09 - Understanding Leases Under IFRS 16

These flashcards cover key concepts related to leases under IFRS 16, including definitions, recognition, measurement, and accounting treatment.

What is a lease according to IFRS 16?

A contract that conveys the right to use an asset for a period of time in exchange for consideration.

What is an underlying asset?

The asset that is the subject of a lease.

Who is a lessor?

The entity that supplies the underlying asset.

Who is a lessee?

The entity that has the right to use the underlying asset.

What must a contract convey to be deemed a lease?

The right to control the use of an identified asset for a period of time in return for consideration.

What rights does a lessee have to control the asset?

The right to obtain substantially all economic benefits and the right to direct the use of the asset.

How is an identified asset specified?

It is specified in the lease and cannot be substituted by the supplier.

What are the two ways to define the period of a lease?

A duration (number of years) or an amount of use (number of units produced).

What are short-term leases according to IFRS 16?

Leases that are less than 12 months with no purchase option.

What is a low-value lease?

A lease for an asset worth less than $5000 when new.

What are the criteria for a low-value asset?

It must be usable on its own or with other resources and not highly dependent on other assets.

In a rental contract, what components might be present?

Both a lease component and a non-lease component.

How should lease payments be apportioned in contracts with both components?

Based on the stand-alone prices of all components.

What does initial recognition of a lease involve?

Recognizing a right-of-use asset and a lease liability.

What does subsequent measurement of a ROU asset involve?

Depreciating the right-of-use asset and amortizing the lease liability.

How is a right-of-use asset initially measured?

At cost, including the amount of the lease liability, direct costs, and costs expected to be incurred at the termination of the lease.

What costs should be included in the calculation of a right-of-use asset?

Lease liability, direct legal costs, and costs to remove the plant, minus lease incentives.

What does subsequent measurement of a right-of-use asset focus on?

Cost less accumulated depreciation, and testing for impairment.

What is a lease liability recognized at?

The total present value of future lease payments discounted at the implicit interest rate in the lease.

What additional items are included in the recognition of a lease liability?

Variable lease payments linked to an index, guarantees, and penalties for termination.

What happens during the amortization of a lease liability?

The liability increases due to the finance cost and decreases with lease payments.

In the pro-forma for a lease in arrears, how is interest expense calculated?

Interest expense equals the opening balance multiplied by the interest rate.

What is the order of adjustments for lease payments in arrears?

Interest expense is accounted for first, followed by the lease payment.

In advance lease payment scenarios, what is the first adjustment made?

The lease payment is deducted first since it's already paid.

What should be ignored in the initial measurement of a ROU asset?

Marketing costs that are not directly attributable to the lease.

What are the applicable standards governing the ROU asset?

IAS 16 for property, plant, and equipment and IAS 40 for investment properties.

What must be consistent in a lessee’s depreciation policy?

It must be consistent with the depreciation policy for similar assets.

What factors indicate that a lease does not contain an identified asset?

If the supplier can substitute the asset for an equivalent during the lease.

Why must lessees test ROU assets for impairment?

To ensure the assets are not carried at a value higher than their recoverable amount.

In the example provided for right-of-use asset measurement, what should not be included?

Marketing costs related to the product produced by the leased asset.

Which approach is utilized for low-value leases?

Entities can treat low-value leases as a straight-line expense.

What is a finance cost in the context of lease liabilities?

The cost recognized as the lease liability is unwound over time.

How should changes to lease liability be recorded?

Adjustments based on payment timing in either arrears or advance.

What information is required for measuring the present value of lease payments?

Lease payment amounts, timing, and the applicable discount rate.

What are the implications of not making lease payments as scheduled?

Possible penalties for early termination and adjustments in lease liability.

What is the significance of stand-alone prices in lease contracts?

They are used for apportioning payments between lease and non-lease components.

What is the minimum duration for a lease to be classified as a short-term lease under IFRS 16?

Less than 12 months.