In today’s blog post, we will provide a glimpse of the IFRS 16 transition considerations for lessees because of the new international lease accounting standard, IFRS 16, Leases.
Editor's note: we have adjusted this blog as of 11/30/17 for precision and clarity.
- Overview: Under IFRS 16, a lessee accounts for a lease under a single lessee accounting model – a finance lease.
- Effective Date: IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019, with earlier application permitted (if IFRS 15, Revenue Recognition, is also applied).
- Transition Methods: Full retrospective approach (refer to Option A below) or cumulative effect approach (refer to Option B below)
*Helpful Tip: The election chosen MUST be consistently applied to ALL leases in which the company is a lessee.
- Option A: If the full retrospective approach is chosen, apply the guidance under current international standard IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
- Option B: If the cumulative effect approach is chosen, a lessee does not restate comparative information. Instead, the lessee shall recognize the cumulative effect of initially applying this Standard as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at the date of initial application.
The Cumulative Approach and Operating Leases under IAS 17 (current standard): If the cumulative effect approach method is chosen, the following 3 steps MUST be applied by lessees for operating leases:
- Recognize a lease liability at the date of initial application
- Recognize right-of-use asset at the date of initial application for leases previously classified as an operating lease applying IAS 17. On a LEASE-BY-LEASE basis, the company will measure that right-of-use asset at either:
- its carrying amount as if the Standard had been applied since the commencement date, but discounted using the lessee’s incremental borrowing rate at the date of initial application; OR
- an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the statement of financial position immediately before the date of initial application.
- Apply IAS 36, Impairment of Assets to right-of-use assets at the date of initial application as applicable.
The Cumulative Approach and Finance Leases under IAS 17: If the cumulative effect approach method is chosen, the carrying amount of the right-of-use asset and the lease liability at the date of initial application shall be the carrying amount of the lease asset and lease liability immediately before that date measured applying IAS 17. For those leases, a lessee shall account for the right-of-use asset and the lease liability applying this Standard from the date of initial application.
In a subsequent blog post, we will give a detailed example with the accounting entries that illustrate the transition impact of IFRS 16 based on the method chosen. If you have any questions, please leave a comment below, or email us directly at info@LeaseQuery.com.
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