Lessee determines the proportionate decrease in the carrying amount of the right-of-use asset on the basis of
the remaining right-of-use asset (i.e. 2,500 square metres corresponding to 50 per cent of the original right-
of-use asset).
50 per cent of the pre-modification right-of-use asset (CU184,002) is CU92,001. Fifty per cent of the pre-
modification lease liability (CU210,618) is CU105,309. Consequently, Lessee reduces the carrying amount
of the right-of-use asset by CU92,001 and the carrying amount of the lease liability by CU105,309. Lessee
recognises the difference between the decrease in the lease liability and the decrease in the right-of-use asset
(CU105,309 – CU92,001 = CU13,308) as a gain in profit or loss at the effective date of the modification (at
the beginning of Year 6).
Lessee recognises the difference between the remaining lease liability of CU105,309 and the modified lease
liability of CU129,884 (which equals CU24,575) as an adjustment to the right-of-use asset reflecting the
change in the consideration paid for the lease and the revised discount rate.
IFRS 16 Example 18 – Modification that both increases and decreases the scope of the lease
Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease payments are
CU100,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily
determined. Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. At the
beginning of Year 6, Lessee and Lessor agree to amend the original lease to (a) include an additional 1,500
square metres of space in the same building starting from the beginning of Year 6 and (b) reduce the lease
term from 10 years to eight years. The annual fixed payment for the 3,500 square metres is CU150,000
payable at the end of each year (from Year 6 to Year 8). Lessee’s incremental borrowing rate at the beginning
of Year 6 is 7 per cent per annum.
The consideration for the increase in scope of 1,500 square metres of space is not commensurate with the
stand-alone price for that increase adjusted to reflect the circumstances of the contract. Consequently, Lessee
does not account for the increase in scope that adds the right to use an additional 1,500 square metres of space
as a separate lease.
The pre-modification right-of-use asset and the pre-modification lease liability in relation to the lease are as follows.
Lease liability
Right-of-use asset
Beginning
6% interest
Lease
Ending
Beginning
Depreciation
Ending
balance
expense
payment
balance
balance
charge
balance
Year CU CU CU
CU
CU
CU CU
1
736,009
44,160 (100,000)
680,169
736,009
(73,601)
662,408
2
680,169
40,810 (100,000)
620,979
662,408
(73,601)
588,807
3
620,979
37,259 (100,000)
558,238
588,807
(73,601)
515,206
4
558,238
33,494 (100,000)
491,732
515,206
(73,601)
441,605
5
491,732
29,504 (100,000)
421,236
441,605
(73,601)
368,004
6
421,236
368,004
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability on
the basis of: (a) a three-year remaining lease term, (b) annual payments of CU150,000 and (c) Lessee’s
incremental borrowing rate of 7 per cent per annum. The modified liability equals CU393,647, of which (a)
CU131,216 relates to the increase of CU50,000 in the annual lease payments from Year 6 to Year 8 and (b)
CU262,431 relates to the remaining three annual lease payments of CU100,000 from Year 6 to Year 8.
Decrease in the lease term
At the effective date of the modification (at the beginning of Year 6), the pre-modification right-of-use asset
is CU368,004. Lessee determines the proportionate decrease in the carrying amount of the right-of-use asset
based on the remaining right-of-use asset balance for the original 2,000 square metres of office space (i.e. a
remaining three-year lease term rather than the original five-year lease term). The remaining right-of-use
asset for the original 2,000 square metres of office space is CU220,802 (i.e. CU368,004 ÷ 5 × 3 years).
Leases (IFRS 16) 1737
At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability is
CU421,236. The remaining lease liability for the original 2,000 square metres of office space is CU267,301
(i.e. present value of three annual lease payments of CU100,000, discounted at the original discount rate of
6 per cent per annum).
Consequently, Lessee reduces the carrying amount of the right-of-use asset by CU147,202 (CU368,004 –
CU220,802), and the carrying amount of the lease liability by CU153,935 (CU421,236 – CU267,301). Lessee
recognises the difference between the decrease in the lease liability and the decrease in the right-of-use asset
(CU153,935 – CU147,202 = CU6,733) as a gain in profit or loss at the effective date of the modification (at
the beginning of Year 6).
Lease liability
CU153,935
Right-of-use asset CU147,202
Gain
CU6,733
At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of the
remeasurement of the remaining lease liability reflecting the revised discount rate of 7 per cent per annum,
which is CU4,870 (CU267,301 – CU262,431), as an adjustment to the right-of-use asset.
Lease liability
CU4,870
Right-of-use asset CU4,870
Increase in the leased space
At the commencement date of the lease for the additional 1,500 square metres of space (at the beginning of
Year 6), Lessee recognises the increase in the lease liability related to the increase in scope of CU131,216
(i.e. present value of three annual lease payments of CU50,000, discounted at the revised interest rate of 7 per
cent per annum) as an adjustment to the right-of-use asset.
Right-of-use asset
CU131,216
Lease
liability
CU131,216
The modified right-of-use asset and the modified lease liability in relation to the modified lease are as follows.
Lease liability
Right-of-use asset
Beginning
7% interest
Lease
Ending
Beginning
Depreciation
Ending
balance
expense
payment
balance
balance
charge
balance
Year CU CU CU
CU
CU
CU CU
6
393,647
27,556 (150,000)
271,203
347,148
(115,716)
231,432
7
271,203
18,984 (150,000)
140,187
231,432
(115,716)
115,716
8
140,187
9,813 (150,000)
–
115,716
(115,716)
–
IFRS 16 Example 19 – Modification that is a change in consideration only
Lessee enters into a 10-year lease for 5,000 square metres of office space. At the beginning of Year 6, Lessee
and Lessor agree to amend the original lease for the remaining five years to reduce the lease payments from
CU100,000 per year to CU95,000 per year. The interest rate implicit in the lease cannot be readily determined.
Lessee’s incremental borrowing rate at the commencement date is 6 per cent per annum. Lessee’s incremental
borrowing rate at the beginning of Year 6 is 7 per cent per annum. The annual lease payments are payable at
the end of each year.
At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability
based on: (a) a five-year remaining lease term, (b) annual payments of CU95,000, and (c) Lessee’s
incremental borrowing rate of 7 per cent per annum. Lessee recognises the difference between the carrying
amount of the modified liability (CU389,519) and the lease liability immediately before the modification
(CU421,236) of CU31,717 as an adjustment to the right-of-use asset.
In some cases, the lessee and lessor may agree to a modification to the lease contract
that starts at a later date (i.e. the terms of the modification take effect at a date later than
1738 Chapter 24
the date when both parties agreed to the modification). For example, a lessee enters
into a lease arrangement with a lessor to lease an asset for 10 years. At the beginning of
year 8 the lessee and lessor agree to a modification to the contract that will take effect
from the beginning of year 9.
• If the modification is an increase in the scope that does not result in a separate
lease, the lessee will re-allocate the consideration in the modified contract to each
existing lease component and non-lease component and remeasure the lease
liability at the date both parties agreed to the modification (the beginning of year 8).
• If the modification results in a separate lease component, the lessee will allocate
the consideration in the modified contract to each existing and new lease and non-
lease component at the date both parties agreed to the modification (the beginning
of year 8). The lessee will remeasure the lease liability for the existing lease
components at that date as well. However, recognition of the lease liability and
right-of-use asset for any new lease component occurs at the commencement date
of the new lease component (the beginning of year 9).
• If the modification is a decrease in the scope, the lessee will re-allocate the
consideration in the modified contract to each existing lease and non-lease
component and remeasure the lease liability and right-of-use asset at the effective
date of the modification (the beginning of year 8).
5.6
Other lessee matters
5.6.1
Impairment of right-of-use assets
A lessee applies IAS 36 to determine whether the right-of-use asset is impaired and to
account for any impairment loss identified. [IFRS 16.33].
IAS 36 requires an impairment indicator analysis at each reporting period. If any
indicators are present, the entity is required to estimate the recoverable amount of the
asset (or the cash-generating unit of which the asset is a part – the CGU). The entity has
to recognise an impairment loss if the recoverable amount of the CGU is less than the
carrying amount of the CGU. After an impairment loss is recognised, the adjusted
carrying amount of the right-of-use asset would be its new basis for depreciation.
Subsequent reversal of a previously recognised impairment loss needs to be assessed if
there is any indication that an impairment loss recognised in prior periods may no longer
exist or may have decreased. In recognising any reversal, the increased carrying amount
of the asset must not exceed the carrying amount that would have been determined
after depreciation, had there been no impairment.
Lessees currently apply the same impairment analysis to assets held under finance
leases. This analysis would be new for leases currently accounted for as operating leases
and could significantly affect the timing of expense recognition.
5.6.2
Leases denominated in a foreign currency
Lessees apply IAS 21 – The Effects of Changes in Foreign Exchange Rates – to leases
denominated in a foreign currency. As they do for other monetary liabilities, lessees
remeasure the foreign currency-denominated lease liability using the exchange rate at
each reporting date. Any changes to the lease liability due to exchange rate changes are
Leases (IFRS 16) 1739
recognised in profit or loss. Because the right-of-use asset is a non-monetary asset
measured at historical cost, it is not affected by changes in the exchange rate.
The IASB acknowledged in the Basis for Conclusions that this approach could result in
volatility in profit or loss from the recognition of foreign currency exchange gains or
losses, but it will be clear to users of financial statements that the gains or losses result
solely from changes in exchange rates. [IFRS 16.BC199].
5.6.3 Portfolio
approach
IFRS 16 specifies the accounting for an individual lease. However, as a practical
expedient, an entity may apply it to a portfolio of leases with similar characteristics if
the entity reasonably expects that the effects on the financial statements of applying
IFRS 16 to the portfolio would not differ materially from applying it to the individual
leases within that portfolio. If accounting for a portfolio, an entity uses estimates and
assumptions that reflect the size and composition of the portfolio. [IFRS 16.B1].
A decision to use the portfolio approach would be similar to a decision some entities
make today to expense, rather than capitalise, certain assets when the accounting
difference is, and would continue to be, immaterial to the financial statements.
5.6.4
Income tax accounting
IFRS 16 could affect lessees’ accounting for income taxes. For lessees, IFRS 16 requires
recognition of lease-related assets and liabilities that are not on the balance sheet under
today’s accounting (i.e. amounts related to leases that are operating leases under IAS 17)
and could change the measurement of other lease-related assets and liabilities. These
changes affect certain aspects of accounting for income taxes such as the following:
(a) recognition and measurement of deferred tax assets and liabilities; and
(b) assessment of the recoverability of deferred tax assets.
Deferred tax assets and liabilities are further discussed in Chapter 29 at 7 and 8.
5.7 Presentation
A lessee presents either in the statement of financial position, or discloses in the notes:
(a) right-of-use assets separately from other assets. If a lessee does not present right-
of-use assets separately in the statement of financial positi
on, the lessee:
(i)
includes right-of-use assets within the same line item as that within which the
corresponding underlying assets would be presented if they were owned; and
(ii) discloses which line items in the statement of financial position include those
right-of-use assets;
(b) lease liabilities separately from other liabilities. If the lessee does not present lease
liabilities separately in the statement of financial position, the lessee discloses
which line items in the statement of financial position include those liabilities.
[IFRS 16.47].
The requirement above does not apply to right-of-use assets that meet the definition of
investment property, which is presented in the statement of financial position as
investment property. [IFRS 16.48].
1740 Chapter 24
Right-of-use assets and lease liabilities are subject to the same considerations as other
assets and liabilities in classifying them as current and non-current in the statement of
financial position.
In the statement of profit or loss and other comprehensive income, a lessee presents
interest expense on the lease liability separately from the depreciation charge for the
right-of-use asset. Interest expense on the lease liability is a component of finance costs,
which paragraph 82(b) of IAS 1 – Presentation of Financial Statements – requires to be
presented separately in the statement of profit or loss and other comprehensive income.
[IFRS 16.49].
In the statement of cash flows, a lessee classifies:
(a) cash payments for the principal portion of the lease liability within financing activities;
(b) cash payments for the interest portion of the lease liability applying the
requirements in IAS 7 – Statement of Cash Flows – for interest paid; and
(c) short-term lease payments, payments for leases of low-value assets and variable
lease payments not included in the measurement of the lease liability within
operating activities. [IFRS 16.50].
The following table summarises the presentation requirements for lessees.
Financial statement
Lessee presentation
Statement of financial
Right-of-use assets presented either:
position
• separately from other assets (e.g. owned assets); or
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 343
