IAS 17 and IFRIC 4; or
(b) not to apply IFRS 16 to contracts that were not previously identified as containing
a lease applying IAS 17 and IFRIC 4. [IFRS 16.C3].
If an entity chooses to apply the practical expedient, it discloses that fact and applies
the practical expedient to all of its contracts. As a result, entities apply the requirements
in paragraphs 9 to 11 (identifying a lease) only to contracts entered into after the date of
initial application. [IFRS 16.C4].
As the accounting for operating leases under IAS 17 is similar to the accounting for
service contracts, entities may not always have focussed on determining whether an
arrangement is a lease or a service contract. Some entities may need to revisit
assessments made under IAS 17 and IFRIC 4 because, under IFRS 16, most leases are
recognised on lessees’ balance sheets and the effects of treating an arrangement as a
service instead of a lease may be material. IFRS 16’s practical expedient that allows an
entity not to reassess whether a contract contains a lease, only applies to arrangements
that were appropriately assessed under IAS 17 and IFRIC 4.
10.3 Lessee
transition
A lessee applies IFRS 16 to its leases either:
(a) retrospectively to each prior reporting period presented applying IAS 8 (see 10.3.1
below); or
(b) retrospectively with the cumulative effect of initially applying IFRS 16 recognised
at the date of initial application (see 10.3.2 below). [IFRS 16.C5].
A lessee applies its elected transition approach consistently to all leases in which it is a
lessee. [IFRS 16.C6].
Leases (IFRS 16) 1763
10.3.1
Full retrospective approach
Under the full retrospective approach, an entity applies IFRS 16 as if it had been applied
since the inception of all lease contracts that are presented in the financial statements.
If the standard is applied at 1 January 2019, this means that, in the 31 December 2019
financial statements, the comparative period to 31 December 2018 (assuming that this is
the only comparative period presented) must be restated. A restated opening balance
sheet at 1 January 2018 will also need to be disclosed as required by IAS 1.
10.3.2 Modified
retrospective
approach
When applying the modified retrospective approach, a lessee does not restate
comparative figures. Instead, a lessee recognises the cumulative effect of initially
applying IFRS 16 as an adjustment to the opening balance of retained earnings (or other
component of equity, as appropriate) at the date of initial application. [IFRS 16.C7].
10.3.2.A
Leases previously classified as operating leases
For leases previously classified as operating leases by applying IAS 17, a lessee:
(a) recognises a lease liability at the date of initial application for leases previously
classified as an operating lease applying IAS 17. The lessee measures that lease
liability at the present value of the remaining lease payments, discounted using the
lessee’s incremental borrowing rate at the date of initial application;
(b) recognises a right-of-use asset at the date of initial application for leases previously
classified as an operating lease applying IAS 17. The lessee chooses, on a lease-by-
lease basis, to measure that right-of-use asset at either:
(i) its carrying amount as if IFRS 16 had been applied since the commencement
date, but discounted using the lessee’s incremental borrowing rate at the date
of initial application; or
(ii) an amount equal to the lease liability, adjusted by the amount of any prepaid
or accrued lease payments relating to that lease recognised in the statement
of financial position immediately before the date of initial application; and
(c) applies IAS 36 to right-of-use assets at the date of initial application, unless the
lessee applies the practical expedient below. [IFRS 16.C8].
Notwithstanding the requirement in IFRS 16.C8 above, a lessee:
(a) is not required to make any adjustments on transition for leases for which the
underlying asset is of low value. The lessee accounts for those leases applying
IFRS 16 from the date of initial application;
(b) is not required to make any adjustments on transition for leases previously accounted
for as investment property using the fair value model in IAS 40. The lessee accounts
for those leases applying IAS 40 and IFRS 16 from the date of initial application; and
(c) measures the right-of-use asset at fair value at the date of initial application for
leases previously accounted for as operating leases under IAS 17 and that will be
accounted for as investment property using the fair value model in IAS 40 from the
date of initial application. The lessee accounts for those leases applying IAS 40 and
IFRS 16 from the date of initial application. [IFRS 16.C9].
1764 Chapter 24
A lessee may use one or more of the following practical expedients when applying the
modified retrospective approach to leases previously classified as operating leases
applying IAS 17. A lessee is permitted to apply these practical expedients on a lease-by-
lease basis:
(a) a lessee may apply a single discount rate to a portfolio of leases with reasonably
similar characteristics (such as leases with a similar remaining lease term for a
similar class of underlying asset in a similar economic environment);
(b) a lessee may rely on its assessment of whether leases are onerous applying IAS 37
immediately before the date of initial application as an alternative to performing an
impairment review. If a lessee chooses this practical expedient, the lessee adjusts the
right-of-use asset at the date of initial application by the amount of any provision for
onerous leases recognised in the statement of financial position immediately before
the date of initial application. In the Basis for Conclusions, the IASB explained that
it could be costly for a lessee to perform an impairment review of each of its right-
of-use assets on transition to IFRS 16. In addition, any onerous operating lease
liability identified applying IAS 37 is likely to reflect impairment of the right-of-use
asset. [IFRS 16.BC287]. Thus, even when the provision for an onerous lease, immediately
before the date of initial application, is nil we believe a lessee is able to rely on this
practical expedient and not perform impairment reviews on that date;
(c) a lessee may elect not to recognise a lease liability and a right-of-use asset for
leases for which the lease term ends within 12 months of the date of initial
application. In this case, a lessee:
(i) accounts for those leases in the same way as short-term leases; and
(ii) includes the cost associated with those leases within the disclosure of short-
term lease expense in the annual reporting period that includes the date of
initial application;
(d) a lessee may exclude initial direct costs from the measurement of the right-of-use
asset at the date of initial application; and
(e) a lessee may use hindsight, such as in determining the lease term if the contract
contains options to extend or terminate the lease. [IFRS 16.C10]. IFRS 16 does not
provide detailed
guidance on the use of hindsight. However, we believe, similarly
to the requirements of IAS 8 (paragraph 53) that hindsight can only be applied to
matters of judgement and estimates and therefore would not apply to matters of
fact such as changes to an index or rate.
Example 24.23: Accounting for lease contracts at transition using the full
retrospective and modified retrospective approaches
A retailer (lessee) entered into 3-year lease of retail space beginning at 1 January 2017 with three annual lease
payments of CU1,000 due on 31 December 2017, 2018 and 2019, respectively. The lease is classified as an
operating lease under IAS 17. The retailer initially applies IFRS 16 for the first time in the annual period
beginning at 1 January 2019.
The incremental borrowing rate at the date of the initial application is 3% p.a.. The incremental borrowing
rate at the commencement of the lease was 6% p.a. The right-of-use asset is subject to straight-line
depreciation over the lease term. The present values of the remaining lease payments as of 1 January 2017
at 6% p.a., 1 January 2017 at 3% p.a. and 1 January 2019 at 3% p.a. are CU2,673, CU2,829 and CU971,
respectively. Assume no practical expedients are elected.
Leases (IFRS 16) 1765
For simplicity, this example assumes the lessee did not incur initial direct costs, there were no lease incentives
and there were no requirements for the lessee to dismantle and remove the underlying asset, restore the site on
which it is located or restore the underlying asset to the condition under the terms and conditions of the lease.
The following example illustrates the lease liability, the right-of-use asset at the date of initial application and
expenses applying both the full retrospective and the modified retrospective approaches:
Full retrospective approach
Analysis: Under the full retrospective approach, the lease liability and the right-of-use asset are measured on
the commencement date using the incremental borrowing rate at that date. The lease liability is accounted for
by the interest method subsequently and the right-of-use asset is subject to depreciation on the straight line
basis over the lease term of three years. The following table shows account balances under this method
beginning at lease commencement:
Right-of-use
Lease liability Interest
Amortisation
Retained
asset
expense
expense
earnings
1 January 2017
2,6731 2,6731
– – –
31 December 2017
1,7822 1,8333 1604 8915 (51)
31 December 2018
8916 9437 1108 891 –
1
January
2019
891 943 –
–
–
31 December 2019
–
–
579 891 –
1
Present value of three CU1,000 payments at 6%
2
CU2,673 – (CU2,673 / 3 years) = CU1,782
3
CU2,673 (prior period ending lease liability) – CU1,000 (cash payment) + CU160 (current period interest expense) =
CU1,833
4
CU2,673 × 6% = 160
5
CU2,673 / 3 years = 891
6 CU1,782
–
(CU2,673 / 3 years) = CU891
7
CU1,833 (prior period ending lease liability) – CU1,000 (cash payment) + CU110 (current period interest expense) = CU943
8
CU1,833 × 6% = CU110
9
CU943 × 6% = CU57
At adoption, lessee would record the right-of-use asset and lease liability at the 31 December 2017 values from
the above table, with the difference between the right-of-use asset and lease liability going to retained earnings
as of 1 January 2018 (assuming that only the 2018 financial information is included as comparatives).
Right-of-use asset
CU1,782
Retained earnings
CU51
Lease
liability
CU1,833
To initially recognise the lease-related asset and liability as of 1 January 2018
The following journal entries would be recorded during 2018:
Interest expense
CU110
Lease
liability
CU110
To record interest expense and accrete the lease liability using the interest method
Depreciation expense
CU891
Right-of-use
asset
CU891
To record depreciation expense on the right-of-use asset
Lease liability
CU1,000
Cash
CU1,000
To record lease payment
1766 Chapter 24
The following journal entries would be recorded during 2019:
Interest expense
CU57
Lease
liability
CU57
To record interest expense and accrete the lease liability using the interest method
Depreciation expense
CU891
Right-of-use
asset
CU891
To record depreciation expense on the right-of-use asset
Lease liability
CU1,000
Cash
CU1,000
To record lease payment
Modified retrospective approach (alternative 1)
Analysis: Under the modified retrospective approach (alternative 1), the lease liability is measured based on
the remaining lease payments discounted using the incremental borrowing rate as of the date of initial
application (i.e. 3% per p.a.). The right-of-use asset is at its carrying amount as if the standard had been
applied since the commencement date. The right-of-use asset is subject to depreciation on the straight-line
basis over the lease term of three years:
Right-of-use asset
CU94310
Retained earnings
CU2811
Lease
liability
CU97112
To initially recognise the lease-related asset and liability as of 1 January 2019
The following journal entries would be recorded during 2019:
Interest expense
CU2913
Lease
liability
CU29
To record interest expense and accrete the lease liability using the interest method
Depreciation expense
CU943
Right-of-use
asset
CU943
To record depreciation expense on the right-of-use asset
Lease liability
CU1,000
Cash
CU1,000
To record lease payment
Modified retrospective approach (alternative 2)
Analysis: Under the modified retrospective approach (alternative 2), the lease liability is also measured based
on the remaining lease payments discounted using the incremental borrowing rate as of the date of initial
application. In this example, the carrying amount of the right-of-use asset is an amount equal to the carrying
amount of the lease liability on the date of initial application as there are no prepayments or accrual items:
Right-of-use asset
CU97112
Lease
liability
CU97112
To initially recognise the lease-related asset and liability as
of 1 January 2019
The following journal entries would be recorded during 2019:
Interest expense
CU2913
Lease
liability
CU29
To record interest expense and accrete the lease liability using the interest method
Leases (IFRS 16) 1767
Depreciation expense
CU97112
Right-of-use
asset
CU971
To record depreciation expense on the right-of-use asset
Lease liability
CU1,000
Cash
CU1,000
To record lease payment
10 CU2,829 (present value of three CU1,000 payments at 3%) – (CU2,829 / 3 years) × 2 = CU943
11 CU971 – CU943 = CU28
12 Present value of one CU1,000 payment at 3%
13 CU971 × 3% = CU29
A summary of the lease contract’s accounting (assuming no changes due to reassessments) is, as follows:
Modified
Modified
retrospective
retrospective
Full retrospective
approach
approach
approach
(alternative 1)
(alternative 2)
Opening balance sheet impact as of 1 January 2019
Right-of-use asset
CU891
CU943
CU971
Lease liability
CU943
CU971
CU971
Period ended 31 December 2019 activity
Cash lease payments
CU1,000 CU1,000 CU1,000
Lease expense recognised
Interest expense
CU57
CU29
CU29
Depreciation expense
CU891
CU943
CU971
Total periodic expense
CU948
CU 972
CU1,000
Immaterial differences may rise in the computation of amounts in the example above due to rounding.
10.3.2.B
Separating and allocating lease and non-lease components of a contract
upon transition – leases previously classified as operating leases
IFRS 16 does not specify how a lessee would separate and allocate lease and non-lease
components of a contract upon transition when the modified retrospective approach is
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 348
