Latest update on accounting for lease

The development on accounting for lease

Effective from 1 January 2019, IAS 17 Leases will be replaced by MFRS 16 with the following changes.

The leases are no longer classified into operating leases or finance leases
All leases are capitalised by recognising a lease liability and the right to use of assets on balance sheet.

This means that the Company which takes up leases that only allows the right of use of asset, and not the ownership of assets, will also need to recognise its right to use the assets (Asset) first, and later on expense off to the interest (Expenses) and depreciation of the assets (Expenses).

This affects the balance sheet of the company as the old accounting standards only requires Company to disclose these leases on the profit and loss.

The new standard on MFRS 16 and the effect on financial statements are as follows:-

A ‘right-of-use’ model replaces the ‘risks and rewards’ model.

Lessees should recognise an “right-of-use” asset and lease liability based on the payment under lease
The lease liabilities must be measured to the lease term (optional lease period)
Lessees should reassess the lease term only upon the occurrence of a significant event or a significant change in circumstances that are within the control of the lessee

Double entry of accounting for leasing

For leases that allows right of use but the lessee does not have ownership at the end of the lease(i.e. renting an asset), the new accounting standard requires Company to recognise the lease on the assets and liability on balance sheet. So, at the commencement of lease, based on the contract of rental, the lessee will need to present the contracted rental payment as follows:

Dr Right of use of asset
Cr Lease liability

The asset and liability will be slowly reduced when the payment are made, as the company will expense off these expenses to profit and loss (i.e. interest paid, rental expenses/depreciation).

Dr Lease liability
Dr Interest paid
Dr Rental expenses paid
Cr Cash at bank paid
Cr Right of use of assets

Recognition of lease

To recognize the right of use and lease liability by:

Right of use – measured by cost /fair value/ revaluation method

obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use
direct the use of the identified asset throughout that period

Lease liability – Lessee needs to recognize on interest of lease liability