Accounting treatment
Contract evaluation
Management should evaluate whether a contract is, or contains, a lease:
- Identification of the asset with right of use.
- Right to obtain economic benefits.
- Rights to direct how and for what purpose the asset is used.
- Term of leases longer than 12 months.
- High value.
Define the lease term
The term of the lease should reflect the reasonable expectation of the period over which the asset will be used, as this approach provides the most useful information in the financial statements:
- Determine the non-cancellable period of the lease.
- Reflect the reasonable expectation of the period over which the asset will be used.
Evaluation of the interest rate
In order to calculate the present value of the lease payments it is required to determine a discount rate, which can be:
- The interest rate implicit in the lease.
- The lessee’s incremental loan rate.
Financial management should support the accounting area by quoting the interest rate in the financial market.
Determination of present value and amortized cost
The lessee should recognize a right-of-use asset and a lease liability, corresponding to the present value of expected payments at the end of the lease. Subsequently, the right-of-use asset must be depreciated in accordance with IAS 16 and the liability must be treated as a financial liability and measured at amortized cost:
Information to be disclosed
A tenant must disclose:
- Asset depreciation charge for right of use by underlying asset class.
- Interest expense on lease liabilities.
- Expense related to short-term leases accounted for by applying paragraph 6. This expense need not include expense related to leases of one month’s duration or less.
- Expense related to low value asset leases accounted for by applying paragraph 6. This expense need not include expense related to short-term leases of low value assets included in paragraph 53(c).
- Expense related to variable lease payments not included in the measurement of lease liabilities.
Islava Zulema Ruiz Quiroz Bachelor of Public Accounting
