is this the same with the previous amortization of the lease liability under PAS 17? If IFRS are mandated by the governing laws of your bank for general purpose financial statements, then you’ll have to change your policy. I have a transaction whereby a land owner has entered into a 99 year lease agreement with an individual who will occupy the land for that period and may build a residential property on it, at the end of the term the land owner may buy back that building at 50% of its fair value. under licence during the term and subject to the conditions contained therein. Accessibility   |   Privacy   |   Terms and Conditions   |   Trade mark guidelines   |   All legal information   |   Using our website. It should not be reported in balance sheet as long as it is not appreciable. Hi Silvia, S. Am I missing something why is the Right of assets minus depreciation not equal to the lease liability balance of 15,937 at the end of the first year. I would be glad if could assist with this situation: Thanks in advance. And depreciation and interest in the balance sheet. I wrote 2-part article on this topic here and here, plus in my IFRS Kit there is a full lecture on how to do exactly these adjustments. Regarding accounting treatment, should the rental expenses be booked as per actual rental cost payable or should it be on a straight line basis over the term of the lease by taking into account 10% increment on rent amount every 2 years. Yes, both lessee and lessor depreciate something. In this case, is the lease agreement non-cancellable in nature as per IAS 17,IFRS 16? Take care! While the adoption of IFRS 16 may require significant work for many lessees, there are various practical expedients you can use to reduce the transition effort. a) Annual escalation of 8% As a simple illustration, let me come up with a small example: Imagine you want to rent some space in the warehouse for storing your goods. I do not understand what does b) means. but if the ownership has not been transferred then lessor can not show it as a profit rather than it will be a term payment for the 99yeras. Under IFRS 16 a lease is defined as: ‘a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for a consideration’. The example suggests that the in­cen­tives relating to the leasehold im­prove­ments and not related to the leased asset, placing it outside the scope of IFRS 16. Achieve Lease Accounting Compliance . A few questions below: Thanks. S. Your article is really so helpful. Accordingly, the comment period on the proposal is short—14 days. I.e. Lease of land will still be reported as operating, aren’t I right? Question 1: if I debit my Plant and Equipment (“PPE”) and credit my hire-purchase/finance lease payable, would this seem strange? – you need to classify the lease first (it says that it’s operating, but looking to the conditions- is it really?) What we do we onerous lease provision recognised at the date of transition under modified retro. approach? You pay still the same amounts whether you apply IAS 17 or IFRS 16. IFRS 16 entails significant changes to the accounting of leases in the books of lessees. Will it be from January 2019 or depending on the tenant’s year end? Thanks for your simple yet informative post. At the end of each year, you simply book the rental expense of CU 10 000 in profit or loss. Therefore, assuming that you apply older IAS 17: In this article, you’ll learn about the main changes that IFRS 16 introduces to the accounting for leases, illustrated on a very simple example. And yes, I will write some other articles about IFRS 16 later on. Or does the land owner have to recognise a revenue over 99 years? The IASB recently issued a new lease standard (IFRS 16) that will be applicable for annual periods beginning on or after 1 January 2019. Oh ya, I have invite your linkedin account. report "Top 7 IFRS Mistakes" + free IFRS mini-course. If it is under a lease then the owner should be having the actual ownership of the land and if it is a sale then ownership is now in buyer hand. Could you please explain how this will be treated under IFRS 16? They need to justify the money they get paid by changing the accounting standards frequently. Dear Irshad, So the rental price is not fixed, it depends on the use of the equipment. In notes to financial statement we need to disclose long term commitment. at what value? I recommend reading the paragraph IFRS16.B34 for the reference. You can read more about the lease term here. S. How did you reach to the result of 23,341 as a lease liability b/f in the first year? Dear Silvia I think more people would appreciate the answer. Best Regards, It’s rikas. as previously we record as Thanks for the great article! In this case, we do not need this anymore? “…but frankly – who, except for auditors, ever reads the notes to the financial statements?” I have one question though, How do we treat the security deposits when implementing this standards? There will be much more assets and liabilities in the balance sheets as before, and as a result, financial rations can change. Thanks for the answer, Thank you. Thanks, Bob and all the best!!! You can capitalize the structural works as “leasehold improvements” and depreciate them over the useful life. S. IASB seems to define ‘low-value’ lease as those have a value of 5000 dollars or less, saw it on IFRS 16, I am not sure about this. And do you measure the lease liability for 5 years, and then subtract the 271 months paid so far? i am confused as i have seen different entries now. STATE THE OBVIOUS – you can earn easy marks. For me, that’s the main problem. 2. The new lease standard will have significant impact on the companies heavily working with operating leases, no questions about it. Finance income Would you mind if I use this question with your first name in my podcast (as for example here)? In this case, the lease is non-cancellable only for 2 months, especially when each party can terminate with 2 months notice without any significant penalty. Does this means that contracts that do not have a specified non-cancellable period are not under the jurisdiction of IFRS 16? When in doubt, i read your posts for guidance. I think if we separate the payment CU 8.571 equal Interest CU 1.167 + Principal (asset) CU 7.403 (end of first year), and then we make accounting treatment base on this; that will make its easier. Under Cost model, we have to recognize Depreciation Expense yet as per books of the lessor if the lease was accounted as operating lease, the PPE shall continue to be recognized in its books thus recognizing depreciation expense as well, in that case the PPE will be depreciated under the books of both lessor and lessee accounting. Under IFRS 16, all leases, excluding those that meet the practical expedient for low-value and short-term leases, if elected, are treated as finance leases. What are the effects under IFRS 16 for above two balances? Dear Bernhard, The International Financial Reporting Standards Foundation is a not-for-profit corporation incorporated in the State of Delaware, United States of America, with the Delaware Division of Companies (file no: 3353113), and is registered as an overseas company in England and Wales (reg no: FC023235). They structure a deal as an operating lease by viably shifting the ownership risk from the company to special purpose entities to minimize any legal and capital consequences. Copyright © 2009-2020 Simlogic, s.r.o. Hi rsh, thank you! Hi Anna, International Financial Reporting Standards Transition to IFRS 16 Kathryn Donkersley, Technical Manager, IASB Patrina Buchanan, Associate Director, IASB Therefore, while certain leases might not have deferred rent, it is more common that a lease has deferred rent. I am here again to thank you for your well simplified explanations. For more ACCA courses, please visit http://www.globalapc.com The new rules were set to turn balance sheets and internal processes on their heads and dramatically … Your explanation and illustration is very simple and easy to understand. after IAS 16 was implemented? Under new IFRS 16, you need to split the rental or lease payments into lease element and non-lease element, because you need to: • Account for a lease element as for a lease under IFRS 16 (if it meets the criteria in IFRS 16); and • Account for a service … is it? Entity A enters into a 10-year lease for a 2,000 sq meters of office space. yes, IFRS 16 affects you, because instead of accounting for prepaid rent, you have a right-of-use asset here, so you need to account for Debit ROU asset/Credit Cash (or lease liability, but if the full rent is prepaid, then just cash). Effective from 1 January 2019 a company will be required to recognise its leases on the balance sheet if they come within certain criteria under the… thanks. Post Views: 2,031. IFRS® is the IFRS Foundation’s registered Trade Mark and is used by Simlogic, s.r.o Does the conceptual or theoretical factors for these Can you please advise what rate should be used? hello Thank you in advance. Sachin, Modified retrospective method #1 – Adjust ROU asset. – or you do one-off adjustment. The reason is that the lease is non-cancellable as long is it is enforceable and it is not enforceable beyond 2 months. You can view which cookies are used by viewing the details in our privacy policy. Real estate leases pose many practical accounting challenges for tenants – the underlying asset has a high value, lease terms can be long, discount rates can . here’s the article about transition to IFRS 16. great excel examples exactly on these issues in my IFRS Kit, 036: Contract asset vs. account receivable, How to Capitalize Borrowing Costs under IAS 23, Conceptual Framework for the Financial Reporting 2018, IFRS 16 Leases vs. IAS 17 Leases: How the lease accounting changed. This payment includes the payment for rental of the unit n. 13 and its cleaning once per week. If not, then you should look to incremental borrowing rates (e.g. yes, you do need to apply some judgement here, but the guidance says that the examples of items with low value are computers or items of furniture – so you get the point. Dear Silvia, Remember – keep it simple, revise a lot and re-do past ACCA’s exam questions as much as you can. How to ensure the element cost is fairly measured comparing to market prices? Can the land owner recognise this as a sale; derecognise the land and recognise a profit? How do IFRS-16 apply to sale and leaseback transaction specially for lessee? For the simplicity, I illustrated it on the cost model. c. Should I consider a one year contract with non-cancellable period of two months with option to continue/terminate as lease contract? I have an ACCA P2 exam and after some weeks reading and trying to compare, your examples have broke it down and made it easy to understand. It relates to previous periods, too. The above is intended to provide an overview of the impact of IFRS 16 for restructuring market participants, it is not intended as advice for preparers of financial statements. Hi SK, Warning: this is NOT exhaustive description of the standard, and I simplify the things a lot for illustration purposes. or we amortise onerous provision over the lease term? 0. Hi Silvia, does this changes will affect the accounting treatment of the lease? It is very simply said. The IASB along with all the other accounting boards are a bunch of morons. I cannot say based on the monthly expense – you need to look at the value of an underlying asset and assess. (Deferred rent in year 1 equals rent expense of $115,639 less cash paid of $100,000 for the first year’s rent). And yes, you are right. How this will be treated, i will take the same example used by you above. No, that’s under non-current assets if the lease term is longer than 1 year. The amendment would apply to covid-19-related rent concessions that reduce lease payments due in 2020. How does this changes come January 01, 2019 under IFRS 16? Significant change in lessee accounting SFRS(I) 16/FRS 116 Leases no longer makes a distinction between operating and finance lease for a lessee and is effective for financial periods beginning 1 January 2019. Notes to financial statement we need to reverse the ROU by the.... Subsidiary who is using that building recognise a revenue over 99 years will stay according to 17. //Www.Cpdbox.Comlearn the basic steps in lease payments required by a lessee and a good read 1.167 credit cash 7.403 P/L... Asset to capital allowances and claiming AIA 2 months ask about how to treat rent agreement!, and communication the market, not government or any accounting standard every. And the rental expense of CU 10 000, including concessions books and will described! 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Your linkedin account treat them as operating leases were non-cancellable, and depreciation/interest... Item in SFP would credit the entire outstanding balance of prepaid rent at your transition date or from...