Case IFRS 16 Lease car contract

Because this is a quite frequently used type of lease it is good to get an understanding of how to apply IFRS 16 on a car lease. This includes all the detailed calculations in spreadsheet examples (including Excel functions used) needed to record the correct entries.

The case:

Contract commencement date: 27/02/2017
Lease term: 48 months
The lessor’s investment in the car is EUR 20,872.33
The residual value of the car is EUR 12,112.00
The monthly lease payment … Continue reading

The contract contains a lease

A lease is a contract outlining the terms under which one party agrees to rent property owned by another party. It guarantees the lessee, also known as the tenant, use of an asset and guarantees the lessor, the property owner or landlord, regular payments from the lessee for a specified number of months or years. Both the lessee and the lessor face consequences if they fail to uphold the terms of the contract.

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Does the contract contain a lease 5

Did the customer design the asset in a way that predetermines how and for what
purpose the asset will be used throughout the period of use?

Consideration: The customer designed the asset (or specific aspects of the asset) in a way that predetermines how and for what purpose the asset will be used throughout the period of use.

Yes   /   No

This is part of the  walk through decision model that may assit in determining if a contract
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Does the contract contain a lease 2

Does the customer have the right to obtain substantially all of the economic
benefits from use of the asset throughout the period of use?

Consider the explanations in the right to obtain economic benefits from use, before answering the question yes or no. You will be going to the next question or come to a conclusion.

Yes   /   No

This is part of the  walk through decision model that may assit in determining if a contract contains
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The contract does not contain a lease

Because the contract does not contain a lease IFRS 16 Leases does not apply.

Signing a contract will not require a journal entry unless cash, a promissory note, or another asset is exchanged at the time. Signing a contract causes  a commitment but does not necessarily create a liability or asset at the time of signing.

The entity shall account for a non-lease contract applying other appicable IFRSs.

This is part of the  walk through decision model that may assit in determining if a
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IFRS 16 Scope

An entity shall apply IFRS 16 Leases to all leases, including leases of right-of-use
assets in a sublease, except for:

  1. leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
  2. leases of biological assets within the scope of IAS 41 Agriculture held by a lessee;
  3. service concession arrangements within the scope of IFRIC 12 Service
    Concession Arrangements;
  4. licences of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from Contracts with Customers; and
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Investment Property

Investment property – Introduction

16.1 Investment property applies to accounting for investments in land or buildings that meet the definition of investment property (See Definition and initial recognition of investment property – Owner and Lessee) and some property interests held by a lessee under an operating lease (see Definition and initial recognition of investment property – Lessee) that are treated like investment property. Only investment property whose fair value can be measured reliably without undue cost or effort … Continue reading