Factsheet Series: IFRS 16 Leases - The lessee perspective

Originally published at: IFRS 16 Leases - The lessee perspective | TheAccSense

In this article, we bring to you IFRS 16 Leases from the lessee perspective. IFRS 16 was issued by the International Accounting Standards Board (“IASB”) in January 2016. IFRS 16 replaces the previous lease standard, IAS 17 Leases with significant changes made on the accounting treatment for lease transactions for lessees. The accounting requirements for…

In assessing the lease term, if the contract does not state the lease term or the contract is an evergreen contract, how do we determine the lease term?

And subsequently, if there is a change in the lease term, how do we account it?

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When the contract does not have the term, the non-cancellable period is generally one day, on the assumption that the lessee can just return back the asset to the lessor and walk away. But again, the standard requires you to determine significant penalty and other factors that may suggest lessee to stay longer than one day. In such a situation, the lease term may be longer than a day.

You have to determine what is the reason for the change in the lease term. Does it relate to the reassessment of the extension or renewal options stated in the contract? If it does, then, the re-measurement will impact the RoU asset and lease liability. If due to contract modification, we have explained this in the article (see Question #10 of the Factsheet)