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- 3 Marks
Question
IFRS 16: Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption is permitted, provided IFRS 15: Revenue from Contracts with Customers is implemented also. This standard applies to all leases, except those shorter than 12 months and small assets. It also brings additional disclosure requirements for both lessees and lessors. The IFRS brings significant changes to those leases formerly classified as operating leases under IAS 17: Leases, the previous standard.
Required:
Identify THREE (3) key principles behind the accounting treatment for leases as required by IFRS 16.
Answer
- Right-of-use asset: The lessee must recognize a right-of-use asset and a lease liability for all leases unless the lease term is less than 12 months or the underlying asset is of low value.
- Lease liability: The lease liability is measured at the present value of lease payments that are not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate.
- Depreciation and interest: The right-of-use asset is depreciated, and the lease liability incurs interest over the lease term. These are recorded in the lessee’s financial statements, replacing rental expense with depreciation and interest costs.
- Tags: Financial Liabilities, IFRS 16, Leases, Right-of-Use Assets
- Level: Level 2
- Topic: Financial Reporting Standards and Their Applications
- Series: MAY 2019
- Uploader: Dotse