Last updated: 30 August 2020. The approach of IAS 17 was to distinguish between two types of lease. The plant cost $750,000 on 1 October 20X0 and, at that date, had an estimated useful life of five years. To obtain the lease, the lessee incurred initial direct costs of $25,000. the seller-lessee shall recognise only the amount of any gain or loss that relates to the rights transferred to the buyer-lessor. When the trucks are not in use, they are kept at L’s premises. The standard provides a single lessee accounting model, requiring lessees to recognise assets and li­a­bil­i­ties for all leases unless the lease term is 12 months or less or … The global body for professional accountants, Can't find your location/region listed? The truck is explicitly specified in the contract and H does not have substitution rights. A lease that contains a purchase option cannot be a short-term lease. Now, let’s compare. The customer has the right to direct how and for what purpose the asset is used throughout its period of use; or. Thomas says. Given the IFRS 15 treatment as a ‘sale’ B would almost certainly regard the lease of the building as an operating lease. Accounting for assets, impairments and grants. The requirements of IFRS 16 will have significant impacts on key accounting ratios of lessees. Biological assets, intangible assets and investment property are not PPE. L can use the trucks for another purposes if it so chooses. The buyer-lessor shall account for the purchase of the asset applying applicable Standards, and for the lease applying the lessor accounting requirements in IFRS 16 (these being essentially unchanged from the predecessor standard). Future economic benefits occur when the risks and rewards of the asset's ownership have passed to the entity. 2.2  The right to direct the use of the asset. IAS 40 Investment Property. In the same circumstances, the buyer recognizes a financial asset equal to the ‘sales proceeds’. In order for such a contract to exist the user of the asset needs to have the right to: One essential feature of a lease is that there is an ‘identified asset’. Revaluations must be made with sufficient regularity to ensure that the carrying amount is not materially different from fair value. The assessment is not affected by the size, nature or circumstances of the lessee. IAS 16, ‘Property, plant and equipment’ includes guidance on how to account for property carried at cost. Therefore the residual would be regarded as a ‘lease rental’ at an amount of $159,878 ($200,000 – $40,122). The amount capitalised as part of the asset's cost will be the amount estimated to be paid, discounted to the date of initial recognition. The IASB is engaged in a project to make a narrow-scope amendment to IAS 16 to clarify that where items produced before an item of PPE is available for use, the proceeds of sale may not be deducted from the cost of the PPE. The purpose of this article is to summarise the key changes introduced by IFRS 16 from the perspective of the lessee and how these impact on their financial reporti… In order to help us with the example in the following section, we will measure the lease liability up to and including the end of year ten. Temporary idle activity does not preclude depreciating the asset, as future economic benefits are consumed not only through usage but also through wear and tear and obsolescence. IAS 16 defines PPE as tangible items that are: held for use in the production or supply of goods or services, for rental to others, or for administrative purposes and expected to be used during more than one accounting period. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations . London: IFRS Foundation. Free IFRS Quizzes IAS 16 – Property Plant and Equipment Quiz ) , () ) Previous Lesson. When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. I explain how is IFRS 15 changed from IAS 18 or 11. At the same time, X enters into a contract with Y for the right to use the building for 20 years, with annual payments of $200,000 payable at the end of each year. For example, leases of cars would not qualify as leases of low-value assets because a new car would typically not be of low value. The above normally occurs when the risks and rewards of the asset have passed to the entity. 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