Section C

Question 4

IFRS 16 Leases comes into operation for accounts periods begining on or after 1 January 2019 to replace IAS 17. This new standard implements long awaited changes to how leases are accounted for by lessees in published financial statements.

Required:

(a) Explain how a lease liability and a right of use asset should be measured on initial recognition.

(b) On 1 January 2019, LeesCo entered into a four year lease for a machine with a useful life of 8 years. The contract contains an option to extend the lease term for a further year and the Directors believe that it is reasonably certain they will exercise this option.

Lease payments are €10,000 per year for the initial term and €15,000 per year for the option period. All payments are due at the end of the year. To obtain the lease, LeesCo incurs initial direct costs of €3,000. The lessor reimburses €1,000 of these costs.

The interest rate implicit in the lease is 10%.

Required:

Calculate the initial carrying amount of the lease liability and the right-of-use asset as they would be recorded on 1 January 2019 (i.e. Day 1 of the contract). Provide the journal entries needed to record these amounts.

Note:

Discount factors @ 10% are:

DCF @

10%

0.909

0.826

0.751

0.683

0.621