IFRS16-Treatment of quarterly rent payments in Balance Sheet with monthly closing

[uxblam]

Hiya,

So glad I have found this forum, and hopefully gurus here can help me to resolve my issues.

As per attached working, do I need to anything in the yellow highlighted area if we close our books every month? if so, what do I need to do?


Millions of thanks,

[Ketan Marwah]

Hi,

You will accrue interest and therefore the liability balance will increase proportionately before you repay principal and interest at the start of next quarter. The LL schedule that you shared therefore would have to be expanded with the details of finance charge at a monthly level to have a carrying amount of LL at the end of the month.
I did not check the asset schedule but even there the concept would be similar I.e. have the depreciation spread out at a monthly level if the idea is to close books monthly.

[uxblam]

Hi Ketan,

Thanks for coming back to me.
So, for month 2 and 3, I still need to work out the interest and added to the mth end balance?
If so, use the same interest rate or amend the interest rate to become per mth? i.e. 15.33320% /12 = 1.27777%

Tks in advance.

[Marek Muc]

Yes, you need to accrue interest at each reporting date, this is illustrated in this example:

https://ifrscommunity.com/wp-content/up ... ments.xlsx

[uxblam]

Hi Marek,
tks for response and the illustration example which I fully understood.

Problem is, per my example, when I calculate LL, the PV is based on annual interest rate divided by 4.
To accrue interest monthly but to keep the quarter payments :-
Step 1. Do I amend the initial PV calculation by spread the payment monthly and discount the payment by (annual interest rate divided by 12)?
Step 2. For month 2 and 3, accrued interest is calculated by LL opening of the month x (annual interest rate divided by 12)?

I got stuck into this...

[Ketan Marwah]

Hello,

When you use a monthly rate then each month is used as a period for PV calculation. Similarly, when you use a quarterly rate then you use a quarter as a period so you can use annual/quarter/monthly rate for calculation purposes but then you have to calculate PV factor accordingly.

When you use the quarterly rate - You would have PV factor at a quarterly multiple OR
When you use a monthly rate - You would have a PV factor at a monthly interval.

If still confused then continue using the quarterly rate such that you avoid the rework. Use that rate to work out the accrued interest but just be sure of the PV factors that you are using (I haven’t checked it hence asking).

[ngadidala@gmail.com]

Hi Ketan,

A quarterly compounding wouldn't necessarily mean you are changing monthly principal balance. There are two ways to do this. Interest from payment to payment date is spread evenly to 3 months. Method 2, some solutions find EIR which is slightly different from the quarterly rate. EIR is like a goal seek rate.