Transition for lessees

Learning objectives

• Distinguish the lessee's two transition methods (full retrospective, retrospective with the cumulative effect recognised at the date of initial application) and the related practical expedients.L3, L4

Normative references

• IFRS 16 §C2For the purposes of paragraphs C1 to C20E, the date of initial application is the beginning of the annual reporting period in which the entity first applies the standard.
• IFRS 16 §C3As a practical expedient, the entity is not required to reassess, at the date of initial application, whether a contract is, or contains, a lease. It may apply IFRS 16 to contracts previously identified as leases applying IAS 17 and IFRIC 4, and not apply it to contracts that were not previously identified as such.
• IFRS 16 §C5The lessee applies the standard either retrospectively to each prior reporting period presented applying IAS 8, or retrospectively with the cumulative effect of initially applying it recognised at the date of initial application, in accordance with paragraphs C7 to C13.
• IFRS 16 §C7If the approach in C5(b) is applied, the lessee does not restate comparative information; the cumulative effect of initial application is recognised as an adjustment to the opening balance of retained earnings (or another component of equity) at the date of initial application.
• IFRS 16 §C8For leases previously classified as operating leases, the lessee measures the lease liability at the present value of the remaining lease payments, discounted at the incremental borrowing rate at the date of initial application. It measures the right-of-use asset, on a lease-by-lease basis, either as if the standard had always been applied (but discounted at the incremental borrowing rate at the date of initial application) or at an amount equal to the lease liability adjusted for prepaid or accrued lease payments; it applies IAS 36 to those assets at that date, unless it uses C10(b).
• IFRS 16 §C10For former operating leases, a lessee applying C5(b) may use, on a lease-by-lease basis, practical expedients: a single discount rate for a portfolio of similar leases; reliance on its assessment of whether leases are onerous under IAS 37 immediately before the date of initial application instead of an impairment review (the right-of-use asset being reduced by the provision); treatment as short-term leases of leases ending within 12 months; exclusion of initial direct costs; use of hindsight, for example in determining the lease term.

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

3 questions

• Meridia, a lessee, applies IFRS 16 for the first time for the annual period beginning on 1 January 20X1 and presents a comparative period 20X0. It chooses the retrospective method with the cumulative effect of initial application recognised. Which treatment is correct?L3
• The Sorelia group, a lessee, applies IFRS 16 under the retrospective method with the cumulative effect at the date of initial application, for a portfolio of contracts previously classified as operating leases. Which of the following are practical expedients that the standard makes available to it?L4
• Quintal applies IFRS 16 from the annual period beginning on 1 January 20X1, under the cumulative effect retrospective method. A commercial lease previously classified as an operating lease still has 3 annual payments of 100,000, payable at the end of each year. On signing, Quintal paid rent in advance, recognised as an asset at 15,000 at 31 December 20X0. Its incremental borrowing rate is 5% at 1 January 20X1; it was 4% at the original commencement date. For this lease, Quintal elects to measure the right-of-use asset at the amount of the lease liability adjusted by the prepaid lease payments. Which amounts and presentation do you adopt?L4