Lease Accounting

I just came into my old post about accounting for lease. The information in the old post is not valid any more! Thus, I wanted to update it. Here, I’m just giving a quick and briefed summary from lessee prospective (IFRS not GAAP). I might update this later in more details.

What to capitalize

Referring to IFRS 16, starting 1/1/2019, all leases where we have right to use (and control over the use) to be capitalized except for:

  1. less then 12 months with no option to purchase; and
  2. a low value when new, i.e., below $5000.

There are other exceptions that I haven’t mentioned here…

A lessee accounts for two parts:

  • Asset cost = lease liability + any related (initial/direct) costs.
  • Lease liability = Preset value of lease rentals + present value of expected payments at end of lease

(my other post about money time value but in Arabic)

Entries

Recording Lease:
Dr. Right-of-use asset
Cr. Lease liability

Legal fees for negotiating the contract:
Dr. Right-of-use asset
Cr. Cash

The estimated cost of removal, discounted to present value:
Dr. Right-of-use asset
Cr. Provision for asset removal

Depreciation:
Dr. Depr. Exp.
Cr. Acc. Dear.

Interests:
Dr. Interest Exp.
Cr. Lease Liability

Payment:
Dr. Lease Liability
Cr. Cash

Disclosure

It needs Software to do most of it. The information is required to be presented in a single note or as a separate section of the financial statements without duplications.

Quantitative – mainly:

  • Additions to right-of-use assets
  • Year-end carrying amount of right-of-use assets by class
  • Lease liabilities
  • Maturity analysis for lease liabilities
  • Depreciation charge for right-of-use assets by class
  • Interest expense on lease liabilities
  • Expense relating to short-term leases
  • Expense relating to leases of low-value items
  • Expense relating to variable lease payments not included in lease liabilities
  • Income from sub-leasing right-of-use assets
  • Gains or losses arising from sale-and-leaseback transactions
  • Total cash outflow for leases
  • Amount of short-term lease commitments if current short-term lease expense is not representative for the following year

Qualitative – mainly:

  • Description of how liquidity risk related to lease liabilities is managed
  • Use of exemption for short-term and/or low-value item leases

References: IFRS 16 and various websites.

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Author:
Mohamad Al Karbi
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