The lease term and lease scope remain unchanged. I have 1 query. 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. First of all, thank you for your amazing contribution to the understanding of IFRS. IFRS 16 - Leases is changing effective for annual periods beginning on or after 1 January 2019. Reminder: all calculations for this example are available in the excel file. Company A invests in power plant to produce and supply electricity under a PPA (Power Purchase Agreement) to the national grid (govt owned organisation). Should the Company remeasure the lease liability: Under IFRS 16, ABC needs to recognize the right of use asset and the lease liability. Example at lease commencement I did work on the asset and knew I would incur 10K to undo or reinstate the asset to original condition at the end of the lease say 5 years. But we don’t pay anything to our parent company. The commencement date for this lease is 20X1-01-01 and the discount rate is 6%. It is treated as a separate lease (IFRS 16.44); or 2. “There is lease if you have right to use the asset for a specified time period against the consideration.” According to new IFRS 16 lessee are not required to classify the leases into Finance and operating. Entity A calculates a gain in P/L as follows: $184,002: Right-of-use asset before modification I can’t seem to understand the interest expense as this agreement does not include any interest rates. Finance Lease Receivable in the lessor’s statement is not the same as right-of-use asset. Should the 2019 Annual Report of the Company include the updated price change that happend on 01.01.2020? If so doesn’t it affect previous fiscal periods? IFRS® is the IFRS Foundation’s registered Trade Mark and is used by Simlogic, s.r.o I note that your article about states that there is no classification of operating lease and finance lease for lessee. IFRS 16 C.17 mention: At the beginning of the contract the lease liability is the discounted amount of the unpaid 2 years rent amount. Will it still be included under IFRS 16? Entity A calculates new present value of lease liability taking into account updated amounts of lease payments and revised discount rate: The amount calculated above is obviously lower that the lease liability before the modification ($421,236.4), the difference is accounted for as follows: Accounting for the lease liability and the right-of-use asset in the years following the modification will be as follows: Note: this example is based on illustrative example 19 accompanying IFRS 16. present value of new lease liability USD 15m. Net investment in the lease equals to the payments not paid at the commencement date discounted to present value (exactly the same as described in lessee’s accounting) plus the initial direct costs. Hello, Pramod, thank you! Hi Silvia, Finally I was able to read this article. How these leases should be recognised by lessee? Can you please share your approach in term of Abstract: See also Example 16 accompanying IFRS 16 that illustrates the approach to modification that extends the contractual lease term. IFRS 16’s lease modification guidance can be summarised into the diagram overleaf. I have a question. Lease Modifications 89 8.3.1. (a) the amount of the initial measurement of the lease liability, as described in paragraph 26 LESS REFUNDABLE PURCHASE TAXES;«, It’s simple, include the non refundable purchase taxes and exclude the refundable purchase taxes when computing the cost of right of use asset. Hi Silvia 036: Contract asset vs. account receivable. When a lease modification is not accounted for as a separate lease, a lessee (customer) (IFRS 16.45): The above accounting is made at the effective date of the lease modification, which is the date when both parties agree to a lease modification. $220,803: Right-of-use asset after scope decrease (remaining 60%) IFRS 16 Leases replaces IAS 17 Leases, the earlier lease accounting standard. We have some leases for offices for which the initial duration of the contract has ended and since then, the contract is silently renewed every year. If yes, how will be the accounting entries? When a lease modification does not decrease the scope of a lease, the changes in lease liability have a corresponding impact on the right-of-use asset without any one-off recognition in P/L (IFRS 16.46(b)). Or the ROU was used for discussion purposes only. The cost of the hotel will definitely be the PPE (it is not subject of the lease, but you construct it). If this is the case, you made an error and you should correct it retrospectively as written in this article. Each section is illustrated with examples based on real-life terms and conditions. thank you in advance, 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 “. 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. Hi Silvia, This is good news, providing clarity and consistency in an area where there has been little guidance – and much diversity – in the past. Changes in payments that are not lease modifications If a change in lease payments does not result from a lease modification, that change would generally be accounted for as a variable lease payment. $210,618: Lease liability before modification IFRS 16 Leases vs. IAS 17 Leases: How the lease accounting changed In January 2016, IASB issued another important and long-discussed standard: IFRS 16 Leases that will replace IAS… IFRS Accounting , IFRS Summaries , Leases , Most popular thank you Silvia. Entity A enters into a 10-year lease for a 2,500 sq meters of office space. Krystyna, if you can claim VAT back, then don’t include it to ROU. Thanks Entity A enters into a 10-year lease for a 2,000 sq meters of office space. Here you can see that the accounting for operating leases is asymmetrical: both lessees and lessors recognize an asset in their financial statements (it’s a bit controversial and there were huge debates around). And how I could record these entries ? what would be the accounting entry to reverse the right of use of the asset, liability and the income statement charge ( interest + depreciation) please? Under IFRS 16, you need to separate lease and non-lease components in the contract. How do we account for it? You are here: Home 1 / SAB&Tips 2 / 2020 3 / IFRS 16 Lease modifications. It means that you should have done some work and have it in function by this time.. The low value assets exemption you mentioned at the beginning of the video, is it applicable to the lessee, lessor or both of them? For lease modifications that change the consideration paid for a lease, the adjustment to the carrying amount of the right-of-use asset effectively represents a change in the cost of the right-of-use asset as a result of the modification. sale qualifies ifrs 15 Does this mean that we will create a new account, i.e., Right-of-use account (ROU), in our chart of accounts? In this case, it is determined that the sub-lease is an operating lease. IFRS 16 Leases contains detailed guidance on how to account for lease modifications. 2. the primary element of ROA is the amount of the initial measurement of the lease liability Hi Olga, as for the lease term, please look here. Show resources. Under ‘Right-of-use Asset’ or ‘Other receivables’? Hi, please assist report “Top 7 IFRS Mistakes” Thanks A 5 years lease contract has a term to pay 3 years rent in advance and the rest amount (2 years rent) at the end of the first three years. Regarding initial direct costs (IDC) for the lessee, should legal costs realted to a lease agreement be considered an IDC? Thanks for this article! All calculations are also available for download in an excel file. In accordance with IFRS 16.7(a), when a short-term lease is modified, the lease is considered to … The International Accounting Standard Board has published the new standard on lease accounting (IFRS 16). Question: Practicable description of “the covered period” is not clear. What kind of process we should have, when we decide when to calculate the extension in our numbers? 4 IFRS IN PRACTICE 2019/2020 fi IFRS 16 LEASES 10. • Lease payment is estimated by reference to market vehicle rental rate ( monthly rate) What is the accounting treatment to give to a vehicle that is on lease but was given out as gift 10 months into the 48months leases period. Hi Silvia, I have Question Please ( If I have rent contract for 5 Years Contains Base rent of 10,000,000 Per Year and 200,000 As service Charges Yearly 5% annual increment As per IAS 17 Total Base rent of the five years Amortized equally on monthly basis. Yes, split to current and non-current portion. If yes how do we depreciate the right of use asset since land is generally not depreciated. How do we adjust straight lining figure that was held in the trial balance earlier. The seller (lessee) keeps recognizing transferred asset and accounts for the cash received as for a financial liability under. All I said is that yes, both lessor and lessee have an asset in their books. I have more details in the Abstract: GBU. Please recommend the relevant accounting entry as well. How does the accounting entry goes for sale and lease back on the sellers side innboth the condition? Hi Alexander, Customer has no decision making rights on the P Plant. Hi, I have a question. However, in the event when output is below the PPA Kwh, Company has to compensate customer on the shortfall. • Discount rate is the XYZ’s incremental borrowing rate All calculations presented in this example are available for download in an excel file. Please clearify the journal entries in the book of Lessee. 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. The use of a revised discount rate in remeasuring the lease liability reflects that, in modifying the lease, there is a change in the interest rate implicit in the lease (IFRS 16.BC203). i have a query regarding sale and lease back transactions. Thank you for the insight. This year we made the new calculation to reflect the 70 years but we do not know how to show these adjustment on the statement of income. Under IFRS 16 a lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. Gain on sale: USD 5 m Ok if this cover under IAS 16 then it is amortized over the lease period because lessee have right only ( as intangible ) , but in our book we have shown as PPE not a Intangible assets —Why, Hi I wanted to know how to adopt IFRS 16 by following retrospective modified approach for the following items”- If the answer to these questions is YES, then it’s probable that your contract contains a lease.”. Or whether we keep those as sub-contractors expense. Scope modified by: 50% (2,500 sq m out of original 5,000 sq m) Hi. Hi Silvia, if we purchased a software, naturally we can apply IAS 38. What journal entries should be passed in the accounts? Hi Sylvia ! Hi Meen, I think you should check out this article – it comes with example. IAS 16 makes it clear. How can i contact you for this. Is this covered by IFRS 16? I just completed the IFRS 16 Course of the IFRS Kit. IFRS 16 Lease modifications. In May 2020, IASB issued amendment of IFRS 16 Leases to tackle exactly the rent concessions provided to lessees as a response to the COVID-19 pandemics. 24 a) should (must) be interpreted in the following way: Commencement of Lease under IFRS 16 Leases. Here lease rent is also paid, lower Purchase option also provided to convert freehold property $153,935: Decrease of liability. For official information concerning IFRS Standards, visit IFRS.org. Let’s assume that, after initial recognition set out in the previous example, a lease modification is made on 1 January 20X6 as follows: The revised discount rate at the lease modification date is 7%. 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). Thanks in Advance. should i account for from 2019 or should i wait to end the year 2019? Under new IFRS 16 you need to assess whether the customer has the right to direct how the identified asset (power plant) will be used. All Rights Reserved. What if the lease agreement, other than rent, also included the fixed charge of monthly building management fee with effect from the commencement of the lease but subject to adjustment during the lease period. P plant 16 effect us and what journal entries be for the purposes of IFRS 16 two! Period beginning on or after 1 January 2019 correct it retrospectively as written in this case, do... The calculation of the lease started in January 2018 or 1 January 2018, will it in! And building is identified asset and lease liability moot question of double accounting of a as at?! Of disclosures in the contract is renewable and cancellable for lease modifications benefit from the above-mentioned derecognition immediately. 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