Finance Lease Model for Lessee

Under Appendix A, a finance lease is a lease that transfers substantially all the risks and rewards
incidental to ownership of an underlying asset.

IFRS  16:22 states that at the commencement date, the lessee shall recognize a right-of-use asset and a lease liability.

(a) The right of use asset for the right to use the underlying assets over the lease term, and
(b) The lease liability for the obligation to make payments.

All leases shall be accounted for as a finance lease under the new lease accounting standard which is IFRS 16.

The underlying asset is the subject of the lease for which the right to use has been provided by the lessor to the lessee.

On the other hand, the lessor is the entity that provides the right to use an underlying asset for a period of time in exchange for consideration. The lessor however is the entity that obtains that right of use.

Recognition Exemptions | Operating Lease Model for Lessee

A lessee may elect not to recognize the right to use asset and lease liability for:
(a) short-term leases; and

A short-term lease is defined in IFRS 16, Appendix A, as a lease that, at the commencement date, has a lease term of 12 months or less and which does not contain a purchase option.

IFRS 16:8 provides that the election for a short-term lease shall be made by the class of underlying asset to which the right of use relates.

A class of underlying assets is a grouping of underlying assets of a similar nature and use in an entity’s operations.

(b) low-value lease.

The new lease standard does not provide a quantitative threshold for a low-value asset. Therefore, it is a matter of professional judgment.

Appendix B3 provides that the lessee shall assess the value of an underlying asset based on the value of an asset when it is new regardless of its age. With this, a lease of an underlying asset does not qualify as low-value when the asset is typically not of low value when it is new.

IFRS 16:8 provides that the election for a short-term lease for which the underlying asset is of a low value can be made on a lease-by-lease basis.

IFRS 16:6 then provides that if the lessee elects to apply the operating lease accounting under these two exemptions, the lessee shall recognize the lease payments as an expense on either a straight-line basis over the lease term or another systematic basis.

Under the operating lease model, the periodic rentals are simply recognized as rental expenses by the lessee.

Next lesson – Measurement of Right of Use Assets