Question

Pass a journal entries in the in recognition of both an asset and a liability in the books of the lessee at the inception of the lease at amount equal to present value of minimum lease payments.

Answer 1

IFRS 16 Leases brings significant changes in accounting requirements for lease accounting, primarily for lessees.

IFRS 16 replaces the existing suite of standards and interpretations on leases:

– IAS 17 Leases

– IFRIC 4 Determining whether an Arrangement contains a Lease

– SIC 15 Operating Leases – Incentives

– SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease

Lease Liability – Initial Recognition

As per IFRS 16

Lease Liability/Minimum Lease Payments = Fixed Payments from commencement date + Certain Variable Payments + Residual Value Guarantee +  Exercise Price of Purchase Options + Termination penalties

Right of Use Asset = Lease Liability + Initial Direct Costs + Costs of removal and restoring + Payments made at or prior to commencement Lease + incentives received

Journal Entries with an Basic Example.

Lessee enters into a 5-year lease of a Equipment .Economic Useful Life of asset is 5 Year.Annual Lease payments of $30,000 at end of year and Interest Rate @ 5% .Lease Covey No Ownership at the end of Period ,no purchase option at the end of Lease & no Residual Guarantee Value. Because Lease is for full life of and Asset .Lease will be considered as Finance Lease as IFRS 16. Depreciation at Straight Line Method.

Solution :

Present Value of Annuity for 5 Year @ 5% = 4.32948

Present Value of Lease Payment will be as Under : $30000 * 4.32948 = $129,884

Year	Date	Lease Paymnent	Interest @5%	Interest Amount	Amortization of Lease Liablity	Finance Lease Liablity
1	1St Jan	-	-			1,29,884
1	31st Dec	$30,000	129884*5% =	6,494	23,506	1,06,378
2	31st Dec	$30,000	106378*5% =	5,319	24,681	81,697
3	31st Dec	$30,000	81697*5% =	4,085	25,915	55,782
4	31st Dec	$30,000	55782*5% =	2,789	27,211	28,571
5	31st Dec	$30,000	28571*5% =	1,429	28,571	-

Journal Entries Will be as UNDER :

Year	Date	Dr/Cr	Journal Entries	Amount	Remark
1	1st Jan	Debit	Finance Lease - Right-of-use Asset	1,29,884
		Credit	Finance Lease Liablity	1,29,884
1	31st dec	Debit	Interest Expense	6,494
		Debit	Finance Lease Liablity	23,506
		Credit	Cash/Bank	30,000
1	31st dec	Debit	Depreciation Expense	25,976	Straight Line - $129884/5 year
		Credit	Accumulated Depreciation - Finance Lease - Right-of-use Asset	25,976