IFRS 16 Lease (Sublease)

[MIKE_ACCOUNTING]

Hello,
Really appreciate if anyone can help...

Background information: My company has subleased the entire office to external party. ROU was de-recognized and Net investment receivable for sublease was recognized once we entered into subleased agreement.

Current situation, we are the intermediate lessor ( We pay rent to Head lease while we receive rental income from sub-lessee).

My question is, what accounting entries for the lease liability would be when lease payment to Headlease increased?
Prior the sublease, if the rent payment(cashflow) increased the accounting entries would be DR:ROU, CR: Lease liabilities
Should the increment go to Profit and loss?

Thanks a lot

[Ketan Marwah]

Hi,

As I advised on the previous post that the intermediate lessor accounts for the head lease and the sub-lease as two different contracts, applying both the lessee and the lessor accounting requirements. Apply variable lease payment requirement stated under IFRS 16 after going through the contractual terms. Here is a link for reference:

https://ifrscommunity.com/knowledge-bas ... e-payments

[Marek Muc]

But if it's a finance lease, the RoU has been derecognised. So I'd recognise all reassessments of the lease liability on the head lease through P/L, even those that normally would be recognised as an addition to RoU asset. What are your thoughts on this, Ketan?

[Ketan Marwah]

Hi Marek,

Agree with you.

[MIKE_ACCOUNTING]

Follow up on this query, if the increment of HeadLease payment go to P/L. I guess it would be general admin expense. Am I correct? Thanks

[Ketan Marwah]

Hi,

Paragraph 99 of IAS 1 allows a choice in the presentation of an analysis of expenses depending on which method (ie ‘function of expense’ method or a ‘nature of expense’ method) provides information that is reliable and more relevant. IAS 1 allows entities to use judgement on the level of detail for the by-nature and by function expense analysis. Only some illustrative examples are provided in paragraphs 102–103 of IAS 1 and in the Implementation Guidance to IAS 1. If an entity chooses an analysis of expenses using a:
(a) ‘function of expense’ method, the only functional line item that is specifically required to be presented (or disclosed) is ‘cost of sales’ (paragraph 103 of IAS 1). This paragraph also mentions (but does not require) the presentation of two other functional lines: costs of distribution and costs of administrative activities.
(b) ‘nature of expense’ method, paragraph 102 of IAS 1 provides examples of a few line items by nature that could be included (ie depreciation, purchases
of materials, transport costs, employee benefits and advertising costs).

So in summary, IFRS do not provide you a clear answer to your question as explained above but I would say that in general office rents are non-production overheads therefore it would be correct to label them as General expense.