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IFRS 16: Recognition and initial measurement
as announced in our January newsletter, we are addressing issues surrounding IFRS 16 Leasing in a short newsletter series. The previous newsletters have dealt with the following topics:
– January 2021: “Has the plane landed – Introduction to our IFRS 16 series”
– February 2021: “IFRS 16: Scope and Exemptions”
– March 2021: “IFRS 16: Identifying a lease”
– April 2021: “IFRS 16: Determining the lease term”
In today´s newsletter, we focus on recognition and initial measurement.
Ratio des Rights-of Use-Approach
The right-of-use assets approach in IFRS 16 is based on the consideration that the lessee, from an economic viewpoint, acquires a (time-limited) right of use against payment and finances the full amount in a loan arrangement. Logically, the right of use is recognised as a right-of-use asset which is ‘used up’ and depreciated over the term of use. The lease liability which is recognised for the acquisition of the right of use – and which is effectively a financial liability – is discounted and is gradually repaid in the form of the agreed (ongoing) lease payments. Recognition, initial and subsequent measurement, presentation, classification and notes disclosures all follow this logic.
Recognition and initial measurement
Under IFRS 16.22, at the commencement date8, the lessee recognises a right-of-use asset and a lease liability (in the statement of financial position). As of that date, the lessee measures the right-of-use asset at cost (see IFRS 16.23).
The cost (of the right-of-use asset) consists in particular of the components described in IFRS 16.24(a)–(d) (please read). By far the most important item in practice is generally the item referred to in IFRS 16.24(a). This is the amount of the initial measurement of the lease liability, as described in IFRS 16.26, which in turn stipulates that “at the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date. The lease payments shall be discounted at the interest rate implicit in the lease, if that rate can be readily determined. If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate”.
The lease payments to be discounted comprise the payments listed in IFRS 16.27 (please read), as follows:
(a) Fixed payments (including in-substance fixed payments; see IFRS 16.B42);
(b) Certain variable lease payment that depend on an index or a rate (as described in IFRS 16.28);
(c) Amounts expected to be payable by the lessee under residual value guarantees;
(d) The exercise price of a purchase option if the lessee is reasonably certain to exercise that option (assessed considering the factors described in paragraphs B37–B40); and
(e) Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.
The payments to be included under (d) and (e) are determined consistently with the stipulations on determining the lease term.
Should you ever lose track of the big picture, my colleagues and I will be happy to help and guide you safely through the IFRS accounting jungle. Contact me by email at email@example.com