With the interest rate of 6%, we can calculate the discount factor using the formula of 1/(1+r) ^n, we got the result as below: Year Discount Factor Y1 0.9434 Y2 0.8900 Y3 0.8396 Y4 0.7921 Y5 0.7473 How to account for the lease following IFRS 16? Assuming the interest rate is 6% per annum. The company has rented an office with 5 years and the payment of $120,000 is at the end of each year. In this case, the accounting entry would be: Account Debit Credit Right-of-use assets 000 Retained earnings (equity) 000 Lease Liabilities 000 Example 1: Lease accounting in IFRS 16 Lease payment: Account Debit Credit Lease liabilities 000 Interest expense 000 Cash 000įor the first time adoption which the company has existing operating lease, the adjustment will need to be made to the equity account. Lease depreciation: Account Debit Credit Lease depreciation expense 000 Accumulated depreciation – lease 000 Initial recognition: Account Debit Credit Right-of-use assets 000 Lease Liabilities 000 The accounting entry for lease are as follow: interest expense) Accounting Entry for Lease lease liabilities) and another one is interest expense (Dr. The cash payment for lease will be split into two parts, in which one part is to deduct lease liabilities (Dr. The lease assets or right-of-use assets will need to be depreciated using straight-line depreciation method while on the lease liabilities side, interest expense will be recognized. The company can present the leased asset in the statement of financial position as part of the PPE or on its own line item, e.g. The company needs to initially recognize the value of lease assets and liabilities as the present value of the lease payments. The exception is only for those leases that have insignificant value. The company as a lessee is required to recognize lease payments (whole payments in lease contract) as assets and liabilities for all leases that have the term longer than 12 months. For the existing financial leases, it will be treated the same. So, any company as the lessee that use IFRS as its accounting standards is required to review its existing operating lease to make either full or limited retrospective restatement in order to comply with requirements of the new standard, IFRS 16. IFRS 16 leases become effective for annual reporting periods starting on or after 1 January 2019 and fully replace IAS 17.
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