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IFRS 16 / AASB 16 Summary

IFRS 16 / AASB 16 Summary

by Lucas Russell | 2022-03-29

  • IFRS 16 / AASB 16 was introduced to provide greater clarity to the readers of a company’s financial statements of their lease obligations and leased assets.
  • Applies to all contracts deemed a lease which is defined as:
    If the contract conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.
  • Under IFRS 16 / AASB 16, when a company leases an asset (the lessee), it must recognise a lease liability and right of use asset on the balance sheet.
  • The lease liability is the present value (PV) of the minimum value of lease payments similar to that of a finance lease under the previous lease accounting standard AASB 117. The right of use asset represents the right to use the leased asset. This balance is depreciated to zero.
  • These calculations are complicated and susceptible to manual error.
  • Under IFRS 16 / AASB 16, this accounting is now applicable to all leases. Under the previous lease accounting standard, accounting for an operating lease, the most common type, was very straightforward.
  • Accounting for modification of a lease is tricky and will require an intimate knowledge of IFRS 16 / AASB 16. Modifications often occur, for example, a change in the lease payment amount.
  • PV calculations are time-consuming, especially with a portfolio of 30+ leases. The accountant will need to:
    - Maintain two excel spreadsheets for the lease liability and right of use asset – for each lease.
    - Journals to reflect the changes in the month-to-month balances of the lease liability and right of use asset.
    - The split between and principal and interest payments.
    - Not miss any key dates, as they impact the lease accounting.
    - Rigorous lease disclosures in a set of financial statements.

    How to comply?
    - Manually in Microsoft excel:
    > Cheapest
    > Most time consuming
    > Requires intimate knowledge of the standard
    > Suites lease portfolio of fewer than five leases
    > Susceptible to manual error

    - Software solution:
    > Far more cost-effective when a large lease portfolio, e.g., 30+ lease
    > Automates all the calculations, journal entries and disclosures required by IFRS 16 / AASB 16
    > Most accurate
    > Time-efficient
    > Audit efficiencies
    > Document management included