Key definitions

Learning objectives

• Distinguish inception date and commencement date, lease term, lease payments, interest rate implicit in the lease, lessee's incremental borrowing rate, right-of-use asset, gross and net investment in the lease.L1, L2

Normative references

• IFRS 16Appendix A, an integral part of the standard, sets out the operational vocabulary of IFRS 16, in particular the commencement date (when the lessor makes the underlying asset available for use by the lessee) and the inception date (the earlier of the date of the agreement and the date on which the parties commit to its principal terms), lease term, short-term lease (a lease whose term at the commencement date is 12 months or less and that contains no purchase option), lease payments and optional lease payments (payments for periods covered by an extension or termination option that are not included in the lease term), lease incentives, initial direct costs, right-of-use asset, economic life and useful life, unguaranteed residual value, interest rate implicit in the lease and lessee's incremental borrowing rate, gross and net investment in the lease, operating lease and finance lease, sublease, lease modification and its effective date. These definitions govern the application of all the recognition, measurement and disclosure requirements.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

14 questions

• Fixalis leases a machine for a period of 12 months; the contract gives it an option to purchase the machine at the end. This lease can be treated as a short-term lease.L2
• The accountant of Plieuse & Co analyses the lease of an industrial folding machine: (1) the lease term, at the commencement date, is 11 months; (2) the production machinery class is covered by the short-term lease election; (3) the contract contains an option to purchase the machine at the end, but a term of 11 months is enough to qualify it as a short-term lease; (4) the payments are therefore recognised as an expense on a straight-line basis. Which step contains the error?L2
• The inception date of the lease is the date on which the lessee recognises the right-of-use asset and the lease liability.L1
• On 1 February 20X2, Grutia and the lessor Dalvia commit to the principal terms of a lease of a crane (inception date). Dalvia makes the crane available to Grutia on 1 May 20X2 (commencement date). On which dates does Dalvia classify the lease and Grutia recognise the right-of-use asset and the lease liability?L2
• When a contract contains an early termination option that the lessee is reasonably certain not to exercise, the periods it covers form part of the lease term.L1
• Hortalis leases a warehouse. The contract provides for a non-cancellable period of 4 years, a first extension option of 2 years, which Hortalis is reasonably certain to exercise given the significant leasehold improvements it is making (case datum), then a second extension option of 3 years, whose exercise is not reasonably certain. What is the lease term?L2
• Which rate does the lessee use to discount the lease payments when initially measuring the lease liability?L1
• Vexoria knows the interest rate implicit in its lease, which can be readily determined. It may nevertheless choose to discount the lease liability at its incremental borrowing rate if it finds this more practical.L2
• Mirabel, lessee of a shop, analyses the cash flows provided for in the contract. Which of them are part of the lease payments included in the lease liability at the commencement date? (several answers)L2
• Calvane determines the cost of the right-of-use asset for leased premises. Which items are included in that cost at the commencement date? (several answers)L2
• For a lessor, what is a finance lease?L1
• Under IFRS 16, the lessee classifies each of its leases as an operating lease or a finance lease, and recognises a right-of-use asset only for the latter.L1
• The lessor Finaxa has entered into a finance lease. At what amount does it present its receivable at the commencement date, and what does the difference between the gross investment and the net investment in the lease represent?L2
• Which of the following operations take place at the commencement date of the lease, and not at the inception date? (several answers)L2