Under new IFRS 16, you need to assess whether these contracts contain lease as defined in IFRS 16.
The first thing you would look at is whether an underlying asset can be identified.
Long story short:
1. The first contract does not contain any lease, because no asset can be identified.
The reason is that the supplier (warehouse owner) can exchange one place for another and you lease only certain capacity. Therefore, you would account for rental payments as for expenses in profit or loss.
2. The second contract does contain a lease, because an underlying asset can be identified– you are leasing the unit n. 13 of XY cubic meters in the sector A.
Therefore, you need to account for this contract as for the lease and it means recognizing some asset and a liability in your balance sheet.
This was a very simplified illustration to make you aware of this and it’s by no means exhaustive – but you get a point.
Do we pay only for a lease, or also for some services?
This is another change we need to watch out under IFRS 16.
When you lease some assets under operating lease (as called by older IAS 17), in most cases, a lessor provides certain services to you, such as maintenance, repairs, cleaning, etc.
Under older IAS 17, you did not need to think about it too much, because you put all lease payments as some rental expense to your profit or loss.
BUT!!!
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Under new IFRS 16, you need to split the rental or lease payments into lease element and non-lease element, because you need to:
• Account for a lease element as for a lease under IFRS 16 (if it meets the criteria in IFRS 16); and
• Account for a service element as before, in most cases as an expense in profit or loss.
From our example above: let’s say you took the option 2 and you pay CU 10 000 per year. This payment includes the payment for rental of the unit n. 13 and its cleaning once per week.
Therefore, you need to split the payment of CU 10 000 into lease element and cleaning elementbased on their relative stand-alone selling prices (i.e. for similar contracts when got separately).
You find out that you would be able to rent out similar unit in the warehouse next door for CU 9 000 per year without cleaning service, and you would need to pay CU 1 500 per year for its cleaning.
Based on this, you need to:
• Allocate CU 8 571 (CU 9 000/(CU 9 000+CU 1 500)) to the lease element and account for that as for the lease; and
• Allocate CU 1 429 (CU 1 500/(CU 9 000+CU 1 500)) to the service element and in this case, probably recognize it in profit or loss as an expense for cleaning.
Not an easy thing, especially when the stand-alone selling prices are not readily available.
The biggest change: lessee’s accounting for leases
Here’s the biggest change: lessees (those who take an asset under lease) do not need to classify the lease at its inception and determine whether it’s finance or operating.
You might say: OH YES!!!
But not so fast.
The reason is that IFRS 16 prescribes a single model of accounting for every lease for the lessees. Very shortly:
• Lessee needs to recognize a right-of-use asset and corresponding liability in its statement of financial position.
• An asset shall be depreciated and a liability amortized over the lease term.
This model is very similar to the accounting for finance leases under IAS 17.
And yes, you need to account for operating leases in the same way.
There are 2 exceptions from this rule:
1. Lease of assets for less than 12 months (short-term leases), and
2. Lease of assets of a low value (such as computers, furniture etc.).
Example IAS 17 vs. IFRS 16
Let me illustrate the new accounting model and put it in the contract with the treatment under IAS 17.