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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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 contract contains
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Does a contract include a lease?

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 been vanished.  The only optional exemptions are for certain short-term leases and leases of low-value assets.

Recognising operating leases and intangible assets

As part of using the acquisition method for each Business Combination the acquirer has to recognise operating leases and intangible assets.

Operating leases

The acquirer shall recognise no assets or liabilities related to an operating lease in which the acquiree is the lessee except as required by the following two captions:

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