Best guide IFRS 16 Lessor modifications

Best guide IFRS 16 Lessor modifications

summarises the accounting for lessor modifications that depends on – and may change – the lease classification.

Unlike IAS 17 Leases, the new standard provides detailed guidance on the lessor accounting for lease modifications, with separate guidance for modifications to finance leases and operating leases.

However, additional complexities arise for modifications of a finance lease receivable not accounted for as a separate lease for which, under paragraph 80(b) of IFRS 16, the lessor applies the requirements of IFRS 9 Financial Instruments. A number of issues arise due to differences in the basic concepts between IFRS 16 and IFRS 9.

The following diagram summarises the accounting for lease modifications by a lessor.

Best guide IFRS 16 Lessor modifications

Separate lease Not a separate lease – Finance to operating Not a separate lease – Finance to finance Lessor modifications to operating expenses

* A lessee reassessment of whether it is reasonably certain to exercise an option to extend, or not to exercise a termination option, included in the original lease contract is not a lease modification

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Best focus on IFRS 16 Leases

Focus on IFRS 16 Leases

 

Best focus on IFRS 16 Leases Best focus on IFRS 16 Leases

Source: BDO – IFRS at a glance

Focus on IFRS 16 Leases or in slightly more detail…..

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Leases

Lease - 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.

Financing activities

Financing activities - Activities that result in changes in the size and composition of the contributed capital and borrowings of the entity.

Does a contract include a lease?

Does a contract include a lease? is a game like type of thing, walk through a few questions and you have decided whether a contract includes a lease or not.

As from 1 January 2019, the lessee is required to recognise almost all lease contracts on the balance sheet. The distinction between operating lease and finance lease has almost vanished.  The only optional exemptions are for certain short-term leases and leases of low-value assets.  Does a contract include a lease

IFRS 16 defines a lease 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.

This walk through decision model may … Read more

Notes to the financial statements

Notes to the financial statements that contain information in addition to the statement of financial position, of financial performance, of changes in equity

Sale and leaseback accounting

Sale and leaseback accounting – IFRS 16 makes significant changes to sale and leaseback accounting. A sale and leaseback transaction is one where an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) for consideration and leases that asset back from the buyer-lessor.

A sale and leaseback transaction is a popular way for entities to secure long-term financing from substantial property, plant and equipment assets such as land and buildings. IAS 17 covered the accounting for a sale and leaseback transaction in considerable detail but only from the perspective of the seller-lessee. As IFRS 16 has withdrawn the concepts of operating leases and finance leases from lessee accounting, the accounting requirements that the seller-lessee must apply to a … Read more

Financial reporting in change

Financial reporting in change – Many different bodies of practices are used around the world for external financial reporting and these include different approaches to measurement.

  1. Different jurisdictions have developed their own financial reporting requirements, influenced by differences in the uses made of financial reporting information and in business and regulatory environments.
  2. Even within a single jurisdiction, different approaches are sometimes adopted for different entities in order to reflect variations in size, ownership and governance.
  3. Businesses undertake different types of transaction or hold different types of asset or liability. Practices develop that reflect the needs and experiences of particular types of business.

These bodies of practices are rarely systematic; they have evolved over time as collections of diverse responses to Read more

Leases capitalisation on the balance sheet

Summary Leases capitalisation on the balance sheet

IFRS 16 includes a single accounting model for all leases by lessees.

The main implications of the new standard on current practice for lessees include:

  • No more operating leases under IFRS 16 (subject to the exceptions described below)
  • All leases (subject to the exceptions described below) will be capitalised on the balance sheet by recognising a ‘right-of-use’ asset and a lease liability for the present value of the obligation
  • No rental expense! i.e. no more straight-line expenses for operating lease costs. All leases will incur a front-end loaded expense, comprising depreciation on the right-of-use asset, and interest on the lease liability
  • When initially measuring the right-of-use asset and a lease liability, non-cancellable lease
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