How Cradle compares to the IFRS 16 Illustrative Examples

The number one thing

Before signing up with your lease accounting software solution, some due diligence is encouraged. The most crucial aspect of any lease accounting software is the numbers it produces from the contractual data.

Here at Cradle, we are 100% transparent in how we calculate the lease liability and, in turn, the right-of-use asset.

Cradle calculation methodology

The purpose of this document is to show you how Cradle’s lease calculation methodology works and how it’s 100% in compliance with that of IFRS, including all journal entries.

The International Accounting Standards Board (IASB) have released a number of illustrative examples to provide clarity on judgement areas such as:

Is it a lease?
> Examples of control
> Substitution rights
> Right to substantially all economic benefits
> Lease term
How to allocate costs to components of the lease

From Cradle’s perspective, we’ll leave those judgemental areas to you.

What we've focused on, is those IFRS examples that highlight the calculation methodology prescribed by IFRS. We’ve ensured our numbers are consistent with IFRS’s methodology to the cent unless there’s a logical reason for diverging. The benefit of using Cradle is you can be assured this methodology can be applied to your entire portfolio with no susceptibility to human error.

So we’ll walk you through each applicable IFRS example and compare Cradle’s numbers to those of IFRS, and we’re happy to say Cradle is actually more accurate than those writing the standard!

Day Count Convention

When using Cradle you have the ability to select which calculation method you prefer. We've provided two options, one consistent with Microsoft Excel, which uses an Actual/365 day count convention. If you were to recalculate the present value of the lease liability in excel, it would match Cradle’s numbers. The second is that methodology consistent with IFRS Actual/Actual (ISDA). What's the difference? Technically if you're using excel, you are not compliant with the IFRS 16 calculation methodology. In excel, the calculation of interest-based on the input discount rate is fixed on 365 days, so you'll be slightly off if your lease includes leap years with 366 days.

The difference would never be "material" enough to bother auditors, but using Cradle, you can choose.

At Cradle, our biggest priority is the numbers we produce are correct, the IFRS examples we think are a great way to show you that our numbers are compliant. We also encourage you to perform your recalculations.

If requested, our demo accounts will come with the below examples to allow you to run the financial statement reports for yourself. The below is best read in conjunction with the IFRS Illustrative examples.

Example 13 - Measurement by a lessee and accounting for a change in the lease term

These are the following initial recognition details entered into Cradle:

Commencement Date: 2019-1-1
Contract Expiry: 2028-12-31
Payment Timing: In advance
Payment Frequency: Annually
Payment Starts: 1 January 2019
Fixed Payment Amount: $50,000
Direct Costs: $20,000
Lease Before Commencement: $5,000
ROU Expiry: 2028-12-31
Discount rate: 6%

Calculation methodology:

Day count convention: Actual/Actual (ISDA)
Add interest before/after payment: auto

Example 13 initial recognition journals

Part 2 - Subsequent measurement and accounting for a change in the lease term

To account for the modification the following information is entered into Cradle:

On 2025-1-1:

update fixed payment from $50,000 to $55,000 and changed the discount rate from 5% to 6%
Updated accounting & ROU Asset end date from 2028-12-31 to 2033-12-31

Example 14—Variable lease payments dependent on an index and variable lease payments linked to sales

These are the following initial recognition details entered into Cradle:

Commencement Date: 2019-1-1
Contract Expiry: 2028-12-31
Payment Timing: In advance
Payment Frequency: Annually
Payment Starts: 1 January 2019
Fixed Payment Amount: $50,000
ROU Expiry: 2028-12-31
Discount rate: 5%

Calculation methodology:

Day count convention: Actual/Actual (ISDA)
Add interest before/after payment: auto

Part 2 —Variable lease payments dependent on an index and variable lease payments linked to sales

To account for the modification the following information is entered into Cradle:

On 2019-12-31:

In modifications input a variable lease expense for $8,000

On 2021-1-1:

In modifications input a CPI increase of 4% to the accounting end date which increases payments from $50,000 to $54,000

Example 15—Modification that is a separate lease

Example 15 provides an example of when a renegotiation of lease terms results in a new lease instead of applying modification accounting to the existing lease. Adding a new lease in Cradle is easier than saying “123”

Example 16—Modification that increases the scope of the lease by extending the contractual lease term

These are the following initial recognition details entered into Cradle:

Commencement Date: 2019-1-1
Contract Expiry: 2028-12-31
Payment Timing: In Arrears
Payment Frequency: Annually
Payment Starts: 31 December 2019
Fixed Payment Amount: $100,000
ROU Expiry: 2028-12-31
Discount rate: 6%

Calculation methodology:

Day count convention: Actual/Actual (ISDA)
Add interest before/after payment: auto

To account for the modification the following information is entered into Cradle:

On 2025-1-1:

Update the Accounting & ROU end date from 2028-12-31 to 2032-12-31with a discount rate of 7%

Example 17—Modification that decreases the scope of the lease

These are the following initial recognition details entered into Cradle:

Commencement Date: 2019-1-1
Contract Expiry: 2028-12-31
Payment Timing: In Arrears
Payment Frequency: Annually
Payment Starts: 31 December 2019
Fixed Payment Amount: $50,000
ROU Expiry: 2028-12-31
Discount rate: 6%

Calculation methodology:

Day count convention: Actual/Actual (ISDA)
Add interest before/after payment: auto

To account for the decrease in scope - asset size modification the following information is entered into Cradle:

On 2024-1-1:

Update the fixed payment amount from $50,000 to $30,000, with an updated ROU Asset utilization percentage of 50% and a discount rate of 5%.

Example 18—Modification that both increases and decreases the scope of the lease

These are the following initial recognition details entered into Cradle:

Commencement Date: 2019-1-1
Contract Expiry: 2028-12-31
Payment Timing: In Arrears
Payment Frequency: Annually
Payment Starts: 31 December 2019
Fixed Payment Amount: $100,000
ROU Expiry: 2028-12-31
Discount rate: 6%

Calculation methodology:

Day count convention: Actual/Actual (ISDA)
Add interest before/after payment: auto

Decrease in the lease term

To account for the decrease in scope - lease term modification the following information is entered into Cradle:

On 2024-1-1:

Update the Accounting end date from 2028-12-31 to 2026-12-31, with an updated discount rate of 7%

Increase in the leased space

To account for the increase in scope - lease term modification the following information is entered into Cradle:

On 2024-1-1:

Update the fixed payment amount from $100,000 to $150,000, with an updated discount rate of 7%.

Example 19—Modification that is a change in consideration only

These are the following initial recognition details entered into Cradle:

Commencement Date: 2019-1-1
Contract Expiry: 2028-12-31
Payment Timing: In Arrears
Payment Frequency: Annually
Payment Starts: 31 December 2019
Fixed Payment Amount: $100,000
ROU Expiry: 2028-12-31
Discount rate: 6%

Calculation methodology:

Day count convention: Actual/Actual (ISDA)
Add interest before/after payment: auto

Modification that is a change in consideration only

To account for the modification the following information is entered into Cradle:

On 2024-1-1:

Update the fixed payments from $100,000 to $95,000, with an updated discount rate of 7%