Specifications

The following document lists our methodology and implementation details and specifications for Contract Accounting by Infosite. Contact us at any point if you require additional details or are interested in a quote by our sales professionals.

BASIC INFORMATION

IFRS–16

ROU

The cost of the right-of-use asset shall comprise:

  1. The amount of the initial measurement of the lease liability, as described in paragraph 26;
  2. Any lease payments made at or before the commencement date, less any lease incentives received;
  3. Any initial direct costs incurred by the lessee; and
  4. An estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease, unless those costs are incurred to produce inventories. The lessee incurs the obligation for those costs either at the commencement date or as a consequence of having used the underlying asset during a particular period.

    A Tenant Allowance received during the course of the lease shall be part of the payment structure of the lease and part of the present value of the lease obligation. It would automatically be considered in the ROU amount.
Obligation – Lease Liability

The initial lease liability shall comprise:

  1.  The amount of the present value (PV) of all payments to be made and received during the course of the lease;

    A Tenant Allowance received during the course of the lease shall be part of the payment structure of the lease and part of the present value of the lease obligation. It would automatically be considered in the ROU amount.
Date to Recognize the Asset

At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability. The Commencement date of the lease (commencement date) is the date on which a lessor makes an underlying asset available for use by a lessee.

FASB: Under ASC 842, the determination of whether or not a contract is a lease or contains a lease is done at the inception date. Lease classification, recognition and measurement are determined at the lease commencement date.

Lease Signed before Commencement Date

IFRS16. 59 In addition to the disclosures required in paragraphs 53–58, a lessee shall disclose additional qualitative and quantitative information about its leasing activities necessary to meet the disclosure objective in paragraph 51 (as described in paragraph B48). This additional information may include, but is not limited to, information that helps users of financial statements to assess:

  1. the nature of the lessee’s leasing activities;
  2. future cash outflows to which the lessee is potentially exposed that are not reflected in the measurement of lease liabilities. This includes exposure arising from:
    1. variable lease payments (as described in paragraph B49);
    2. extension  options  and  termination  options  (as  described  in paragraph B50);
    3. residual value guarantees (as described in paragraph B51); and
    4. leases not yet commenced to which the lessee is committed.
  3. restrictions or covenants imposed by leases; and
  4. sale and leaseback transactions (as described in paragraph B52).
Subleases

Classified as a finance lease, i.e. the term of the sublease represents more than 75% of the remaining term of the original lease.

Head lease—An lessee enters into a five-year lease for 5,000 square feet of office space (the head lease) with Entity A (the head lessor).

Sublease—At the beginning of Year 3, the lessee subleases the 5,000 square feet of office space for the remaining three years of the head lease to a sublessee.

The lessee, now sublessor, classifies the sublease by reference to the right-of-use asset arising from the head lease.  The lessee classifies the sublease as a finance lease, having considered the requirements in paragraphs 61–66 of IFRS 16.

When the lessee  enters into the sublease, the lessee:
a.        derecognises the right-of-use asset relating to the head lease that it transfers to the sub lessee. and recognises the net investment in the sublease;
b.        recognises any difference between the right-of-use asset and the net investment in the sublease in profit or loss; and
c.        retains the lease liability relating to the head lease in its statement of financial position, which represents the lease payments owed to the head lessor.

During the term of the sublease, the lessee recognises both finance income on the sublease and interest expense on the head lease

Lease Extension

Modification that increases the scope of the lease by extending the contractual lease term.

Lessee enters into a 10-year lease for 5,000 square feet of office space. The annual lease payments are $100,000 payable at the end of each year.  The interest rate implicit in the lease cannot be readily determined therefore lessee must use its incremental borrowing rate at the commencement date of 6% per annum.  At the beginning of Year 7, Lessee and Lessor agree to amend the original lease by extending the contractual lease term by four years.  The annual lease payments are unchanged (i.e. $100,000 payable at the end of each year from year 7 to year 14). Lessee’s incremental borrowing rate at the beginning of Year 7 is 7 per cent per annum.

At the effective date of the modification (at the beginning of Year 7), Lessee remeasures (restates) the lease liability based on: (a) an eight-year remaining lease term, (b) annual payments of $100,000 and (c) Lessee’s incremental borrowing rate of 7 per cent per annum.  The modified lease liability equals $597,130. The lease liability immediately before the modification (including the recognition of the interest expense until the end of Year 6) is $346,511. Lessee recognises the difference between the carrying amount of the modified lease liability and the carrying amount of the lease liability immediately before the modification ($250,619) as an adjustment to the right-of-use asset.