In: Accounting
At the beginning of 2016, IASB issues a new accounting standard for lease transactions ( IFRS 16), which will be rffective from 01 January 2019.
1. Explain the accounting treatment for lease transactions on the lessee's financial statements under both the current accounting standard (IAS 17) and new standare (IFRS 16) on the lessee's financial statement.
Accounting treatment of lease in lessee’s financial statement in new IFRS 16 are as follows:-
• At a time of lease commitment a lessee recognize a right of use asset and a lease liability in his financial statement.
• Right of use of assets=Total amount of lease liabilities+ net Initial direct costs incurred by the lessee, subject to adjustment. Lessee should use cost model to calculate right of use.
• Lease liability= lease payments payable over the lease term, discounted at the borrowing rate or a rate implicit in the lease.
• If there are any change happen in lease than lease liabilities and right of use should be measure subsequently.
Accounting treatment of lease in lessee’s financial statement in present accounting standard (IAS17) are as follows:-
• At the time of commencement of the lease term, finance leases should be recorded as asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments should be discounted at the interest rate implicit in the lease or borrowing cost.
• Finance lease payment should be apportioned between the finance charge and the reduction of the outstanding liability.
• Lessee should use a consistent depreciation on lease asset as that for owned assets. If there is no reasonable certainty to obtain ownership at the end of lease then the asset should be depreciated over the shorter of the lease term or the life of the asset.
• In operating leases, the lease payments should be recognize as an expense in the income statement over the lease term on a straight line basis.
• If there are any change happen in lease than lessee should recognize revised rental expense as lease expenses.