IFRS 16 Training:

Subsequent Measurement

Introduction

In the previous guide we discussed how to recognize your liability and asset. You now need to process periodic journals (usually monthly). This includes the interest expense, depreciation, and lease payments. As you account for the lease with the journals periodically, it will run down the balances to zero.

If done right, at the end of the lease term the lease liability should be zero (if not then you made a mistake somewhere). However, keep in mind that because the depreciation is accounted for against the accumulated depreciation, there will still be balances left for the asset. So, one more step is required.

The asset cost and accumulated depreciation balances would have to be removed from the balance sheet via a journal. This journal will have no net book value impact on the balance sheet but is purely to keep your disclosure balances correct.

In this guide we will look at some methods of accounting for the Right-of-use asset, how the periodic journals will look, and the extra journal needed at the end of the lease term.
Thereafter, we will look at the lease liability, with the standard periodic journals.

At the end of this guide, you will be able to download an interactive Excel workbook that shows you exactly how all the calculation is performed.

Right-of-use Asset

Once the Right-of-use asset is recognized it needs to be depreciated under the requirements of IFRS 16. In the vast majority of the cases, it will be depreciated on a straight-line basis.
For the other methods, you can refer to the following models that are available:

  1. Cost Model (IAS 16 – Property, plant and equipment)
  2. Revaluation Model (IAS 16)
  3. Fair Value Model (IAS 40 – Investment Property)

The rest of the guide we’ll assume straight-lining is used.

On the journal side of things, for the asset, it is quite simple and there is nothing new:

Period Journals (each month or year):
Debit – Depreciation Expense
Credit – Accumulated Depreciation – Right-of-use Asset

Termination Journals (end of the lease):
Debit – Accumulated Depreciation – Right-of-use Asset
Credit -Right-of-use Asset (Cost)

If you have a sublease (where the leased asset is then leased to a third party) and the asset is property, IAS 40 is the right standard to use instead of IAS 16. You will have to apply the accounting of Investment properties to your asset.

Lastly, just keep it in the back of your mind that IAS 36 – Impairment of Assets, is applicable to assets recognized in terms of IAS 16.

Lease Liability

The subsequent measurement of the liability will be the periodic journals for the interest and lease payments. This is usually tracked through an amortization table over the lease period. This table will help you to easily calculate income statement and balance sheet amounts each period per lease.

For an example of how this is calculated, download the Excel example workbook below.

The journals will look as follow, and you will note that it is the same principle for as a loan from the bank (which we know IFRS 16 is mimicking).

Journal for the interest (each month or year):
Debit – Interest Expense
Credit – Lease Liability

Lease Payment Journals (each payment cycle of the lease):
Debit – Lease liability
Credit – Bank (Lease payment)

As mentioned in the previous guide, you continue to use the discount rate at commencement date (original rate) to calculate the subsequent interest journals.

Closing

I dare say it – most of the lessee training is behind us. We have considered all the initial steps and from here it will be downhill. Hopefully you have a perfect world scenario and nothing in this lease changes until it ends. If that’s the case, you’re very lucky.

For those that aren’t so lucky, stay glued to your seat, we are nearly there because there are only a few concepts left. In our next guide, we will look at the nitty-gritties of a lease changing.

The Rubli tool automatically creates an amortization table for each lease based on the lease terms. The system allows you to view each lease’s subsequent measurement separately, while the reporting includes the required journals for one or all leases at the click of a button.

Download Excel Example Workbook
Subsequent Measurement Table of Contents

More guides:

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