IFRS-16 Manufacturer/Dealor Lessor

[Muzammil Korai]

Q1:
According to the Net Investment in Lease definition, it specifies that the Gross Investment (Lease payments + IDC) needs to be discounted using the interest rate implicit in the lease. However, in paragraph 71 (a), it mentions that Revenue should be based on the lower of the Fair Value of the underlying asset and the present value of lease payments discounted at the market rate of interest.

So, the question arises: How should the lease receivable or net investment in the lease be recorded in case of Manufacturer/Dealer lessor? Discounted at Market interest rate, or Interest rate implicit in the lease?

Q2:
If UGRV is involved, it will be subtracted from the Cost of Sales. I would like to know where the second impact goes. Will it be deducted from Sales or somewhere else?

[Ketan Marwah]

Hello Muzammil,

Q1: Use market rate of interest as Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers. The use of such a rate would result in a lessor recognising an excessive portion of the total income from the transaction at the commencement date. If artificially low rates of interest are quoted, a manufacturer or dealer lessor shall restrict selling profit to that which would apply if a market rate of interest were charged (IFRS 16:73)
Q2: The second impact is towards reduction in revenue by the present value of un-guaranteed residual value.

Refer the folllwing link for an example (section: 5.3.2 Manufacturer or dealer lessors) : https://assets.ey.com/content/dam/ey-si ... oad#page94

[Muzammil Korai]

Thank you, @Ketan Marwah.