IFRS 16, the new leases standard, Part V (final)

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Athens, January 2019

Chris Ragkavas, BA, MA, FCCA, CGMA
IFRS technical expert, financial consultant.

Comprehensive example

Burberry enters into a lease agreement as follows:

  • Commencement date of the lease: 1/1/2020.
  • Annual lease payments in arrears:  GBP 100,000.
  • Lease term: 10 years.
  • No end-of-lease-term purchase options.
  • Burberry can extend for another 5 years, to be followed by a last option to extend, for another 5 years.
  • Burberry incurred initial direct costs to the lease agreement, e.g. agency fees, of GBP 23,000.

Expected useful life of the leased property is 34 years. Burberry’s incremental borrowing rate on 1/1/2o2o, is 5%.

Lease period

Burberry apply professional judgement and estimate that the most likely lease period is 15 years, considering facts and circumstances, as described in Part III of this series.  Annuity factor of payments incurred in arrears for a period of 15 years, at 5%, is 10.38.

Lease liability

Present value of all lease payments is 10.38 x 100,000 = GBP 1,038,000.

The lease liability will be amortized as follows.

Year  Opening balance  Finance cost  Payment  Ending balance 
2020 1,038,000 51,900 (100,000) 989,900
2021   989,900 49,495 (100,000) 939,395
2022 939,395 46,970 (100,000) 886,365
2023 886,365 44,318 (100,000) 830,683
2024 830,683 41,534 (100,000) 772,217
2025 772,217 38,611 (100,000) 710,828
2026 710,828 35,541 (100,000) 646,369
2027 646,369 32,318 (100,000) 578,688
2028 578,688 28,934 (100,000) 507,622
2029 507,622 25,381 (100,000) 433,033
2030 433,033 21,650 (100,000) 354,654
2031 354,654 17,733 (100,000) 272,386
2032 272,386 13,619 (100,000) 186,006
2033 186,006 9,300 (100,000) 95,306
2034 95,306 4,694 (100,000)

Right-of-use asset

Burberry will recognize an equivalent asset, on top of which, will be added the directly attributable costs, of GBP 23,000 i.e, in total 1,061,000. This asset will be depreciated over the expected lease period, i.e. over 15 years. Annual depreciation charge is GBP 70,733. The asset will subject to IAS 36 Impairment of Assets, as any other non-current asset carried at historic cost. Alternative measurement options are available, but are outside the scope of this series of payments.

Accounting in 2020, and extracts of financial statements

Right-of-use asset 1,061,000
Lease liability                     1,038,000
Banks/Accounts payable       23,000
Depreciation 70,733
Accumulated depreciation 70,733
Finance cost 51,900
Lease liability 51,900
Lease liability 100,000
Banks 100,000
Statement of financial position Statement of profit or loss
                                                         GBP                                                   GBP
Right-of-use asset                   990,267 Depreciation                      70,733
Lease liability, non-current   939,935 Finance cost                       51,900
Lease liability, current             50,505

Queries, comments, are welcome at [email protected]

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