Niraj Thapa ❚ IFRS:An Opportunity ❚ Discussing IFRS 16:LEASES

1. IFRS: An Opportunity
Discussing
IFRS 16: LEASES
I have made an attempt to highlight few updates on
the topic.
From a finance perspective, these 3 decisions
(Financing, Investing & Dividends) have always
been critical to a company so as to maximize firm’s
value. One of the important components of
Financing Decision is “Leasing” and let me assure
you, this time I will not be discussing it from a
finance perspective.
WHY IFRS 16
On my first paragraph I would like to answer the
most sought question “Why IFRS 16? - What’s the
problem with existing Standards!”
Answer: There is A GAP in GAAPs. US GAAP runs
around 30000 pages while IFRS runs for around
1000 pages.
Leases being an important and flexible source of
financing to the companies, over 85% of these lease
commitments do not appear on balance sheet today.
Because, the previous (old) model required lessees
and lessors to classify their leases as either finance
or operating leases and to account for those two
types of leases differently. For operating leases
there was no need to recognize Lease Assets & Lease
Liabilities. The problem is transactions that were
economically similar is being accounted very
differently.
As a result the existing standards (AS-19/IAS-17)
are highly criticized as these model fails to make
faithful representation of leasing transactions which
makes investors and stakeholders difficult to get a
clear picture of company’s lease assets and
liabilities. Furthermore it’s difficult to compare the
financial position of the companies that lease assets
with those that buy assets. It’s a reality because
operating lease is an off balance sheet item
currently. Thus under IFRS 16 operating leases will
be a balance sheet item.
IFRS 16 ?
The IFRS 16: Leases was issued in 13th January 2016
and applies to annual reporting periods beginning
on or after 1st January 2019. Oh! Then is it too early
to study. It’s better to study than not to study. Early
application of IFRS 16 is permitted provided your
entity applies for IFRS 15: Revenue from Contracts
with Customers. So, if your company is highly
affected by IFRS 15, then early application is
desirable.
When looked over the financial statements of two
entities-one having financial lease and another
having operating lease, it could hide the true gearing
of the company of the company, as a result it also
hampers comparability, and thus, IFRS comes into
play.
MAJOR CHANGES
Remember! Major changes have been made from
lessee's perspective, so I will be discussing the
highlights only.
Accounting for lease in the lessee’s financial
statements changed and lessees do not classify the
lease anymore. Instead they should account for all the
leases in the same way.
IFRS 16 requires a lessee to recognize the assets and
liabilities for the rights and obligation created by
leases. Hence, Operating Lease is no longer an off
balance sheet item under IFRS 16.
The lessees were able to hide certain liabilities
resulting from leases and simply not present them on
the face of the financial statements. Under the new
standard, lessees will need to show all the leases in the
statement of financial position instead of hiding them
in notes to financial statements.
Are there any exemptions??
Of course, a lessee is not required to account for
lease assets and lease liabilities for all leases with a
lease term up to or less than 12 months and for
those leases where the underlying asset is of low
value.

2. ACCOUNTING BY LESSEE
A lease is defined as a contract or part of contract
that conveys the right to use an asset (underlying
asset) for a period of time in exchange for
consideration.
Again I repeat- There is no more classification of lease
into Finance Lease and Operating Lease by the lessee
A lessee measures Right OF Use Assets
(ROU- Assets) similarly to other non financial
assets like (Property, plant and equipment) and
lease liabilities to other financial liabilities.
As a result:
a) he claims for depreciation
b) books interest on lease liability
c) classifies lease payments into principal portion
and interest portion and presents in statement of
cash flows.
MEASUREMENT
The right of use asset is measured initially in the
amount of the lease liability and initial direct costs
It is then adjusted by lease payments made before or
on commencement date, lease incentives received
and any estimate of dismantling and restoration
costs.
All payments not paid at the commencement date
discounted to present value using the interest rate
implicit in the lease (or incremental borrowing rate)
LOGIC-ROU -ASSET
Logic behind recognizing lessee’s right to use an
underlying asset: AS AN ASSET
IFRS defines an asset as “a present economic
resource controlled by the entity as result of past
events"
Economic resource is a right that has the potential
to produce economic benefits.
Lessee's Right to use an underlying asset meets the
definition of asset based on IASB's views, so such right
is treated as an asset.
Similarly, lessee's obligation to make lease payments
meet the definition of liability as defined in IFRS.
R LEASES & SERVICE CONTRACTS SAME?
The answer is big NO. Because in service contracts,
the customer receives the service only at the time
when the service is rendered and thus the customer
has to make the payment for the service availed.
Service provider may require the use of some asset
to provide a contracted service, but such contract
does not allow making those assets available for use
by customer.
Note: The new definition of the lease can cause that
some contracts previously treated as “service
contracts” can now be treated as “lease contracts”.
EXEMPTIONS DETAILED
Short term leases:
a) Lease term of maximum of 12 months or less
b) Lessee can recognize the lease payments
associated with short term leases as an expense
over the lease term typically on straight line basis.
c) Choice to be made on the basis of CLASS (group)
of underlying assets
d) If you rent a vehicle for 7 months, you can simply
account for all payments made directly in SPL no
need to create ROU Asset and lease liability
Low value assets
a) Choice to be made on Lease by Lease basis
(asset wise)
b) Low value is to be checked assuming as if the
asset is new in all cases. (Lease of old car will not
be a low value item, because when it was new it
was not of low value)
c) You can consider asset amounting $ 5000 as low
value asset
d) Lease with purchase option does not classify to
be of low value asset
e) Lease of IT equipment used by the individual
employees, lease of office furniture.
QUESTION 4 U
Under IFRS (say for operating lease)
Lessor keeps the Asset in BS &
Lessee also keeps same asset in BS at different value.
Both lessee and lessor recognize the asset in their
statement of financial position.
Is this correct?
Thank you for reading!!!
Niraj Thapa (canirajthapa@gmail.com)