IFRS 16 · Case studies (Step 3 of 5)
Case study
Verdal Distribution (a fictitious company) has leased a logistics warehouse of 2,000 m² from Foncière Arvel (a fictitious company) since 1 January 20X1. Two events occur during the lease: at the end of 20X3, Verdal installs an automated storage system in the warehouse that leads it to include the extension option; on 1 January 20X6, an amendment reduces the floor space leased. Lease payments are made once a year, on 31 December, in arrears. The interest rate implicit in the lease cannot be readily determined. You are in charge of the accounting treatment by the lessee.
Your assignment
Using the documents, analyse each event, remeasure the lease liability at 31 December 20X3 and then at 1 January 20X6, measure the effects of the floor-space reduction and record the entries. One document is not useful; assess the relevance of the others, including a note that does not by itself trigger a reassessment.
Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.
Advanced level: no help, the work is grouped by kind.
Document 1
Document 2
Document 4
7 documents: open each one to read it.
Document 1Contract
Extract from the lease: commencement date 1 January 20X1; warehouse of 2,000 m²; non-cancellable period of 5 years until 31 December 20X5; extension option of 3 years (20X6 to 20X8) at the same rent, exercisable by the lessee only; annual lease payment of 100,000 payable on 31 December. At the commencement date, the exercise of the option was not reasonably certain and the incremental borrowing rate used was 5%.
The figures of the documents, gathered for your work.
| Item | Value | Found in |
|---|---|---|
| Commencement date | January 1 20X1 | |
| Floor space originally leased (m²) | 2,000 units | |
| Initial annual lease payment | €100,000.00 | |
| Duration of the extension option | 3 years | |
| Incremental borrowing rate at the commencement date | 5% | |
| Date of the triggering event | December 31 20X3 | |
| Lease liability at 31 December 20X3 | €185,941.05 | |
| Cost of the right-of-use asset | €432,947.68 | |
| Accumulated depreciation at 31 December 20X3 | €259,768.62 | |
| Carrying amount of the right-of-use asset at 31 December 20X3 | €173,179.06 | |
| Incremental borrowing rate at 31 December 20X3 | 6% | |
| Effective date of the amendment | January 1 20X6 | |
| Floor space returned (m²) | 800 units | |
| Floor space retained (m²) | 1,200 units | |
| Revised annual lease payment | €58,000.00 | |
| Lease liability at 31 December 20X5 | €267,301.19 | |
| Carrying amount of the right-of-use asset at 31 December 20X5 | €245,084.63 | |
| Incremental borrowing rate at 1 January 20X6 | 7% | |
| Increase in market rents in 20X2 | 10% | |
| Annual amount of the cleaning quote | €9,600.00 |
Not every document matters: identify those that affect the accounting treatment.
Part 1 · Classification · Analysis
Sort each document: does it affect the accounting treatment?
Drag each item into its category, or tap the category under the item.
Extract from the lease
Minutes of the board of directors
Balances at 31 December 20X3
Floor-space reduction amendment
Balances at 31 December 20X5
Note from the real estate department
Cleaning quote
11 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.
Task 1Analysis
Does the storage system require the lease term to be reassessed? Which rate applies?
Task 2Calculation
Calculate the remeasured lease liability at 31 December 20X3.
Part 1 · Calculation
Calculate the remeasured lease liability at 31 December 20X3.
Result: Remeasured lease liability at 31 December 20X3
Task 3Calculation
Calculate the adjustment to the right-of-use asset at 31 December 20X3.
Part 1 · Calculation
Calculate the adjustment to the right-of-use asset at 31 December 20X3.
Result: Right-of-use asset after the remeasurement
Task 4Journal entries
Which entry do you record at 31 December 20X3?
Part 1 · Journal entry · Journal entries
Entry 1 of 1
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 5Analysis
How is the amendment of 1 January 20X6 qualified?
Task 6Calculation
Calculate the decrease in the right-of-use asset and in the lease liability and the gain or loss on the partial termination.
Part 1 · Calculation
Calculate the decrease in the right-of-use asset and in the lease liability and the gain or loss on the partial termination.
Result: Gain on the partial termination
Task 7Calculation
Calculate the remeasured lease liability at 1 January 20X6.
Part 1 · Calculation
Calculate the remeasured lease liability at 1 January 20X6.
Result: Remeasured lease liability at 1 January 20X6
Task 8Calculation
Calculate the residual adjustment to the right-of-use asset at 1 January 20X6.
Part 1 · Calculation
Calculate the residual adjustment to the right-of-use asset at 1 January 20X6.
Result: Right-of-use asset after the amendment
Task 9Journal entries
Which entries do you record at 1 January 20X6?
Part 1 · Journal entry · Journal entries
Entry 1 of 2
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Line 3
Part 2 · Journal entry · Journal entries
Entry 2 of 2
One line = one account and one side. Add a line if the entry needs more; the balance check updates live.
Line 1
Line 2
Task 10Effects on the financial statements
What is the impact of the amendment on the financial statements?
Part 1 · Classification · Analysis
State the direction of the effect on each financial statement aggregate.
Financial position (balance sheet)
Profit or loss
Other comprehensive income
Equity
Notes
Part 2 · Calculation · Analysis
Quantify the effect on the aggregates concerned.
Result: Amount of the effect — Equity
Task 11Conclusion
Write the conclusion.
Your working draft for this file: points noted, leads, intermediate calculations.
Saved on this device only; never graded.
Complete every item of the file to submit it (0 / 14).
Document this file
These working papers use the data and results of this case.
Normative references