Virtual classroom support for learning partners, ). IFRS 16 leases. IFRS 16 defines a lease as “A contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration”. IAS 16 Property, Plant and Equipment outlines the accounting treatment for most types of property, plant and equipment. The transfer to retained earnings should not be made through the income statement so as to prevent 'recycling'. This site uses cookies. Any income earned during the pre-production phase, which is not necessary to bring the asset into working condition, should be recognised in the income statement. For an asset to be recorded in the financial statements should meet this definition laid by IASB Framework under IAS 16; “IAS 16 Asset is a resource which is controlled by the entity, as a result of past event and from which economic benefit are expected to flow to the entity” at cost less any accumulated depreciation and impairment losses). In other words, after taking account of normal depreciation that would have been charged had no impairment occurred. If you’re still confused about the differences between old standards and new, the information below will help. Impairment must be considered at both interim and annual reporting dates. View 4 IAS 16.pdf from ACCA 123 at Finance University under the Government of the Russian Federation. If the transaction does constitute a ‘sale’ under IFRS 15 then the treatment is as follows: If the fair value of the consideration for the sale of an asset does not equal the fair value of the asset, or if the payments for the lease are not at market rates, an entity shall make the following adjustments to measure the sale proceeds at fair value: Entity X sells a building to entity Y for cash of $5 million. An exposure draft was issued in June 2017 and a final amendment is expected in the first half of 2020. We'd suggest that you use this as a guide when allocating yourself CPD units. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations . The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and, if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an accounting estimate in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. The contract specifies the goods to be transported on the truck and the dates of pickup and delivery. Spread the word. An exposure draft was issued in June 2017 and a final amendment is expected in the first half of 2020. However, productive assets held by entities in the extractive industries are subject to the same recognition and measurement rules as other PPE. A customer (C) enters into a contract with a road haulier (H) for the transportation of goods from London to Edinburgh on a specified truck. The global body for professional accountants, Can't find your location/region listed? The lease classification set out in IAS 17 was subjective and there was a clear incentive for the preparers of lessee’s financial statements to ‘argue’ that leases should be classified as operating rather than finance leases in order to enable leased assets and liabilities to be left out of the financial statements. The most significant are: New definition of the leasecan cause that some contracts previously treated as “service contracts” can now be treated as “lease contracts”, 2.2  The right to direct the use of the asset. IAS 40 Investment Property (13:52) Start; 12. Owing to the current economic environment, it may be more likely that impairment indicators exist. Where consideration is deferred beyond normal credit terms, it should be discounted to present value. To read the whole embedded document use the navigational links at the bottom of snippet or the scroll bar of embedded document. Association of Chartered Certified Accountants (ACCA). Its goods will occupy substantially all of the capacity of the truck, thereby preventing other parties from obtaining economic benefits from use of the truck. Hi. Accordingly, different lessees are expected to reach the same conclusions about whether a particular underlying asset is of low value. . When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The requirements of IFRS 16 will have significant impacts on key accounting ratios of lessees. IFRS 16 specifies how an IFRS reporter will recognise, measure, present and disclose leases. Hello Sir, First question is about having a legal obligation. It was for this reason that IFRS 16 was introduced. Archived from the original on 2013-09-27; International Accounting Standards Board (2011). Under a contract between a local government authority (L) and a private sector provider (P), P provides L with 20 trucks to be used for refuse collection on behalf of L for a 6-year period. The truck is explicitly specified in the contract and H does not have the right to substitute that specified truck. The purpose of this article is to summarise the key changes introduced by IFRS 16 from the perspective of the lessee and how these impact on their financial reporti… This Standard deals with the accounting treatment of Property, Plant & Equipmentincluding the guidance for the main issues related to the recognition & measurement, determination of carrying value, depreciation charges, any impairment loss and de-recognition aspects for the property, plant & equipment in the financial statements of an entity. Thus, residual values take account of changes in prices up to the balance sheet date, but not of expected future changes. The recognition and measurement of exploration and evaluation assets is set out in IFRS 6, Exploration for and Evaluation of Mineral Resources. Back to Course Next Lesson. This site uses cookies. The related credit is recognised in provisions. IFRS 16 Leases will start to apply on all the financial years starting after 1 st January, 2019. There is an identified asset. | Riaduzzaman, ACCA Course Instructor AMTRAS 4 Depreciation - Depreciation : o Depreciation = Systematic allocation of the depreciable amount of an asset over its useful life (IAS 16.50). A lessee enters into a 20-year lease of one floor of a building, with an option to extend for a further five years. 5. IAS 16 standard specifies property, plant and equipment's detailed accounting and disclosure requirements. Accounting for non-current assets. At the same time, X enters into a contract with Y for the right to use the building for 20 years, with annual payments of $200,000 payable at the end of each year. When an entity purchases or constructs an asset, it may take on a contractual or statutory obligation to decommission the asset or restore the asset site. With a very few exceptions (see section 3.4 for further details) IFRS 16 abolishes the distinction between an operating lease and a finance lease in the financial statements of lessees. The IASB is engaged in a project to make a narrow-scope amendment to IAS 16 to clarify that where items produced before an item of PPE is available for use, the proceeds of sale may not be deducted from the cost of the PPE. To obtain the lease, the lessee incurred initial direct costs of $25,000. Lessees can elect to treat short-term leases by recognising the lease rentals as an expense over the lease term rather than recognising a ‘right of use asset’ and a lease liability. Lecture_4_2(IAS 16).pdf - ACCA F3 International Financial Accounting Non-current assets acquisition and depreciation Introduction \u00a9 2013 ZAO KPMG a Future economic benefits occur when the risks and rewards of the asset's ownership have passed to the entity. However, C does not have the right to control the use of the truck because C does not have the right to direct its use. The present value of the annual payments (20 payments of $200,000, discounted at 5%) amounts to $2,492,400, of which $500,000 relates to the additional financing and $1,992,400 ($2,492,200 - $500,000) relates to the lease (as adjusted for the fair value difference already identified). A lease is an agreement whereby the lessor (the legal owner of an asset) conveys to the lessee (the user of the asset) the right to use an asset for an agreed period of time in return for a payment or series of payments. Hi. An item of property, plant, or equipment shall not be carried at more than re­cov­er­able amount. 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