In this situation, a seller becomes a lessee and a buyer becomes a lessor. if Yes In summary, the following accounting entries are made by Entity A at the modification date: 1/ Gain on the termination of the lease of 2,000 sq metres for years 9 and 10 -> immediate recognition in P/L: 2/ Impact of revised discount rate for years 6-8 on the lease of 2,000 sq metres: 3/ Impact of increased leased space (additional 1,500 sq metres): Note: this example is based on illustrative example 18 accompanying IFRS 16. It is treated as a separate lease (IFRS 16.44); or 2. what about the cost is for innovation (eg. A companion publication looking at real estate leases from the tenant’s perspective is also available. I have more details in the Abstract: present value of new lease liability USD 15m. 4 IFRS IN PRACTICE 2019/2020 fi IFRS 16 LEASES 10. remeasures the lease liability by discounting the revised lease payments using a revised discount rate. IFRS® is the IFRS Foundation’s registered Trade Mark and is used by Simlogic, s.r.o The article is great, but I would like to point out that when the answer is “yes” to the following question, then you probably DO not have a lease contract: “Can the supplier substitute the asset during the period of use? Yes, Atul, you are right. Is IFRS effective starting on 1 January 2018 or 1 January 2019. 24 a) should (must) be interpreted in the following way: Hello Silvia, assuming i have leashold land for 49 years at $2m. IFRS 16 Leases contains detailed guidance on how to account for lease modifications. what entries would be in general when we extend the period of lease as if the lease yet classified as operating lease. So, the acquisition cost of your ROU asset should have included the provision for the restoration cost. after period of 36 months customer has right to buy this asset at $1 (negligible amount) what should be accounting treatment in my books ? Your feedback will be highly appreciated. Hi, I understood you are adopting IFRS 16 for the first time, so in this case please check out this article describing different options that you have, with examples. In January 2016, the new standard about lease accounting IFRS 16 was issued and it introduced a few major changes. Can you please share your approach in term of Abstract: Thank you Silvia, this was great article to get the first touch to the standard. Because our auditor insists want to pass the ROU at beginning of 2019. For each payment, the discount factor is calculated in order to determine the total present value of the lease liability. Our Real estate leases – The landlord perspective (PDF 1.4 MB) publication covers key areas of IFRS 16 that are particularly relevant to landlords in real estate leases. When a lease modification is not accounted for as a separate lease, a lessee (customer) (IFRS 16.45): The above accounting is made at the effective date of the lease modification, which is the date when both parties agree to a lease modification. Does this mean that we will create a new account, i.e., Right-of-use account (ROU), in our chart of accounts? thanks in advance and waiting for your cooperation The IASB staff have recorded a web presentation discussing the lease modification requirements for lessees in IFRS 16 Leases. A 5 years lease contract has a term to pay 3 years rent in advance and the rest amount (2 years rent) at the end of the first three years. Please check out IFRS 16 Leases in the following video: report "Top 7 IFRS Mistakes" + free IFRS mini-course. 3) Prepaid expenses You can apply IFRS 16 earlier than that, but only if you apply IFRS 15 Revenue from Contracts with Customers, too (the reason is that these 2 standards are closely related). It is intended for use by entities that are in the process of adopting IFRS 16 and those that have already adopted it. As it is not logical that two leased assets – one with refundable purchase taxes, one with non refundable pruchase taxes – that have the same lease payment schedule should have the same ROA-cost amount I think (my opinion) that IFRS 16 art. $92,001: Decrease of right-of-use asset by 50% Under the new standard, lessees will need to show all the leases right in their statement of financial position instead of hiding them in the notes to the financial statements. Thanks for this article! The scope of the lease decreases by 50% so that Entity A leases only 2,500 sq m out of original 5,000 sq m. The annual payment decreases as well from $50,000 to $30,000. 1) open end contracts, which we are going to renew every year. I have a query regarding how we would adjust for rent accruals and prepayments existing at ye 31 dec 2018 under modified retrospective approach whereby we set the lease liability = right of use asset. is IFRS 16 still enforceable? Future payments for the lease are listed in the table below. Now, whether the rent during the construction period can be capitalized or not, it’s a huge question and I tried to clarify it here. How do we account for it? During the preparatory works, ABC discovered that the operating lease contract related to a machine might require some adjustments. (the point): Sale-and-Leaseback transactions 92. As a result of the above calculations, Entity A recognises $13,308 ($105,309 – $92,001) as a gain on the termination of the lease under old terms (immediate recognition in P/L). For those leases, a lessee shall account for the right-of-use asset and the lease liability applying this Standard from the date of initial application. Can we capitalise depreciation charges on right to use asset (land) during the construction period of a permanent building on the same land? what would be the accounting treatment for this? I don’t think so since the salary is paid rather for the driver’s service than for the right-of-use asset. Hi Silvia, How do I: That is we computed the lease over 60 years but it should have been over 70 years. i have a query regarding sale and lease back transactions. How should the ‘Finance Lease Receivable’ from a sublease be presented in the ‘Statement of Financial Position’? VAT Operating Expenses What it means by lease by lease basis? IFRS 16 Leases replaces IAS 17 Leases, the earlier lease accounting standard. Can the asset be identified? In this case the lease term is your asset’s useful life. Hi Silvia your articles and website is so helpful it has helped me through many questions I have come across on IFRS 16. Hi Silvia, I have Question Please ( If I have rent contract for 5 Years Contains Base rent of 10,000,000 Per Year and 200,000 As service Charges Yearly 5% annual increment As per IAS 17 Total Base rent of the five years Amortized equally on monthly basis. does it applies for lessor or for finance lease??? Hi Meen, I think you should check out this article – it comes with example. I note that your article about states that there is no classification of operating lease and finance lease for lessee. We ultimately charge one fixed price for the entire service. I hope you are well. – account for the disposal or write-off of the asset and de-recognition of the leasee’s lease laibility. Hi Sylwia, – who has these rights? Are you ready? sale qualifies ifrs 15 You have made the complex IFRS 16 look easy !The moot question of double accounting of asset by both lessor and lessee remains. Lessor keeps recognizing the leased asset in his statement of financial position. If you sublet a building for the remainder of the lease (to be classified as a finance lease), how do you treat fixtures & fittings that you hold as an asset on your balance sheet? Question on Restoration costs. Althought under IAS 16 (art. Thanks For lease modifications that change the consideration paid for a lease, the adjustment to the carrying amount of the right-of-use asset effectively represents a change in the cost of the right-of-use asset as a result of the modification. What if the contracts doesn’t state any useful life/term and the contract is renewable and cancellable. Thanks. Really helpful, thanks. Is this a finance or operating lease for Y Company? S. Thanks a lot for the valuable inputs, really appreciated. Hi Juliette, was the amendment in place on the first application and you forgot to include it? Amr, Hello Sylivie. No, because under the finance lease, the lessor does not have an item of PPE, but the net investment in the lease (receivable). When a lease modification does not decrease the scope of a lease, the changes in lease liability have a corresponding impact on the right-of-use asset without any one-off recognition in P/L (IFRS 16.46(b)). IFRS 16 - Leases is changing effective for annual periods beginning on or after 1 January 2019. Hi Sylvia ! Assuming that the underlying asset is an investment property (land) in the lessee’s books, what happens to the right of use asset at the end of the lease term in the lessee’s books under an operating lease? should i account for from 2019 or should i wait to end the year 2019? But if there are any licensing fees to use that software, can we treat the licensing fee under IFRS 16? 036: Contract asset vs. account receivable. 3. as lease liability is present value of the lease payments that are not paid at the lease commencement date we get from 1. and 2. The application of IFRS 16.C10(c) is tantamount to treating the leases as short-term leases from the DIA. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration (IFRS16, par.9). I have a question about a lease agreement signed by a holding company with landlord of office premises. – What are my journal entries? Learn here what's the matter and see the example. Furthermore – can you argue that the depreciation of the Right of Use Asset can be classified under G&A (and not with other depreciation?). or let’s say is it a lease contract? Do you just disclose it as reclassification under IFRS 16 on PPE note ? Or it should not? Below is an excel example based on Example 19 from IFRS 16. Under the limited retrospective approach to applying IFRS 16 by lessees, does a lessee need to to determine a new discount rate on the date of initial application (Jan 1st, 2019) to subsequently remeasure the lease liability carried forward from 2018 for a lease previously accounted for a finance lease? 63) outlines examples of situations that would normally lead to a lease being classified as a finance lease (and they are almost carbon copy from older IAS 17): At the commencement of the lease term, lessor should recognize lease receivable in his statement of financial position. As a result, Entity A recognises $6,733 ($153,935 – $147,202) as a gain on the termination of the lease under old terms (immediate recognition in P/L). if yes then there is no definite future period mentioned in the agreement . if the holding company default in lease payment, each subsidiary will be liable to any loss to the landlord. For example the amortisation has decreased since in previous calculation we over amortise. Initial measurement of the right … Entity A determines that the increase in scope of the lease does not meet the criteria set out in paragraph IFRS 16.44 and therefore the increase in scope is not accounted for as a separate lease. So we have a big factory building leases with two kind of lease terms: thank you for your insightful articles, really finding it easy to follow and understand. It is not treated as a separate lease (IFRS 16.45-46). Under new IFRS 16 you need to assess whether the customer has the right to direct how the identified asset (power plant) will be used. Can the customer get the economic benefit from the use of that asset? Hi, Silvia, What will be the treatment of previously recognized finance lease when my year end is at 31 march 2019? a) Debit Lease receivable Credit PPE Your expertise in this matter is highly appreciated. Use at your own risk. 2. 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