IFRS 16: Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption is permitted, provided IFRS 15: Revenue from Contracts with Customers is implemented also. This standard applies to all leases, except those shorter than 12 months and small assets. It also brings additional disclosure requirements for both lessees and lessors. The IFRS brings significant changes to those leases formerly classified as operating leases under IAS 17: Leases, the previous standard.
Required:
Identify THREE (3) key principles behind the accounting treatment for leases as required by IFRS 16. (3 marks)
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- The approach to leases adopted by IFRS 16 requires the commitment to make annual payments to be recognised as a liability, provided the resulting benefit is an asset under the control of the entity for the term of the lease.
- The asset is recognised at present value of the minimum required lease payments, and is depreciated over the shorter of the lease term or the asset’s useful economic life (unless it is highly likely that the asset will transfer to the lessee at the end of the least term, in which case the asset’s useful economic life should be used).
- The liability is initially measured at the present value of minimum required lease payments, and is subsequently measured at amortised cost, with finance costs taken to profit or loss as incurred, using the effective rate implicit in the lease, or the entity’s cost of capital if the implicit rate is not available.