:Key definitions

A lease: is contract that conveys the right to use an

.asset for a period of time in exchange for consideration

The Lessor: is the entity that provides the right to

.use an underlying asset in exchange for consideration

The Lessee : is the entity that obtains the right to use

.an underlying asset in exchange for consideration
How to decide if the contract contains a
?lease
?can the asset be identified -
?Can the lessee decide about the asset use - 
Can the lessee get the economic benefit -
?from the use of that asset
Can the lessee substitute the asset during -
the period of use (if there is a problem in the
? asset )
IF the answers are “Yes” then it is a lease
.contract
IAS17 The OLD Lease standard

Since 1984, companies used IAS17 for leases. But this

.standard become invalid at 2019

IAS17 Classification

Financing Operating
lease lease
Lease consider as Financing lease if risks and rewards -
that related to the ownership of asset are transferred to
.the lessee
.The lessee record it as an Asset in the Balance sheet 

IF the risks and rewards that related to the - 

ownership of the asset remain with the lessor then
.the lease consider as Operating lease
Lease payments are recorded as Rent Expenses in the
.income statement
? Why do IASB establish IFRS16
Under IAS17 lessees used to hide the Financing lease
contracts and they didn’t appear it in the financial
statements; they used to recognize and record it as
. operating lease instead of Financing
there for an important part of the company’s obligations
.do not appear in the financial statements
So, the financial statements are not faithful
.representation and do not reflect the reality
 IFRS 16 LEASE

No classification for leases ; All leases are

treated at the same way. And they are appear in
.the Balance sheet
The objective of the of IFRS16 is to specify the rules for
recognition, measurement, presentation and the
.disclosure of leases
 :The Lease Term

:The Lease term contains

.Non cancellable periods *

Periods covered by an option to extend the lease if *
.reasonably certain to be exercised
Periods covered by an option to terminate the lease if *
.these are reasonably certain not to be exercised
 The initial measurement
At the commencement of the lease, the lessee should
:recognize 2 things
.A- Lease Liability
B- Right-of-use asset.
Lease liability

Fixed Payments

Amounts expected to be payable under

residual value guarantee
Options to purchase the asset that are
reasonably certain to be exercised

Termination penalties
The residual value guarantee is when the lessor is
guaranteed that the underlying asset at the end of the
.lease term will not be worth less than a specified amount

The discount rate should be implicit in the lease. But if

this can not be determined then the entity should use its
.incremental borrowing rate

The rate at which it could borrow funds to purchase a

.similar asset
The initial measurement
Right of use asset

Amount for lease liability

Lease payments made at or before

commencement date

Initial direct costs

Estimate of dismantling costs as per

the condition of the lease
:EXAMPLE
On 1January 20X0, Dynamic entered into 2 years lease for
lorry. The contract contains an option to extend the lease
term for a further year. Dynamic believes that it is
reasonably certain to exercise this option. Lorries have a
.useful economic life 10 years

Lease payments are $10,000 per year for the initial term and
$15,000 per year for the option period. All payments are due
at the end of the year. To obtain the lease, Dynamic incurs
initial direct costs of $3,000. The lessor reimburses $1,000
.of these costs
The interest rate within the lease is not readily determined.
.Dynamic’s incremental rate of borrowing is 5%

:Required
Calculate the initial carrying amount of lease liability and
.the right of use asset

PV=FV/(1+R)^n
 Solution: The Lessee’s entries
Cash 1000
9,524 =1^)1.05(/10000 Right of use asset 1000

9,070 =2^)1.05(/10000
12,958 =3^)1.05(/10000
Total Pv = 31,552 Right of use asset

Right of use asset 31,552 31552 1000

Lease liability 31,552
3000

Right of use asset 3000

cash 3000
33,552
: The Lessor’s initial measurement

A/R 31,552
Lorries 31,552
: Subsequent measurement
Riyad enters into agreement to lease an asset. The terms of
.lease are as follow
Primary period is for 4 years from 1 January 20X2 *
.with rental of 2000 payable on 31 December each year
The PV of the lease payments is 5710*
The interest rate implicit in the lease is 15%*
 Subsequent measurement
Liability end Outstanding payment Interest Liability period
balance 15% beg
4,567 1413 2000 857 5,710 Year1

3,252 1315 2000 685 4,567 Year2

1,740 1512 2000 488 3,252 Year3
0 1740 2000 260 1,740 Year4

Depreciation =
1,428
The Lessee’s subsequent measurement
:Year 1
Depreciation Expense 1428 Dr: Lease liability 1143
Accumulated Depreciation 1428 Dr : Interest Expense 857
Cr: Cash 2000
Year 2
Dr: Lease liability 1315 Dep Exp 1428
Dr: Interest Expense 685 Acc Dep 1428
Cr: Cash 2000
:Year3
Dr: Lease Liability 1512 Dep Exp 1428
Acc Dep 1428 Dr: Interest Expense 488
Cr: Cash 2000
: The Lessee’s Subsequent measurement
:Year 4
Dep Exp 1740 Dr: lease liability 1428
Acc Dep 1428 Dr: Interest Expense 260
Cr: Cash 2000

Lease liability
1143 5710

1315

1512

1740

0
The Lessor’s subsequent measurement
:Year 4: Year 1
Cash 2000 2000 Cash
Interest revenue 857 Interest revenue 260
Lease liability 1143 lease liability 1740
:Year 2
Cash 2000
Interest revenue 685
lease liability 1315
:Year 3
Cash 2000
Interest revenue 488
lease liability 1512
:Short-life and low value assets
:Short life lease
If the lease is short term (less than 12 months at the
inception date) or of a low value then simplified treatment
.is allowed
In these cases. The lessee can choose to recognize the lease
payments in profit or loss on a straight line basis .No lease
.liability or right of use asset would there for be recognized
Short life and low value asset
:Low value assets
The standard gives the following examples of low value
:assets
.Tablets *
.Small personal computer*
.Telephones *
.Small items of furniture*
The assessment of wether an asset qualifies as having a
.low value must based on its value when new
: Sale and Leaseback
If an entity (the seller-lessee) transfers an asset to another
entity (the buyer-lessor) and then leases it back from the
buyer- lessee must assess whether the transfer should be
.accounted for as sale
For this purpose, the seller must apply IFRS 15 Revenue
from contracts with customers to decide whether a
performance obligation has been satisfied. This normally
.occurs when the buyer obtains control of the asset
Control of an asset refers to the ability to obtain
.substantially all of the remaining benefits
:Transfer is a sale
If the transfer does qualify as a sale then the seller-lessee
must measure the right of use asset as the proportion of
previous carrying amount that relates to the rights
.retained
This means that the seller lessee will recognize a profit or
loss based only on the rights transferred to the buyer-
.lessor
:Transfer is not a sale
If the transfer is not a sale then seller-lessee continues to
recognize the transferred asset and will recognize a
.financial liability equal to the transfer proceeds
In simple terms, the transfer proceeds are treated as a
.loan
:Example
On 1 January 20X1, Painting sells an item of machinery to
collage foe its fair value of $3 million. The asset had a
carrying amount of $1.2 million prior to the sale. This sale
represents the satisfaction of a performance obligation. In
accordance with IFRS15 Revenue from contracts with
customers. Painting enters into a contract with collage for
the right to use the asset for the next 5 years. Annual
payments of $500000 are due at the end of each year. The
.interest rate implicit in the lease is 10%
The present value of the annual lease payments is 1.9
million . the remaining useful economic life of the machine
.greater than the lease term
:Required
Explain how Painting will account for the transaction on1
.January 20X1
:Solution
1.2m = 0.76 m * ( Right of use asset = (1.9m/ 3m
The gain or loss of the over all : 3m – 1.2m = 1.8 m
1.8m=0.66m*))3m/)3m – 1.9m((
.Relates to the right transferred to collage

3m Dr: cash
0.76m Dr Right of use asset
Cr Machine 1.2 m
Cr Lease liability 1.9m
Cr Profit or loss 0.66 m
Practice: The effect of implementing IFRS16 on the financial
.statements of Jordanian public shareholding companies

The issuing of the new lease accounting standard is expected to

have significant effect on lease accounting, the key change will
be eliminating the off balance sheet liabilities which appeared in
disclosures previously and add them to the financial statements
as Right of use assets and lease liability. There for the study aims
to shed light on the effects of implementing this new standard on
Jordanian publicly traded companies. This study was
implemented on nine publicly traded companies on the Amman
stock exchange. The researcher calculated the Pv for minimum
future lease payments. The results stated that implementing
IFRS16 will have statistical effects on Assets liabilities and the
equity of the sampled companies as will as statistical effects on
.the financial ratios
:Presented by
Aya Abd Al-Nabi
Yara Saifan