IFRS 16 Leases

This Standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. The objective is to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions. This information gives a basis for users of financial statements to assess the effect that leases have on the financial position, financial performance and cash flows of an entity.

Calculations IFRS 16 Leases

Leases – Fixed payments depending on an index and rent-free period

This case is rather simple, fixed payments depending on an index and rent-free period. Here are only included the journal entries to be made at the inception of the lease contract.

This contract comprises a lease contract for the lease of office space, archive space, inside garage space and outside parking places. The contract consist of special and general conditions. The special conditions prevail the general conditions.

The lease contract has a lease term of 12 consecutive years (144 months), starting date is 1 March 2015, ending date is 28 February 2027. Tacit renewal of the agreement for a definite period of time, such as with six … Read more

IFRS 16 Leases


IFRS 16 Scope

IFRS 16 Leases was introduced by IASB in January 2016. IFRS 16 Leases is effective for periods beginning on or after 1 January 2019. Early adoption is allowed, but only in conjunction with IFRS 15 Revenue from Contracts with Customers because significant interactions are likely. This standard will significantly change how lessees account for leases as it removes the distinction between operating and finance leases (around 85% of lease contracts are operating leases). For lessors, IFRS 16 will only have minor effects.

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Right to direct the use of the identified asset

[IFRS 16 B24]

Requiring a customer to have the right to direct the use of an identified asset is a change from IFRIC 4. A contract may have met IFRIC 4’s control criterion if, for example, the customer obtained substantially all of the output of an underlying asset and met certain price-per-unit-of-output criteria even though the customer did not have the right to direct the use of the identified asset as contemplated by IFRS 16. Under IFRS 16, such arrangements would no longer be considered leases.

A customer has the right to direct the use of an identified asset throughout the period of use when either:

  • The customer has the right to direct how and for what purpose

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Leases and joint arrangements

Entities often enter into joint arrangements with other entities for certain activities (e.g., exploration of oil and gas fields, development of pharmaceutical products).

A contract for the use of an asset by a joint arrangement might be entered into in a number of different ways, including:

  1. Directly by the joint arrangement, if the joint arrangement has its own legal identity
  2. By each of the parties to the joint arrangement (i.e., the lead operator and the other parties, commonly referred to as the non-operators) individually signing the same arrangement
  3. By one or more of the parties to the joint arrangement on behalf of the joint arrangement. Generally, this would be evidenced in the contract and the parties to the joint arrangement
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IFRS 16 Leases – Lease liability

The lease liability will be the present value of the lease payments not paid on the date the contract starts over the lease term. This will be calculated using the interest rate implicit in the lease or, if that is not known, the lessee’s incremental borrowing rate.

Lease payments

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Impairment test before and after IFRS 16 Leases

Below is a simplified example of an impairment test that shows the situation pre-IFRS 16 and post-IFRS 16 and the effects of adjusting the (pre-tax) discount rate. The CGU has a finite life of five years, with no residual value. The lease term and useful life of the right-of-use asset are also five years.

Pre-IFRS 16

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Treatment of lease liabilities

The recognition of right-of-use assets with corresponding lease liabilities raises the question of whether and how the lease liabilities associated with the right-of-use assets should be considered when performing impairment assessments. In our view, the treatment of lease liabilities may differ in practice depending on whether the recoverable amount is based on the assets’ fair value less cost of disposal (FVLCD) or value in use (VIU).

In general, liabilities are ignored when performing an impairment test of a CGU, meaning that the starting point would be that both the carrying amount of the lease liabilities and the respective future lease payments would be ignored when determining the carrying amount and the recoverable amount of a CGU. However, there are exceptions … Read more

Impairment of right-of-use assets

In IFRS 16, lessees must record a right-of-use asset and a lease liability for all lease arrangements in their statement of financial position. Under IFRS 16, these ‘new’ right-of-use assets will be subject to the impairment requirements of IAS 36.

When to test for impairment?

Similar to other assets, a right-of-use-asset will only be tested for impairment when impairment indicators exist. If impairment indicators exist, an entity must determine whether the right-of-use-asset can be tested on a stand-alone basis or whether it will have to be tested at a Cash Generating Unit level (GCU-level). This will depend on whether the right-of-use-asset generates largely independent cash inflows from other assets or groups of assets. While there may be instances where leased … Read more

Implementation IFRS 16 Leases Air France KLM

In the Registration Document 2018 including the annual financial report by AIR FRANCE KLM GROUP the Group implemented IFRS 16 and IFRS 15 and IFRS 9. Here are some excerpts from the document to illustrate the effects:

[Air France KLM – 2018 Registration document – page 220]

note 2. Restatement of 2017 Financial statements

Since January 1, 2018, the Air France – KLM Group has applied the following three new standards:

IFRS 9 “Financial Instruments

  • IFRS 15 “Revenue Recognition from Contracts with Customers”

This standard came into force on January 1, 2018.

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