you haven’t done that at the contract commencement, then this is the error and you need to correct it in line with IAS 8 (depending on its materiality – if immaterial, then yes, adjust ROU asset, if material – restate). Entity A determines that the increase in scope of the lease does not meet the criteria set out in paragraph IFRS 16.44 and therefore the increase in scope is not accounted for as a separate lease. Entity A enters into a 10-year lease for a 2,000 sq meters of office space. $210,618: Lease liability before modification We have 5 year lease, with 5 year extension option. IFRS 16 – the new lease standard. Under IFRS 16, companies capitalize all leases and report them on the balance sheet. A lease modification includes adding or terminating the right to use one or more underlying However, lessee can optionally choose not to separate these elements, but account for the whole contract as a lease (this applies for the whole class of assets). Hello Mam, today i am buying one asset on my customer request, customer is going to reimburse me full cost of asset + 15%. Thank you for the insight. $267,301: Remaining liability relating to modified scope (at original discount rate) NEW: Online Workshops – US GAAP, IFRS and other, any estimate of dismantling and restoration costs (remember IAS 37), IFRS 15 Revenue from contracts with customers, please check out this article describing different options that you have, See, if this is really burning question, you can sign up for my Helpline service. Hi Silvia, Looking for some information about subleases and was hoping you might do something on this. Remeasurements of the lease liability are treated as adjustments to the right-of-use asset. At least I got some idea/knowledge about this new standard on lease. IFRS 16 Leases replaces IAS 17 Leases, the earlier lease accounting standard. I can’t seem to understand the interest expense as this agreement does not include any interest rates. If a change in lease payments results from a lease modification, a lessee applies paragraphs 44-46 of IFRS 16 and a lessor applies paragraphs 79-80 or paragraph 87 of IFRS 16. Hello,Silvia! Here, I have one question related to Accounting for finance lease by lessors. After commencement date, lessee needs to take care about both elements recognized initially: Debit Profit or loss – Depreciation charge, Credit Accumulated depreciation of right-of-use asset. Hello Silvia M,I request you to upload a page consisting of Manufacturer dealer lessor Journal entries format and treatment of IDC (Initial Direct Cost). Just be careful about their useful life (if they are attached to the leased asset, then the useful life should not exceed the lease term). Thanks for this article! You can scroll tables presented below horizontally if they don’t fit your screen. Hi does IFRS 16 apply to land taken on lease ? would like to clarify with you a simple things please advice, the impact of IFRS-16 on us. A question for you. Krystyna. Looking to see how you would account for a sublease of 7 years if head lease is for 10 years. The commencement date for the lease is 20X1-01-01 and the discount rate is 6%. Hi Kaplan, Following. I’m talking about operating leases, especially those with non-cancellable terms. thank you in advance, Lease term is 5 years subject to annual escalation clause. A lessee (customer) accounts for a lease modification as a separate lease if both the criteria are met (IFRS 16.44): When a lease modification is treated as a separate lease, the original right-for-use asset remains unaffected, and the separate lease is recognised under general recognition principles. VAT Base Rent Thank you for the insight. You can scroll tables presented below horizontally if they don’t fit your screen. $92,001: Decrease of right-of-use asset by 50% Accordingly, Entity B applies the guidance in IFRS 16.5-8 to such leases. IFRS 16 Leases replaces IAS 17 Leases, the earlier lease accounting standard.IFRS 16 is effective for annual period beginning on or after 1 January 2019. Show resources. If the carrying amount is reduced to zero, any further reduction is recognised immediately in P/L (IFRS 16.39). Each section is illustrated with examples based on real-life terms and conditions. Assume PPA agreement is for 10 years with possibility of extending for another 10 years. The article is great, but I would like to point out that when the answer is “yes” to the following question, then you probably DO not have a lease contract: “Can the supplier substitute the asset during the period of use? Lease income from operating leases shall be recognized as an income on a straight-line basis over the lease term, unless another systematic basis is more appropriate. In accordance with IFRS 16.7(a), when a short-term lease is modified, the lease is considered to be a new lease on the effective date of the modification. If we have a building lease terminating on 30.06.2019 however exit terms (for ex an exit fee etc) have all been agreed formally and in writing by 31.12.2018, then would we still be able to apply the short term exemption and continue accounting for the lease as a normal operating lease until termination? At the inception of the lease the present value of the lease payments amounts to at least substantially. Appreciate your view on whether we should account for 3,000 under Portfolio lease with following: Krystyna, if you can claim VAT back, then don’t include it to ROU. Our Real estate leases – The landlord perspective (PDF 1.4 MB) publication covers key areas of IFRS 16 that are particularly relevant to landlords in real estate leases. Will it still be included under IFRS 16? I working in UAE and we are having warehouses on lease. Adding to the same, I have a doubt regarding the current scenario that I am facing. You are doing a great work here, keep it up. I hope you are well. How do I: Thank you for your clarifications. What if we just started a tenancy agreement with our landlord for 12 months but they gave us 1 month free, so in total, 13 months for the price of 12 months. have also right to use , right to provide direction . In this case the lease term is your asset’s useful life. It is treated as a separate lease (IFRS 16.44); or 2. You do NOT need to account for all leases like described above. Check your inbox or spam folder now to confirm your subscription. Leases with the lease term of 12 months or less with no purchase option – What about lease contracts with the lease term of less than 12 months BUT with the right for prolongation or if contract has wording as following,for example: “the term is min 8 months/ max 13 months” or min till February 11,2019 (and this is the term of 10 months) and max till May 11,2019 “. Hi Ahmed, How does the accounting entry goes for sale and lease back on the sellers side innboth the condition? How do we account for it? I need some additional clarification in terms of the below point from IFRS 16, B35 For those leases, a lessee shall account for the right-of-use asset and the lease liability applying this Standard from the date of initial application. The questions are: Parking – account for the disposal or write-off of the asset and de-recognition of the leasee’s lease laibility. Company X Rents a handset to a customer on a contract basis with an option to renew the lease or purchase the assets at a cost of 3 months installments. Assets obtained through customer finance facility (loan) which are paid in monthly installment later (Entity direct own the title of the asset, but at the same time pledge it for finance facility), whether under this arrangement can be considered as finance lease assets (under previous IAS) which now (reclassed) are ROU under IFRS 16 lease? You have made the complex IFRS 16 look easy !The moot question of double accounting of asset by both lessor and lessee remains. The table below is providing to support the implementation of IFRS 16 been granted ( i.e that..., keep it up visit IFRS.org through many questions i have come across on IFRS 16 prescribes a number disclosures! 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