IFRS 16 Transition Series for Lessees – Example 2

George Azih IFRS 16, Lease Accounting Transition

To read the first example of the IFRS 16 transition series for lessees, click here

How to transition from an operating lease under current IAS 17 to the single lessee accounting model – a finance lease using the full retrospective approach.

In today’s blog post, we will provide a detailed example of the full retrospective approach with the accounting entries that illustrate the transition impact of IFRS 16.

Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.

Here are the steps in the IFRS 16 transition for an operating lease from current IAS 17 to IFRS 16 for lessee accounting.

Step 1: Calculate the initial lease liability as of the commencement date and calculate the subsequent lease liability using the effective interest method.

Step 2: Calculate the right-of-use asset as of the commencement date and calculate the subsequent right-of-use asset by depreciating the ROU asset.

 

Let’s explain the steps with an example. Consider the following scenario:

Commencement date:

January 1, 2015

Lease Term:

10 years

Payments (paid in arrears):

$10,000/year

Incremental Borrowing Rate (on transition):

6%

 

Step 1: Calculate the initial lease liability as of the commencement date and calculate the subsequent lease liability using the effective interest method.

The lease liability schedule since commencement date is as follows:

IFRS 16 transition for lessee example 2 table 2

To see my blog on how to calculate the present value of the remaining lease payments, click here. 

Step 2: Calculate the right-of-use asset as of the commencement date and calculate the subsequent right-of-use asset by depreciating the ROU asset.

The following is the straight-line amortization schedule for the lease in this scenario since commencement:

IFRS 16 lease accounting sofware example for lessee table 3

 

To see my blog on how to calculate the present value of the remaining lease payments, click here.

The lessee will restate the comparative figures as if IFRS 16 had always been in effect under the full retrospective approach. On transition, the opening balance sheet control accounts for 2017, 2018, and 2019 are as follows:

Balance Sheet Accounts

January 1, 2017

January 1, 2018

January 1, 2019

Lease Liability (Step 1)

62,098

55,824

49,173

Right-of-Use Asset (Step 2)

58,881

51,521

44,161

Equity Adjustment

3,217

4,303

5,012

 

The journal entry to make on January 1, 2019 (transition date) would be:

DR Lease Liability 6,651

DR Equity 709

                                  CR Right-of-Use Asset 7,360

 


Need to comply with FASB 842 & IFRS 16? We'll make the transition effortless. Click here.

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