Useful life vs Lease term

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tracy23282000
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Joined: 15 Jan 2020, 07:28

Useful life vs Lease term

Post by tracy23282000 »

Hi All!

I have leased an identified asset with useful life of 4 years, but lease term stated in contract as 10 years, provided that lessor will replace the asset when it become obsolete so it is available for use for 10 years. There is no option to purchase the asset by the end of lease term.
Should I depreciate the asset for 10 years?

Recap of IFRS16.32
If the lease transfers ownership of the underlying asset to the lessee by the end of the lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a purchase option, the lessee shall depreciate the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Otherwise, the lessee shall depreciate the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term.

Thanks so much!!
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Marek Muc
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Re: Useful life vs Lease term

Post by Marek Muc »

RoU relating to this asset should be amortised for 4 years, but be careful with the amounts, the right-of-use asset and a related liability is recognised at the commencement date, which is the date on which a lessor (a supplier) makes an underlying asset available for use by a lessee

https://ifrscommunity.com/knowledge-bas ... of-a-lease

therefore, as I understand, you won't recognise RoU and lease liability relating to full 10 years as 10 years covers also new assets that may subject to a lease in the future
tracy23282000
Posts: 2
Joined: 15 Jan 2020, 07:28

Re: Useful life vs Lease term

Post by tracy23282000 »

Thanks for your reply.
But the contract stated lease term as 10 years, what you mean is that amortise for 4 years is that to treat it like the lease term is 4 years only, then when the lessor replace a new asset to me, and if the asset's useful life is also 4 years, then I recognise the next 4 years, and at the end of the 8th year, I will recognise only 2 years as the lease term is only for 10 years. Is this correct?

in other words, i would split up the entire 10-year lease term into terms of 4-4-2.

This is how i thought it should work but i just couldnt find any discussion/guidance specific to this situation. Many thanks!!!!!!!!
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Marek Muc
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Re: Useful life vs Lease term

Post by Marek Muc »

More or less this direction, but I'm not sure about all the facts. Let’s assume that annual lease payment is $100. What is your lease liability relating to the first asset? I.e. how much will you pay for the first asset if the new one is not provided after 4 years. And then, what are the terms relating to the new asset?
Irfan Mustafa
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Joined: 05 May 2020, 18:51

Re: Useful life vs Lease term

Post by Irfan Mustafa »

In this case, the useful life of the asset for you is ten years not 4 years because it will work for u for 10 year. U should recogise right of use asset and lease liability for 10 years and amortise accordingly.
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