IFRS 16 - ACCOUNTING FOR LEASES
Under IFRS 16, the accounting for leases slightly differs from IAS 17. Earlier in IAS 17, a lessee was not required to recognize assets and liabilities arising from operating leases. Now, under IFRS 16 a lessee is required to recognize both assets and liabilities for almost all the leases. The exception is only in two cases when the lease is
-> a short term lease
-> The underlying asset has a low value
What is a Short Term Lease?
Ans: A Short Term Lease is a lease whose lease period is anywhere between 1 - 12 months.
If the lease is less than 12 months, but it has a purchase option at the end of the lease period. Will it still be classified as a short term lease?
Ans: No, a lease having a purchase option at the end of the lease period will not be qualified as a short term lease.
What is the accounting treatment, if the lessee has an option to extend the lease period beyond 12 months?
Ans: If the lessee has an option to extend the lease period beyond 12 months and if the lessee is reasonably certain at the commencement of the lease that the extension will be made, then the lease will not be a short term lease. On the other hand, if the lessee is reasonably certain at the commencement of the lease that the lease period will not be extended, then the lease will be a short term lease.
What should be the value of the underlying asset in order to be classified as low-value asset?
Ans: According to IASB, the value of the underlying asset should be lower than $5000 in order to be classified as a low value asset. Also, this classification is applicable only for new assets.
DEFINITION OF LEASE:
IAS 17 defines lease as an "agreement whereby the lessor conveys to the lessee in return for payment or series of payments the right to use an asset for an agreed period of time".
Will IFRS 16 apply to the contracts which contain right to use the asset and also requires operation and maintenance service of such assets?
Ans Yes, IFRS 16 applies to a lease contract if it contains the right to use the asset and also requires operation and maintenance service of such assets. IFRS 16 does not apply if the contract does not contain the right to use the asset and it is only a contract for services.
Will IFRS 16 apply if the lease contract gives the option to acquire a title to the asset when the agreed conditions have been complied with?
Ans Yes, IFRS 16 applies to hire purchase contracts where the lease contract gives the option to the hirer to acquire the title to the asset when the agreed conditions have been complied with.
HOW TO DETERMINE WHETHER AN ARRANGEMENT CONTAINS LEASE?
HOW TO DETERMINE IF AN ARRANGEMENT HAS A LEASE IN SUBSTANCE THOUGH NOT IN ITS LEGAL FORM?
WHEN TO MAKE THE MEASUREMENT AND HOW TO IDENTIFY THE LEASE ELEMENT?
Ans: The answer to this question is provided in IFRIC 4. The interpretation specifies that if the arrangement contains any of the following criteria, then it is said to contain a lease and should be accounted for in accordance with IAS 17.
1) Fulfillment of an arrangement depends on a specific asset. Here, the asset need not be explicitly identified by the contractual provisions of the arrangement. It could be implicitly specified and it is not economically feasible or practical for the supplier to fulfill the arrangement by providing use of alternative assets (for more clarity read identification of asset)
2) The arrangement conveys a right to use the underlying asset. An arrangement is said to convey the right to use an asset if the following conditions are met
The purchaser in the agreement has the ability or right to operate the asset or direct others to operate the asset(while obtaining more than insignificant amount of the output of the asset).
The purchaser has the ability or right to control physical access to the asset(while obtaining more than insignificant amount of the output of the asset).
There is only a remote possibility that the person other than the purchaser will take more than insignificant amount of the output of the asset and the price paid by the purchaser is neither the fixed per unit of output nor equal to the current market price at the time of delivery.
IDENTIFICATION OF ASSET
We just finished discussing about two conditions which are to be met to determine whether an arrangement contains lease. Of the two conditions, the first one said that an arrangement
should depend on specified asset or assets. IAS 17 applies only to an arrangement in which there is a right to use an asset. Hence, an arrangement will not contain lease unless it depends on specified asset or assets.
If the specific asset is explicitly identified by the arrangement
If an arrangement specifically identifies the asset, the arrangement is said to contain lease, only if it is dependent on the specified asset. If the seller is able to provide goods or services with any other asset other than those specified explicitly in the agreement, then the arrangement is not said to contain lease.
If the specific asset is not explicitly identified by the arrangement
Even if a specific asset/assets are not identified by the arrangement, if the supplier is not able to provide alternative assets or it is not economically feasible for him to provide them, then the arrangement is said to contain a lease.