IFRS 16 Derecognition of ROU

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amosai
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IFRS 16 Derecognition of ROU

Post by amosai »

Hi,

When does one de-recognise the ROU - cost? A lease modification (i.e. extension of lease period assessed under the same lease) wouldn't warrant a de-recognition of ROU - cost right?

Wouldn't this result in an accumulated ROU - cost that will baloon as you lease longer and longer over 10 years?

Thanks for any advice in advance!
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Marek Muc
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Re: IFRS 16 Derecognition of ROU

Post by Marek Muc »

amosai wrote: 21 Jan 2022, 06:42 Wouldn't this result in an accumulated ROU - cost that will baloon as you lease longer and longer over 10 years?
Can you please illustrate this part with a simple numerical example?
JRSB
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Re: IFRS 16 Derecognition of ROU

Post by JRSB »

Aren't you depreciating your asset then? Yes the example please!
amosai
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Re: IFRS 16 Derecognition of ROU

Post by amosai »

For e.g. on initial recognition, the lease agreement was signed with a non-cancellable lease of 2 years with a NPV of 200k (ignoring the reality that it wouldn't be rounded so nicely from discounting).

Subsequently right before the 3 years is up, a new lease agreement was signed for the same lease area so lease modification but not treated as a separate lease for another 3 years for another NPV is 300k.

The balance before the lease modification:
ROU 200k
Accum Depn 200k


The balance right after lease modification:
ROU 500k (200k + 300k)
Accum Depn 200k

On the bolded portion due to how the FS is presented,

(i) the cost of 500k will continually increase if the company continually signs the lease offered by the landlord for the next let's say 20 years, is this correct?

(ii) Or can a company derecognise the previous lease of cost and accum depn (i.e. 200k) before recognising the 300k if it's a lease modification not treated as a separate lease?
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Marek Muc
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Re: IFRS 16 Derecognition of ROU

Post by Marek Muc »

This is not specifically covered in IFRS 16 but I would increase the gross carrying amount with each lease extension that is not treated as a separate lease.

Does it really matter to you? It's visible in the explanatory notes only. Unless it impacts some of your KPIs / non-GAAP measures?
pub_acco
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Re: IFRS 16 Derecognition of ROU

Post by pub_acco »

It's weird that IFRS 16 doesn't cover the derecognition of a ROU, but it doesn't either require disclosure of gross carrying amounts or the amount of derecognition. So they are usually not visible.
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Marek Muc
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Re: IFRS 16 Derecognition of ROU

Post by Marek Muc »

that's a good point, only the carrying amount of RoU is required to be disclosed, so my question to amosai is even more valid: does it matter to you? does it somehow impact your KPIs/APMs?
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Re: IFRS 16 Derecognition of ROU

Post by JRSB »

I guess if you have RoU as a class in the traditional PPE note, and you expect a rolling series of lease modifications, you could get to an unusally big cost figure in there even if depreciated.
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Re: IFRS 16 Derecognition of ROU

Post by Marek Muc »

good point JRSB

I guess the outcome would be similar if one bought a real estate instead of entering into a long-term lease
amosai
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Re: IFRS 16 Derecognition of ROU

Post by amosai »

It doesn't affect my KPI per se as I am not standing from the viewpoint of the preparer of financial statements, it's more of a curious question.

It's like what JRSB has said that ROU is in the traditional PPE explanatory notes, mainly because in the current jurisdiction I am in, the illustrative set by the big 4 and the national accounting body does set the precedent that ROU is subsumed into PPE which results to inflating the PPE Carrying Amount hence my question.

Thank you for all the replies!
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Marek Muc
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Re: IFRS 16 Derecognition of ROU

Post by Marek Muc »

amosai wrote: 27 Jan 2022, 03:58 which results to inflating the PPE Carrying Amount hence my question.
Carrying amount is not inflated thanks to continuos depreciation of RoU
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Re: IFRS 16 Derecognition of ROU

Post by amosai »

My bad, I meant inflating the gross amount of PPE.
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