Calculations IFRS 16 Leases is a case regarding fixed lease payments depending on an index and rent-free period. This case is rather simple, fixed payments depending on an index and rent-free period. Here are only included the journal entries to be made at the inception of the lease contract.
This contract comprises a lease contract for the lease of office space, archive space, inside garage space and outside parking places. The contract consist of special and general conditions. The special conditions prevail the general conditions. Calculations IFRS 16 Leases
The lease contract has a lease term of 12 consecutive years (144 months), starting date is 1 March 2015, ending date is 28 February 2027. Tacit renewal of the agreement for a definite period of time, such as with six months or a year, is not possible. Renewal can only be done by agreeing a new contract.
Summary of the contract:
|Office space: 1,174 m2 at €135/m2 per annum =|
|Archive: 102 m2 at €50/m2 per annum =|
|Inside garage 29 lots at € 1,00 per annum =|
|Outside 6 parking lots at € 750 per annum =|
The lease is indexed starting the 2nd year. The cost-of-living index is annually published by the Department of Economic Affairs. The lease payment is on a quarterly basis at the beginning of the quarter. Calculations IFRS 16 Leases
The special conditions specify a rent-free period for the complete lease contract of two months at the beginning of the contract period: 1 March 2015 to 20 April 2015. In addition the lessor has agreed to provide a reimbursement of the refurbishing of the office and archive spaces at the beginning of the lease with a maximum of € 240,000. It is presumed that these € 240,000 will be completely used. Calculations IFRS 16 Leases
The discount rate to be used is the interest rate implicit in the lease if that rate can be readily determined. If it cannot then the entity uses its incremental borrowing rate instead. The interest rate implicit in the lease is unlikely to be available to the lessee so the it is widely expected that the incremental borrowing rate will have to be used in practice. It is established that a loan of approximately € 2,500,000 for 12 years around 1 March 2015 would be 1.5% plus 6 month Euribor.
6 months Euribor is 0.11% on 1 March 2015. These are annual rates that have to be recalculated to quarterly rates. Total annual rate is 1.5% plus 0.11% is 1.61%.
The interest conversion is calculated using the formula: Calculations IFRS 16 Leases
Effective quarterly interest rate = ((1 + total annual rate))^(number of compounding periods)) minus 1.
The number of compounding periods = 0.25 (¼ quarters) Calculations IFRS 16 Leases
=> Calculations IFRS 16 Leases
((1 + 0.0161)^0.25 ) – 1 = 0.40% is the quarterly effective interest rate. Calculations IFRS 16 Leases
The annual lease term is € 199,990. This is € 49,997.50 on a quarterly basis, but the first two months are free so the first lease term payment on 1 March 2015 is € 16,665,83 (€ 49,997,50 / 3).
The present value of these quarterly payments (1 of € 16,665,83 and 47 of € 49,997,50) has to be calculated. See the simple table at the end, which is based on the Discounted Cash Flow (DCF) calculation model and WACC.
Recognition asset and liability
The net present value is therefore € 2,154,990.20. This is the amount of the lease liability at the commencement of the lease contract, which is also the amount to record the right-to-use asset.
Right-to use asset DT 2,154,990.20
Lease liability CR 2,154,990,20
The first payment of € 16,665.83 will consist of interest (0.40% of € 2,154,990,20 = €8,620,00 (rounded)). The remainder will be redemption of the lease liability (€ 8,045.83). Some rounding differences will occur during the recording of payments because the interest rate is rounded to 0.40%.
We will not repeat every quarterly payment/journal entry. However the quarterly payment as at 1 December 2015, the year-end financial closing entries and the indexing as at 1 March 2016 will be discussed here.
Qtr payment 1 December 2015:
There is a cash payment of € 49,997.50, the lease liability as at 1 December 2015 is € 2,088,526.07, therefore the interest portion of € 49,997,50 is € 8,354 (2,088,526,07 * 0,40%). The redemption of the lease liability is therefore € 41,643.50.
Year end financial close 31 December 2015:
Depreciation of the right-to-use asset has to be recorded over the period 1 March – 31 December 2015, is 10 months. The total lease period is 144 months.
Depreciation 2015: € 2,154,990.20 * 10 / 144 = € 149,652.10, to be recorded as depreciation expenditure.
Interest has been paid on 1 December 2015 for an amount of € 8,354, of which two months are prepaid. € 8,354 * 2 / 3 = € 5,569 to be recorded as prepaid lease interest.
Indexing of the lease terms 1 March 2016:
The cost-of-living index is the index from February 2015 to February 2016 and was reported to be 1.63% (rounded). The lease terms increase from € 49,997,50 * 1.62553276% = € 50,810.23. The new lease table changes and is listed below.
The net present value of the right-to-use asset has to become € 2,028,936,07 as at 1 March 2016. It was under the old lease term € 1,989,523.86. This is an increase of € 49,412.21 for the right-to-use asset and the related lease liability. The QTR interest has also increased from € 7,958 to € 8,116. See also the adjusted lease table below:
See also: The IFRS Foundation