Subsequent measurement of the lease liability

Learning objectives

• Explain how the lease liability changes: increased by interest at a constant periodic rate, reduced by payments, and remeasured.L1, L2
• Calculate the amortisation schedule of the lease liability (interest, payments, balance) and record interest and payments.L2, L3, L4
• Identify the expenses recognised in profit or loss: interest on the lease liability and variable payments not included in the lease liability.L2

Normative references

• IFRS 16 §36After the commencement date, the lease liability is increased to reflect interest, reduced to reflect the lease payments made and remeasured to reflect any reassessment or lease modifications (paragraphs 39 to 46) or revised in-substance fixed lease payments.
• IFRS 16 §37Interest in each period is the amount that produces a constant periodic rate of interest on the remaining balance of the lease liability. That rate is the discount rate in paragraph 26 or, where applicable, the revised rate in paragraphs 41, 43 or 45(c).
• IFRS 16 §38After the commencement date, unless the costs are included in the carrying amount of another asset under other standards, the lessee recognises in profit or loss the interest on the lease liability and variable lease payments not included in the lease liability, in the period in which the event or condition that triggers them occurs.

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

13 questions

• True or false: after the commencement date, the lease liability is increased by interest and reduced by the lease payments made, and it is remeasured upon a reassessment or a lease modification.L1
• True or false: each year, interest on the lease liability is computed by applying the discount rate to the initial amount of the lease liability.L1
• Ramberte leases retail premises: fixed annual payment, plus a variable payment equal to 3% of the store's revenue, not included in the lease liability. The variable payment due on 20X1 sales amounts to 18,000. No standard requires it to be included in the carrying amount of another asset. How should it be treated?L2
• Liseron, lessee of a store lease, pays a fixed annual lease payment included in the lease liability and a variable top-up based on its revenue, not included. No amount is included in another asset. Among the following items relating to the lease liability and payments, which are recognised as expenses of the year? (several answers)L2
• At 1 January 20X1, the commencement date, Lorvane's lease liability amounts to {opening_liability} (given), computed at a rate of {discount_rate}. Annual lease payments of {annual_payment} are paid in arrears, on 31 December. Compute the interest expense for 20X1 and the lease liability at 31 December 20X1 after payment.L2
• The Dunelle cooperative leases a cold room from 1 January 20X1. The initial lease liability is {initial_liability} (given) at a discount rate of {discount_rate}; each lease payment of {annual_payment} is made at year-end, on 31 December. Determine the interest for 20X2 and the balance of the lease liability at 31 December 20X2.L3
• Ferlane leases an industrial furnace from 1 January 20X1 (commencement date, year-end 31 December). The 4 annual lease payments of {annual_payment} are paid in advance, each 1 January; the first was paid at the commencement date. The lease liability, which covers the 3 remaining payments, amounts to {liability_after_first_payment} (given, rounded), at a rate of {discount_rate}. Compute the interest for 20X1 and the lease liability at 31 December 20X1 (rounded to the nearest euro).L3
• The Valmeuse association leases a minibus from 1 January 20X1 (year-end 31 December). The lease provides for {number_of_payments} annual lease payments of {annual_payment} payable in advance each 1 January, the first at the commencement date. The interest rate implicit in the lease, which can be readily determined, is {implicit_rate}. Rounding each amount to the nearest euro, compute the initial lease liability, the interest for 20X2 and the lease liability at 31 December 20X2.L4
• At 1 January 20X1, Marvelle has a lease liability of {opening_liability}, at a discount rate of {discount_rate}. The annual lease payment of {annual_payment} is paid in arrears on 31 December 20X1. Record the 20X1 entries relating to the lease liability: interest for the year, then payment of the lease instalment.L2
• The Orvigne hotel group leases a fleet of electric shuttles. At the start of the year, the balance of the lease liability is {opening_liability}; the incremental borrowing rate used at the commencement date is {discount_rate}. The annual lease payment of {annual_payment} is settled at year-end. Record, for the year, the finance charge and then the settlement of the lease payment.L3
• For 20X1, the accountant of Calderis recorded three entries on a lease (opening lease liability 220,000, rate 5%, lease payment of 52,000 paid on 31 December): (1) depreciation of the right-of-use asset of 40,000; (2) debit interest expense, credit lease liability 11,000; (3) debit lease expense, credit cash 52,000. Which entry is wrong?L3
• Estivale operates a leased boutique. At 1 January 20X1, the lease liability is 400,000 at a rate of 5%; the fixed lease payment of 90,000 is paid on 31 December. The lease also provides for a variable payment equal to 2% of the boutique's revenue, not included in the lease liability; 20X1 revenue is 1,300,000. No amount is included in another asset. State the 20X1 expenses relating to the lease liability and the variable payments (excluding depreciation of the right-of-use asset) and the lease liability at 31 December 20X1.L4
• Norvelle has a lease liability of 200,000 at 1 January 20X1, at a rate of 5%, and pays 46,000 every 31 December. It recognised interest of 10,000 in 20X1, and again 10,000 in 20X2, applying 5% to the initial liability. Which finding is correct?L2