ACCT 2206 · Leases · IFRS 16

Led by Fra Luca de Pacioli Simulacrum

1. Module 6 ○ Open

   Leases · IFRS 16

   Led by Fra Luca de Pacioli Simulacrum

   The question

   Lease accounting under IFRS 16 — the post-2019 lessee model that brought an estimated $3 trillion of assets and liabilities onto company balance sheets globally. The module covers the recognition of the right-of-use asset and lease liability at commencement, the discount-rate selection (interest rate implicit in the lease or the lessee's incremental borrowing rate), subsequent measurement (depreciation of the asset, accretion and reduction of the liability), and the front-loaded P&L impact relative to the former operating-lease accounting. The worked scenario takes a 10-year warehouse lease through to year-end accounting and disclosure.

   Outcome

   The student can recognise a lease under IFRS 16 from the lessee perspective, calculate the initial right-of-use asset and lease liability, prepare the journal entries for the first year, and identify when an arrangement contains an embedded lease that requires recognition. (IFRS 16 leases)

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   Practice scenarios

   Halberd Leases a New Distribution Centre

   You take a 10-year warehouse lease for Halberd's new UK distribution centre — £450k annual rent, fixed escalations, a break clause at year 5 — and produce the IFRS 16 right-of-use asset and lease-liability recognition at commencement plus the year-by-year P&L impact through to year 5. The work tests the discount-rate determination and the front-loaded P&L pattern relative to operating-lease accounting.

   Your goals

   • Calculate the lease liability at 1 January 2024: present value of 10 annual payments of £600k at 5.5%, paid in advance. The first payment is at t=0 (so undiscounted), the second at t=1, etc. Use annuity-due formula or build the cash-flow table. PV ≈ £4,773k (advance annuity at 5.5%).
   • Record the first payment £600k separately if it is *prepaid* (treated as before-commencement); alternatively, treat as a lease payment that reduces liability immediately. Common approach: liability = PV of all 10 payments; first payment reduces the liability on day 1.
   • Calculate right-of-use asset at 1 January 2024: lease liability £4,773k + initial direct costs £45k + restoration provision £180k − any incentives received (none) = £4,998k.
   • Year 1 accounting: depreciation = £4,998k / 10 = £499.8k; interest expense on liability = (£4,773k − £600k initial payment) × 5.5% = £229.5k.
   • Journal entries: at commencement (Dr ROU asset £4,998k, Dr Lease liability movement to clear the £600k first payment, Cr Cash £600k, Cr Lease liability £4,173k, Cr Restoration provision £180k, Cr Cash £45k).
   • Year-end 31 Dec 2024: Dr Depreciation £499.8k, Cr ROU asset £499.8k; Dr Interest expense £229.5k, Cr Lease liability £229.5k.
   • Year 2 payment 1 January 2025: £600k; reduces liability; interest accrual restarts on the lower balance.
   • Frame the disclosure note for the 2024 annual report.

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