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]