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IFRS 16: Subsequent 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”
– May 2021: “IFRS 16: Recognition and initial measurement”
In today´s newsletter, we focus on subsequent measurement.
Under IFRS 16.29-33, subsequent measurement of the right-of-use asset is normally at cost less any accumulated depreciation and any accumulated impairment losses. Under IFRS 16.31, depreciation is normally applied in accordance with IAS 16. The difference between a lease and owner-ship also has to be taken into account with regard to depreciation by way of the stipulations in IFRS 16.32 (please read). Accordingly, if the lease transfers ownership of the underlying asset – either automatically or by the lessee exercising a (discount-priced) purchase option – then depreciation is applied to the end of the useful life of the underlying asset (if longer than the lease term); if not, depreciation is applied to the end of the useful life of the underlying asset or to the end of the lease term, whichever is earlier.
In addition, the carrying amount of the right-of-use asset has to be adjusted (increased or de-creased) for any remeasurement of the lease liability under IFRS 16.30(b) read in conjunction with IFRS 16.36(c).
Under IFRS 16.33, any impairments are accounted for by applying IAS 36.
Subsequent measurement of the lease liability follows the scheme set out in IFRS 16.36 (please read). Under IFRS 16.36(a) together with IFRS 16.37 and IFRS 16.26, the carrying amount of the lease liability is increased to reflect interest on the lease liability as determined under b). The carrying amount (as increased by interest) is then reduced by the lease payments made. In other words, the lease payment is allocated between the interest and repayment components. The interest portion is recognised as expense15 in profit or loss, while the repayment portion reduces the carrying amount of the lease liability on the statement of financial position.
Finally, under IFRS 16.36(c), the carrying amount is remeasured to reflect any reassessment or lease modifications. The detailed stipulations on this are contained in IFRS 16.39-46. In our experience, these cause a lot of work in practice. Covering them here would be beyond the scope of this unit.
In terms of expense in profit or loss under the right-of-use assets approach, this essentially leaves depreciation on the right-of-use asset and interest on the lease liability. This also makes sense, because according to the rationale set out under a), in an ‘economic’ analysis a time-limited right of use is acquired against payment and this purchase is financed in the full amount in a loan arrangement.
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