IFRS 16 SUMMARISE LECTURE NEW

IFRS 16
A lease is a mutual agreement in a contract that give the right to a third party to
control and use an asset over a well-defined period of time known as the lease term
in exchange for a consideration.
There are three key words that you must master in this IFRS,
 The lessor ; this is the person that give the right to use an asset to a third party
in exchange for a consideration
 The lessee ; this is the person to whom the right to use an asset has been given
and the individual must give consideration as per the contract agreement
 Right to use asset; this is the right that was given to the lessee over an asset
for a given period of time (this time is known as the lease term). This asset
must be depreciated and recognised as an asset in our balance sheet
Condition where the agreement is a lease or not
 If the useful life of the asset is 5 years and the lease term is 3 year, the
agreement is still a lease regardless of the duration. This is because control has
nothing to do with the lease duration.
 If i give you an item and i have the right to take back that asset, it means that
you can not claim control over that asset. This is the reason why when the
lessor has the right to substitute an asset, you cannot recognise a right of use
asset.
 There will still be a lease agreement in a contract where the lessor limit the
scope of the lessee’s right of use. What do i mean by limiting, it means that the
lessor in the agreement restrict the lessee to carry out a specified activity. For
example i lease a car to an individual but i limit his activity level by asking him
not to carry out any operation in Bamenda. The fact I have limited his activity
level, does not means that he no more have control over the asset.
Steps to follow in lease accounting
We have the following steps;
Step one ; firstly understand the basic principle
We have lease liability and right of use asset.
Why is right of use an asset?
Remember the conceptual framework defined an asset as an economic resources,
that as a result of past event, is control by the entity.
Do you understand why the right of use asset is recognised in our book as an asset?
Remember we said there is a lease in a contract if an asset can be control by the
lessee (and this asset is known as right of use asset)
Why is there a lease liability?
The conceptual framework define a liability as a present obligation as a result of past
event to transfer economic resources.
Do you understand why there is a lease liability recognise in our book?
Remember that the consideration to be paid by the lessee once the asset has been
made available by the lessor (this is an obligation that must be fulfill over a particular
period of time as per the payment term in the contract). The consideration is
normally in the form of cash and this is an economic resource.
Step two; understand the logic behind discounting
Please my dear student you need to understand how to calculate present value when
the payments are in advance, reason why you need to consider the following points
below.
 When are the payments made . Is it beginning of year or end of year?
 Understand that when they say advance it is beginning of the year and that
will be the first of first of the accounting year. For example accounting year is
01/01/2023 to 31/12/2023, then payment made on 01/01/ every year will be
refer as payment in advance. Imagine your own accounting period, then
imagine your lease payment considering that payments are made in advance.
A good understanding of the date will ease your present value computation.
 In lease calculation payment must be made every year, then if the first
payment is made during the year it means that the second payment will be
made next year. Do you agree?
 If yes we can proceed.
 Now for payment in advance the first payment is made at the beginning of the
period. Do you agree with me that the value of money does not change if we
have a present obligation on Monday 01 of June and we settle it instantly over
the counter on the same Monday 01 of June?
 Now why do we discount the lease payment?
 Remember that subsequent payment are made in the following years and you
all agree with me that as time is passing the economy condition change such
as high interest rate or high level of inflation and all this come in to reduce the
value of money.
 If you understand these logics, then i am glad to congratulate you because you
have understood the logic behind discounting.
 Now you need to properly understand the number of years we are to use to
discount the lease payment.
 For example the lease period is 4 years and payments are made in advance
Remember that the first payment is made in the beginning, it means that
the remaing payments that is to made will be affected by the time value of
money.
If you agree, it means that we are to use three years to discount our lease
payment.
**now for payment in arrear, you have to use the whole lease period to
calculate the present value. This is simply because all the payment will be
affected by the time value of money.
Happy to announce you that, if you understood these basics, it will be easy for you to
understand the calculation.
Step three ; develop the skill to measure properly the lease liability , right of use
asset and the lease term
A. LEASE LIABILITY
B. RIGHT OF USE ASSET
C. LEASE TERM
Now we are going to use this test understanding from you kaplan text to
understand step 2
Step 4; subsequent measurement
** Right of use asset
We have depreciation
*** Lease liability

We have finance cost
We have cash repayment
Here are the recording
The base of assessment is when the asset is new. Meaning you classified an asset as
low value when the initial value does not exceed a given limit. This particular area
require some judgement.
Meaning we just recognise the lease payment in the statement of profit and loss
using the straight line method.
SALES AND LEASE BACK AGREEMENT
(This is a critical area because ACCA enjoy given question on this area in section A )
Will forcus on the case where the transaction is consider as a sale because this area is
very technical when it comes to application.
Here the seller is the lessee

Here the buyer is now the lessor
The concept here is that the seller sells an asset to a third party known as the buyer
and later lease it back. You might wonder why?. This is normal because due to some
new strategy they decided to do so. For example they might be in need of cash etc
The seller –lessee will recognise an asset in his book known as right of use and must
remove the carrying amount of that asset in his book. They will also recognise a
liability
Despite the fact that the asset was sold, the seller still retain some right because he
sold it but still use it
Meaning he is to account for profit/loss on sales base on the right transfer to the
seller
Hence IFRS 16 has given the following to ascertain the value of right retain
Lease liability/sales proceed* previous carrying value of the asset
Understand the following point to master this area

From the above question
The right of use will be $520 000
Lease liability $650 000
Cash received $ 1 000 000
Derecognise the carrying value of the asset $ 800 000
What is the profit or loss from the question?
SECTION A : PAGE 23 TO PAGE 26 (FROM QUESTION NUMBER 77 TO 87)

SECTION B : PAGE 90 (FROM QUESTION 296 TO 300) ASSIGNMENT
ASSIGMENT
EXERCISE FOR LEASE PAID IN ADVANCE
Peace ETS enter into a four year lease of property with annual lease payment of 1
million, payable in advance that is at the beginning of each accounting period. Peace
ets incurred additional cost of 400 000frs and was re-imbursed 200 000 by etabo co
(the lessor). The interest rate implicit to the lease is 5%
Requirement
Present a lease table using the format given in your kaplan text book for the
complete four year
Compute the carrying value of the right of use at the end of accounting year.

IFRS 16 SUMMARISE LECTURE NEW

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IFRS 16

Condition where the agreement is a lease or not

 When are the payments made . Is it beginning of year or end of year?

 Now why do we discount the lease payment?

*** Lease liability

Here the seller is the lessee

Understand the following point to master this area

SECTION A : PAGE 23 TO PAGE 26 (FROM QUESTION NUMBER 77 TO 87)

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