Study Unit 8

IFRS 16 Leases
Gripping GAAP – Cathrynne Service–Chapter 16
Paragraphs:
Study: Ignore:
Par 1,2,4,6,7,8,9, 11 and 12 Par 3 Identifying a lease
Par 5 Combining contracts
Par 9.6 Subsequent
measurement – changing
lease payments,
Par 9.7 Subsequent
measurement – Lease
modifications
Par 10 Tax consequences

LEASES – LESSEE
 Recognition and measurement of lease
Please thoroughly work through all the relevant
paragraphs in the textbook.
 Recognition of lease
Commencement date of lease

Right of use asset and

Lease liability

Dr Right of use asset

Cr Lease liability
 Initial Measurement
COST

Right of use asset (Cost =)

•Amount at which lease liability is initially measured
•Lease payments made before commencement less incentives
received
•Initial direct cost for lessee
•Present value of estimate of dismantling and/or removing
costs for asset
 Initial Measurement

Lease liability
•Present value of future lease payments
•Discounted at implicit interest rate
 Initial Measurement
Lease liability
•Present value of future lease payments
•Discounted at implicit interest rate
Remember this is from the
lessee’s point of view! Def of
lease payments for lessee
include GRV made by lessee!
 Subsequent Measurement
Right of use asset
•IAS 16 cost model or revaluation model
•IAS 40 cost model or fair value model
Depr starts with
commencement of lease

Ownership transfers – useful life

Ownership does not transfer –
shortest of lease term and useful
life
 Subsequent Measurement
Right of use asset
•IAS 16 cost model or revaluation model
•IAS 40 cost model or fair value model

Work though par 11.5.1 –

11.5.4 on your own
NB

IGNORE par 11.6,

11.7 en par 12
 Subsequent Measurement
Lease liability
Amortised cost
• Increase with interest
• Decrease with pmt

Interest will be recognised as expense.

 Example
Asset is leased for 4 years for R71 475 p.a. payable in
arrears @ 16% (assume implicit rate) on 31 Dec
•Useful life = 4 yrs (RV = R0)
•Lease commences on 1 Jan 20x5
•Yearend = 31 Dec
 Example
N = 4 (number of payments)
FV = 0
I = 16% PMT per month or per
year as actual
PMT = 71 475 payment will take
COMP PV =? place.

Initial measurement (1/1/20x5)

Right of use asset 200 000
Lease liability 200 000
(PV above, rounded)
 Example
31 Dec 20X5
Finance cost(p/l) 32 000
Lease liability 32 000
(amrt 1 interest)

Calculator buttons
AMRT
Down arrow x 4
= 31 999.99
 Example
31 Dec 20X5
Lease liability 71 475
Bank 71 475

Depreciation (p/l) 50 000

Acc depreciation 50 000
(200 000/4)
 Example
31 Dec 20X5
Lease liability 45 791
Lease liab: ST portion 45 791

Amount of debt I have now at YE, that will be payable

within 12 months.
 Example

Amortisation table Instal Interest (16%) Cap Bal

01/1/20x5 AMRT 1 200 000

31/12/20x5 71 475 32 000 39 475 160 525
AMRT 2
31/12/20x6 71 475 25 684 45 791 114 734
31/12/20x7 71 475 18 357 53 118 61 616
AMRT 3
31/12/20x8 71 475 9 859 61 616 0
AMRT 4
285 900 85 900 200 000
 Example
31 Dec 20X5
On 31 Dec 20X5 I owe R160 525

Within 12 months from now, on 31 Dec 20X6, I will pay R71 475
again.
This amount will cover interest of R25 684 and what remains will
be capital of R45 791.
 Example
31 Dec 20X5
On 31 Dec 20X5 I don’t owe the interest of R25 684 yet, since no time has
passed for it. Only accrues in 20X6.

Therefore I cannot classify the interest of R25 684 which I will pay within
12 months from now, on 31 Dec 20X6, as short term debt, because I do not
owe it yet at 31Dec 20X5.
Therefore only the R45 791 will be classified as ST. Amrt 2 Principal
 Example
31 Dec 20X6
Finance cost(p/l) 25 684
Lease liability 25 684
Amrt 2 Int

Lease liability 71 475

Bank 71 475

Lease liability 53 118

Lease liab: ST portion 53 118
Amrt 3 Principal
 Example
31 Dec 20X6
Depreciation 50 000
Acc depreciation 50 000
(200 000/4)
 Example
Asset is leased for 4 years for R71475 p.a. payable in
advance @ 16% (assume implicit rate) on 1 Jan.
•Useful life = 4 yrs (RV = R0)
•Lease commences on 1 Jan 20x5 (also first payment)
•Yearend = 31 Dec
 EX PMT payable in advance
BGN function on calculator
Press 2ndF FV (buttons to change to begin)

Calculate PV

N=4
FV = 0
I = 16%
PMT = 71 475
COMP PV =?
R231 999.99
 Example
Initial measurement (1/1/20x5)
Right of use asset 232 000
Lease liability 232 000

1 Jan 20X5
Lease liab 71 475
Bank 71 475
 EX PMT payable in advance
Amortisation table AMRT 1
Instal Int Cap. Balance
01/1/20x5 232 000
01/1/20x5 AMRT 2 71 475 0 71 475 160 525
31/12/20x5 25 684 186 209
01/1/20x6 AMRT 3 71 475 71 475 114 734
31/12/20x6 18 357 133 091
01/1/20x7 AMRT 4 71 475 71 475 61 616
31/12/20x7 9 859 71 475
01/1/20x8 71 475 71 475 -
285 900 53 900 285 900
 Example
The dates of the amortization table on the calculator
is equal to payment dates.
Therefore my first payment is made on 1 Jan 20X5
(amrt 1), but no interest has accrued yet and
therefore amrt 1 interest = R0.
 Example
Amrt 2’s interest is the interest as at 1 Jan 20X6. It is the interest
accrued from 1 Jan 20X5 to 1 Jan 20X6. Therefore this is the
amount of interest for the year ended 31Dec 20X5.
Amrt 2 interest = 20X5 interest
Amrt 3 interest = 20X6 interest
Amrt 4 interest = 20X7 interest
No interest for 20X8 since last payment will be made on 1 Jan 20X8.
 Example
31 Dec 20X5
Finance cost 25 684
Lease liability 25 684
Amrt 2 interest

Depreciation(p/l) 58 000
Acc depreciation 58 000
R232 000/4
 Example
31 Dec 20X5
On 31 Dec 20X5 I owe R186 209.

Within 12 months from now, on 1 Jan 20X6, I will pay R71 475
again.
This amount will cover interest of R25 684 and what remains will
be capital of R45 791.
 Example
31 Dec 20X5
On 31 Dec 20X5 I ALREADY owe the interest of R25 684, since
time has passed for it (1 Jan 20X5 to 31 Dec 20X5).
Therefore the interest of R25 684 which I will pay within 12
months from now, on 1 Jan 20X6, is already debt at YE and it
should be classified as short term debt, because I already owed it at
31Dec 20X5.
Therefore the total payment of R71 475 will be classified as ST.
 Example
31 Dec 20X5

Lease liability 71 475

Lease liab: ST portion 71 475
 Example
1 Jan 20X6
Lease liability 71 475
Bank 71 475

31 Dec 20X6
Finance cost 18 357
Lease liability 18 357
Amrt 3 interest
 Example if YE and payment date differ
Asset is leased for 4 years for R71475 p.a. payable in arrears
@ 16% on 28 Feb.
Lease commences on 1 March 20x5
• Useful life = 4 yrs (RV = R0)
• Yearend = 31 Dec
PAYEMENTS ARE MADE IN
ARREARS Long term: 160 525 (SoFP)
Actual owed
226 667 Total Short term: 66 142 (SoFP)
Year end Lease liability
31 Dec 07 31 Dec 08
1 Jan 05 31 Dec 05 31 Dec 06

28 Feb 06 28 Feb 07 28 Feb 08 28 Feb 09

1 Mar 05
Lease term 26 667 = 5 333
10 mnths

Amort 1 interest 32 000

 Example
N=4
FV = 0 Remember to switch
calculator back to
I = 16% End.
PMT = 71 475
COMP PV =?
Initial measurement (1/3/20x5)
Right of use asset 200 000
Lease liability 200 000
 Example
Time line

1 Mar 20.5 28 Feb 20.6 28 Feb 20.7 28 Feb 20.8

PMT 1 PMT 2 PMT 3

 Example
Time line

1 Mar 20.5 31 Dec 20.5 28 Feb 20.6 31 Dec 20.6 28 Feb 20.7 31 Dec 20.7 28 Feb 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3
 Example
Time line

1 Mar 20.5 31 Dec 20.5 28 Feb 20.6 31 Dec 20.6 28 Feb 20.7 31 Dec 20.7 28 Feb 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3

AMRT 1 INT AMRT 2 INT AMRT 3 INT AMRT 4 INT

 Example
Time line

1 Mar 20.5 31 Dec 20.5 28 Feb 20.6 31 Dec 20.6 28 Feb 20.7 31 Dec 20.7 28 Feb 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3

AMRT 1 INT AMRT 2 INT AMRT 3 INT AMRT 4 INT

R32 000 R25 684 R18 357 R9 859

 Example
Time line

1 Mar 20.5 31 Dec 20.5 28 Feb 20.6 31 Dec 20.6 28 Feb 20.7 31 Dec 20.7 28 Feb 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3

AMRT 1 INT AMRT 2 INT AMRT 3 INT AMRT 4 INT

R32 000 R25 684 R18 357 R9 859

1 Mar 20.5 – 28 Feb 20.6 1 Mar 20.6 – 28 Feb 20.7 1 Mar 20.7 – 28 Feb 20.8 1 Mar 20.8 – 28 Feb 20.9
 Example
Time line

1 Mar 20.5 31 Dec 20.5 28 Feb 20.6 31 Dec 20.6 28 Feb 20.7 31 Dec 20.7 28 Feb 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3

AMRT 1 INT AMRT 2 INT AMRT 3 INT AMRT 4 INT

R32 000 R25 684 R18 357 R9 859

1 Mar 20.5 – 28 Feb 20.6 1 Mar 20.6 – 28 Feb 20.7 1 Mar 20.7 – 28 Feb 20.8 1 Mar 20.8 – 28 Feb 20.9

YE 1 Jan 20.5 – 31 Dec 20.5 YE 1 Jan 20.6 – 31 Dec 20.6 YE 1 Jan 20.7 – 31 Dec 20.7 YE 1 Jan 20.8 – 31 Dec 20.8
 Example
31 Dec 20X5
Finance cost(p/l) 26 667
Lease liability 26 667
(32 000/12*10)
Amrt 1 but only for 10 months
1 March 20x5 to 31 Dec 20x5
 Example
31 Dec 20X5
Depreciation (p/l) 41 667
Acc depr 41 667
(200 000/4*10/12)
 Example
31 Dec 20X5
On 31 Dec 20X5 I owe R226 667 (200 000 + 26 667).

Within 12 months from now, on 28 Feb 20X6, I will pay R71

475.
This amount will cover interest of R32 000 and what remains
will be capital of R39 475.
 Example
31 Dec 20X5
On 31 Dec 20X5 I don’t owe the full amount of interest of R32 000 yet, but
only R26 667. The rest only accrues in 20X6.

Therefore I cannot classify the interest of R5 333 which I will pay within 12
months from now, on 28 Feb 20X6, as short term debt, because I do not
owe it yet at 31Dec 20X5.
Therefore only the R71 475 – R5 333 = R66 142 will be classified as ST.
PMT 1 - Amrt 1 int/12*2
 Example
Time line

1 Mar 20.5 31 Dec 20.5 28 Feb 20.6 31 Dec 20.6 28 Feb 20.7 31 Dec 20.7 28 Feb 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3

Not debt
AMRT 1 INT AMRT 2 INT AMRT 3 INT AMRT 4 INT
at YE yet

R32 000 R25 684 R18 357 R9 859

1 Mar 20.5 – 28 Feb 20.6 1 Mar 20.6 – 28 Feb 20.7 1 Mar 20.7 – 28 Feb 20.8 1 Mar 20.8 – 28 Feb 20.9

YE 1 Jan 20.5 – 31 Dec 20.5 YE 1 Jan 20.6 – 31 Dec 20.6 YE 1 Jan 20.7 – 31 Dec 20.7 YE 1 Jan 20.8 – 31 Dec 20.8
 Example
31 Dec 20X5
Lease liability 66 142
Lease liab: ST portion 66 142
(71 475 – (32000/12*2))

ST portion is PMT less interest not yet

included in closing balance of debt at YE
 Example
28 Feb 20X6
Lease liability 71 475
Bank 71 475

28 Feb 20X6
Finance cost(p/l) 5 333
Lease liability 5 333
(32 000/12*2)
Amrt 1 Int/12*2
 Example
31 Dec 20X6
Finance cost (p/l) 21 403
Lease liability 21 403
(25 684/12*10)

Depreciation (p/l) 50 000

Acc depr 50 000
(200 000/4)
 Example
Time line

1 Mar 20.5 31 Dec 20.5 28 Feb 20.6 31 Dec 20.6 28 Feb 20.7 31 Dec 20.7 28 Feb 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3

Not debt AMRT 3 INT AMRT 4 INT

AMRT 1 INT AMRT 2 INT
at YE yet

R32 000 R25 684 R18 357 R9 859

1 Mar 20.5 – 28 Feb 20.6 1 Mar 20.6 – 28 Feb 20.7 1 Mar 20.7 – 28 Feb 20.8 1 Mar 20.8 – 28 Feb 20.9

YE 1 Jan 20.5 – 31 Dec 20.5 YE 1 Jan 20.6 – 31 Dec 20.6 YE 1 Jan 20.7 – 31 Dec 20.7 YE 1 Jan 20.8 – 31 Dec 20.8
 Example
31 Dec 20X6

Lease liability 67 194

Lease liab:STportion 67 194
(71 475 – (25684/12*2))
Amrt 2 int for 2 months is not debt yet on 31 Dec 20.6. Therefore deduct.

ST portion is PMT less interest not yet

included in closing balance of debt at YE.
 Example if YE and payment date differ
Asset is leased for 4 years for R71475 p.a. payable in advance
@ 16% on 1 March.
Lease commences on 1 March 20x5
• Useful life = 4 yrs (RV = R0)
• Yearend = 31 Dec
 EX PMT payable in advance
BGN function on calculator
Press 2ndF FV (buttons to change to begin)

Calculate PV

N=4
FV = 0
I = 16%
PMT = 71 475
COMP PV =?
R231 999.99
 Example
Initial measurement (1/3/20x5)
Right of use asset 232 000
Lease liability 232 000

1 Mar 20X5
Lease liability 71 475
Bank 71 475
 Example PMT in advance
Time line

1 Mar 20.5 31 Dec 20.5 1 Mar 20.6 31 Dec 20.6 1 Mar 20.7 31 Dec 20.7 1 Mar 20.8 31 Dec 20.8
YE YE YE YE
PMT 1 PMT 2 PMT 3 PMT 4

AMRT 2 INT AMRT 4 INT END of lease

AMRT 3 INT

R25 684 R18 357 R9 859

1 Mar 20.5 – 28 Feb 20.6 1 Mar 20.6 – 28 Feb 20.7 1 Mar 20.7 – 28 Feb 20.8

YE 1 Jan 20.5 – 31 Dec 20.5 YE 1 Jan 20.6 – 31 Dec 20.6 YE 1 Jan 20.7 – 31 Dec 20.7 YE 1 Jan 20.8 – 31 Dec 20.8
 Example
31 Dec 20X5
Finance cost 21 403
Lease liability 21 403
(25 684/12*10)

Lease liability 67 194

Lease liab: ST portion 67 194
(71 475 – (25 684/12*2))

Depreciation 48 333
Acc depreciation 48 333
(232 000/4*10/12)
 Example
31 Dec 20X6
Finance cost 19 579
Lease liability 19 579
(25 684/12*2) + (18 357/12*10)

Lease liability 68 416

Lease liab: ST portion 68 416
(71 475 – (18 357/12*2))