LEASE ACCOUNTING

IFRS 16
NEW STANDARD
Objectives
01 To briefly discussed IAS 17

02 To discussed the new lease standard (IFRS 16)

To see the key difference between IFRS 16 and IAS

03 17

To know the reason why IAS 17 is replaced by IFRS

04 16

To know how IFRS 16 affects company’s

05 balance sheet and income statement
IAS 17
 Lease is an agreement liability recognition by
whereby the lessor the lessee and a
IAS 17 conveys to the lessee in receivable
return for a payment or by the lessor.
series of payments the
right to use an asset for Operating lease which
an agreed period of time. result in expense
recognition by the lessee,
A lease is classified as with the asset remaining
finance lease and recognized by the lessor.
operating lease for both
lessees and lessors. Superseded by IFRS 16
started on January 1,
Finance lease which 2019
give rise to asset and
IFRS 16
 OBJECTIVE OF IFRS 16

 IFRS 16 sets out the principles for the recognition, measurement, presentatio
n and disclosure of leases. The objective is to ensure that lessees and lessors
provide relevant information in a manner that faithfully represents those trans
actions.
 IFRS 16 requires an entity to consider the terms and conditions of contracts a
nd all relevant facts and circumstances, and to apply the standard consistentl
y to contracts with similar characteristics and in similar circumstances.
 SCOPE OF IFRS 16

 IFRS 16 applies to all leases, including leases of right-of-use assets in a

sublease, except for the following:
o Leases to explore for, or use, minerals, oil, natural gas and similar
non-regenerative resources
o Leases of biological assets
o Service concession arrangements
o Licenses of intellectual property granted by a lessor
o Rights held by a lessee under licensing agreements

 A lessee is not required to apply IFRS 16 to leases of intangible assets not

covered by the exceptions above. However, a lessee could choose to
account for leases of such intangible assets under IFRS 16.
 LESSEE ACCOUNTING
 IFRS 16 introduces a single lessee accounting model and
IFRS 16 requires a lessee to recognize assets and liabilities for all leases
except for:
- Short-term lease
- Low value lease

 A lease is defined as a contract or part of a contract that conveys

the right to use the underlying asset for a period of
time in exchange for consideration.

 A contract conveys the right to control the use of asset if the

customer has:
- obtain substantially all of the economic benefits from the use of the
identified asset
- direct use of the identified asset
 NO
START Is there an identified asset?

YES
Does the customer have the right to obtain
substantially all of the economic benefits NO
from use of the asset throughout the period
of use?
YES
Does the customer or the supplier have the SUPPLIER
CUSTOMER right to direct how and for what purpose the
identified asset is used throughout the
Did the customer design
period of use?
the asset (or specific
YES aspects of the asset) in a
way that predetermines how NO DOES NOT
Does the customer or the supplier have the CONTAIN
and for what purpose the
NO LEASE
right to direct how and for what purpose the asset will be used
identified asset is used throughout the throughout the period of
period of use? use?

YES YES
CONTAINS
A LEASE
Customer X enters into a contract with Supplier Y to use a vehicle for a three-year
period. The vehicle is identified in the contract. Supplier Y cannot substitute
another vehicle unless the specified vehicle is not operational.
Under the contract:
o Customer X operates the vehicle (i.e., drives the vehicle) or directs others to
operate the vehicle (e.g., hires a driver).
o Customer X decides how to use the vehicle (within contractual limitations,
discussed below). For example, throughout the period of use, Customer X
decides where the vehicle goes, as well as when or whether it is used and
what it is used for. Customer X can also change these decisions throughout
the period of use.
o Supplier Y prohibits certain uses of the vehicle (e.g., moving it overseas) and
modifications to the vehicle to protect its interest in the asset.

Does Customer X has the right of control the use of asset?

 LESSEE ACCOUNTING
 For a contract that contains a lease component and additional
IFRS 16 lease and non-lease components, lessee shall allocate the
consideration payable on the basis of the relative stand-alone
prices.
Sample Scenario:
A lessee enters into a lease of equipment. The contract stipulates the
lessor will perform maintenance of the leased equipment and receive
consideration for that maintenance service. The contract includes the
following fixed prices for the lease and non-lease component:

Lease Php 80,000

Maintenance Php 10,000
Total Php 90,000
 LESSEE ACCOUNTING
Assume the stand-alone prices cannot be readily observed, so the
IFRS 16 lessee makes estimates, maximizing the use of observable information,
of the lease and non-lease components, as follows:
Lease Php 85,000
Maintenance Php 15,000
Total Php 100,000

The lessee allocates the consideration in the contract (Php 90,000), as

follows:
Lease Php 76,500(1)
Maintenance Php 13,500(2)
Total Php 90,000

(1) 85% x CU90,000

(2) 15% x CU90,000
 LESSEE ACCOUNTING
 If not readily available, a lessee may elect not to separate
IFRS 16 non-lease components from lease components and instead
account for all components as a lease.
 Lessee shall measure the right of use asset at cost at
commencement date which comprises:
- present value of lease payments
- lease payments made to lessor at or before commencement date, such
as lease bonus, less any lease incentives
- initial direct cost incurred by the lessee
- estimate of cost of dismantling, removing and restoring the underlying
asset for which the lessee has a present obligation
 Lessee shall subsequently measure the right of use asset
applying the cost model unless it applies either of the measurement
models.
 LESSEE ACCOUNTING
 To apply a cost model, a lessee shall measure the right-of-use asset
IFRS 16 at cost:
o less any accumulated depreciation and any accumulated
impairment losses; and
o adjustment for any remeasurement of the lease liability
 Lease liability is initially measured at the present value of the
lease payments payable over the lease term, discounted at the
rate implicit in the lease if that can be readily determined and if
not, the lessee shall use their incremental borrowing rate
Lease-related amounts and activities are presented in
Lessee’s financial statements as follows:
 The objective of IFRS 16’s disclosure is for information to be provided in the
notes that, together with information provided in the statement of financial
position, statement of profit or loss and statement of cash flows, gives a basis
users to assess the effect that leases have.
 A lessee shall either apply IFRS 16 with full retrospective effect or
alternatively not restate comparative information but recognize the cumulative
effect of initially applying IFRS 16 as an adjustment to opening equity at the
date of initial application.
 LESSOR ACCOUNTING
 Lessors shall classify each lease as an operating lease or finance
IFRS 16 lease.
 A lease is classified as a finance lease if it transfers substantially
all the risk and rewards incidental to ownership of an underlying
underlying asset. Otherwise a lease is classified as an operating
lease.
 Financial lease indicators:
- lease transfer ownership of the underlying asset to the lessee at the end
of the lease term
- lease has an option to purchase the asset at the price sufficiently lower
than the fair value at the date the option becomes exercisable
- lease term is for the major part of the economic life of the underlying asset
- the present value of the lease payments amounts to substantially all of the
fair value of the underlying asset at the inception of the lease
 LESSOR ACCOUNTING
 At the commencement date, a lessor shall recognize assets held
IFRS 16 under a finance lease in its statement of financial position and
present them as a receivable at an amount equal to the net
investment in the lease.
 Initial measurement of the lease payments included in the net
investment in the lease:
o fixed payments, less any lease incentives payable;
o variable lease payments;
o any residual value guarantees provided to the lessor by the
lessee;
o the exercise price of a purchase option; and
o payments of penalties for terminating the lease
 LESSOR ACCOUNTING
 A lessor shall recognize finance income over the lease term, based
IFRS 16 on a pattern reflecting a constant periodic rate of return on the
lessor’s net investment in the lease.
 A lessor shall recognize lease payments from operating leases as
income on either a straight-line basis or another systematic basis.
The lessor shall apply another systematic basis if that basis is
more representative of the pattern in which benefit derived from
the use of the underlying asset is diminished.
 Lease-related amounts and activities are presented in
lessor’s financial statements as follows:
 At the commencement date, a lessor shall recognize assets held under a
finance lease in its statement of financial position and present them as a
receivable at an amount equal to the net investment in the lease.

 Lessor shall present underlying assets subject to operating leases in its

statement of financial position according to the nature of the underlying
asset.
 SALES AND LEASEBACK TRANSACTIONS
 If an entity (the seller-lessee) transfers an asset to another entity
IFRS 16 (the buyer-lessor) and leases that asset back from the buyer-less
or, both the seller-lessee and the buyer-lessor shall account for
the transfer contract and the lease
 Sale and leaseback transactions no longer provide lessees with a
source of off-balance sheet financing.
 An entity shall apply the requirements for determining when a
performance obligation is satisfied in IFRS 15 to determine
whether the transfer of an asset is accounted for as a sale of that
asset.
 KEY DIFFERENCES BETWEEN

&
IAS 17 IFRS 16
 IAS 17 IFRS 16

Operating
Finance Lease All leases
Lease
Assets
---

Liabilities ---

Off balance
Sheet rights/
obligations --- ---
 IAS 17 IFRS 16

 based on who bears the  based on who has the

risks and rewards of the right of use of the asset
assets under lease

 only finance leases are  all leases are recognized

recognized on balance as assets and liabilities
sheet with operating on balance sheet
leases being an
expense only
 IAS 17 IFRS 16

 Lease and service  Service components of

contracts under an leases must be
operating lease are segregated from assets
generally not required as the treatment will
for analysis as differ and the service
accounting treatment is element will not form part
probably accounted for of the asset, but will
in the same way remain an expense item
 IAS 17
 IAS 17 focuses on  Seller-lessees and
whether the leaseback is
an operating or finance
lease and does not
explicitly require the
transfer of the asset to
meet the requirements for
a sale in accordance with
IAS 18 for seller-lessees
and buyer-lessors
IFRS 16
buyer-lessors apply the
requirements in IFRS
15 to determine
whether a sale has
occurred in a sale and
leaseback transaction
 IAS 17 IFRS 16

 Disclosure cover the  Disclosures do away with

specific requirement of the separate presentation
finance leases separate of finance and operating
from operating leases leases instead requires
disclosures of the right of
use assets and liabilities.
 IAS 17 IFRS 16

 Disclosure cover the  Disclosures do away with

specific requirement of the separate presentation
finance leases separate of finance and operating
from operating leases leases instead requires
disclosures of the right of
use assets and liabilities.
 Reason why IAS 17 is replaced by IFRS 16

Responding to concerns about the lack of transparency of information about

lease obligations, the IASB and the FASB initiated a project to improve the
accounting for leases. To meet this objective, the IASB and the FASB
agreed that a customer (lessee) leasing assets should recognize assets and
liabilities arising from those leases.
 Effect of IFRS 16
BALANCE INCOME
SHEET STATEMENT
Lease assets EBITDA
Financial liabilities Operating profit and finance costs
Equity

For companies that have material IFRS 16 is expected to result in

off balance sheet leases, IFRS higher EBITDA and
16 is expected to result in an operating profit for companies that
increase in lease assets and have material off balance sheet
financial liabilities. leases.
Recognizing assets and liabilities in essence for all leases provides a more
faithful representation of the financial position of a company and greater
transparency about the company’s financial leverage and capital employee.
This is expected to enable investors and analysts to better assess the
financial position and financial performance of a company.
Thank you