NFRS 16 "Leases" Summary

 

Table of Contents

Lessee Accounting. 1

Recognition and Measurement: 1

1)     Recognition Exemptions:. 1

2)     Initial Recognition:. 1

3)     Lease Liability Measurement:. 1

4)     Right-of-Use Asset Subsequent Measurement:. 1

Presentation and Disclosure (Lessee): 2

Lessor Accounting. 2

Classification: 2

Finance Leases: 3

1)     Recognition and Measurement:. 3

2)     Income Recognition:. 3

3)     Manufacturer or Dealer Lessors:. 3

Operating Leases: 3

1)     Recognition and Measurement:. 3

2)     Manufacturer or Dealer Lessors:. 3

Sale and Leaseback Transactions. 3

 

 

The Nepal Financial Reporting Standard 16 (NFRS 16) establishes principles for the recognition, measurement, presentation, and disclosure of leases. The primary objective of the Standard is to ensure that lessees and lessors provide relevant information that faithfully represents those transactions, allowing users of financial statements to assess the effect that leases have on the entity’s financial position, financial performance, and cash flows

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NFRS 16 generally applies to all leases, including leases of right-of-use assets in a sublease. However, it does not apply to leases for exploring or using certain mineral resources, leases of biological assets within the scope of NAS 41, service concession arrangements, licenses of intellectual property (within the scope of NFRS 15), or rights held by a lessee under licensing agreements (within the scope of NAS 38).

Lessee Accounting

NFRS 16 establishes a single lessee accounting model, requiring the recognition of assets and liabilities for most leases.

Recognition and Measurement:

1)  Recognition Exemptions:

A lessee may elect not to apply the main measurement requirements (paragraphs 22–49) to short-term leases (12 months or less at commencement, without a purchase option) or leases for which the underlying asset is of low value. If exempted, the lessee recognizes lease payments as an expense over the lease term, usually on a straight-line basis. The election for short-term leases is made by class of underlying asset, while the election for low-value leases is made on a lease-by-lease basis.

2)  Initial Recognition:

At the commencement date, a lessee recognizes a right-of-use asset and a lease liability.

3)  Lease Liability Measurement:

The lease liability is initially measured at the present value of the lease payments not paid at that date. Payments included generally comprise fixed payments (less incentives), variable payments dependent on an index or rate (measured initially using the index/rate at commencement), amounts expected under residual value guarantees, and the exercise price of a purchase option if reasonably certain to be exercised. These payments are discounted using the interest rate implicit in the lease, or the lessee’s incremental borrowing rate if the implicit rate cannot be readily determined.

4)  Right-of-Use Asset Subsequent Measurement:

The asset is typically measured using the cost model: cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability.

Depreciation is applied using the requirements of NAS 16 Property, Plant and Equipment.

The asset is depreciated over the useful life of the underlying asset if ownership transfers or the purchase option is certain to be exercised; otherwise, it is depreciated over the shorter of the asset's useful life or the lease term.

The lessee applies NAS 36 Impairment of Assets to the right-of-use asset.

Alternatively, if the right-of-use asset meets the definition of investment property (NAS 40), the fair value model in NAS 40 is applied. The lessee may also elect to apply the revaluation model in NAS 16 to all right-of-use assets relating to a class of property, plant, and equipment applying that model.

Presentation and Disclosure (Lessee):

Statement of Financial Position: Right-of-use assets must be presented separately from other assets, unless included in the same line item as corresponding owned underlying assets (if presented together, this must be disclosed). Lease liabilities must also be presented separately or disclosed in the notes.

Statement of Financial Performance: A lessee must present interest expense on the lease liability separately from the depreciation charge for the right-of-use asset. The interest expense is a component of finance costs, which NAS 1 requires to be presented separately.

Statement of Cash Flows: Cash payments for the principal portion of the lease liability are classified within financing activities. Cash payments for the interest portion are classified following NAS 7 requirements for interest paid. Payments for short-term leases, low-value assets, and variable lease payments not included in the liability are classified within operating activities.

Disclosures: The objective of disclosures is to enable users to assess the effect of leases on the lessee’s financial position, performance, and cash flows. Required disclosures include the depreciation charge by class, interest expense on lease liabilities, expenses related to short-term/low-value leases, a maturity analysis of lease liabilities (separate from other financial liabilities, applying NFRS 7 requirements), and information about potential future cash outflows not reflected in the liability measurement.

Lessor Accounting

NFRS 16 requires a lessor to classify each lease as either a finance lease or an operating lease.

Classification:

A lease is a finance lease if it transfers substantially all the risks and rewards incidental to ownership of the underlying asset. Examples include transferring ownership by the end of the lease term.

A lease is an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Classification is determined at the inception date and is only reassessed if there is a lease modification.

Finance Leases:

1)  Recognition and Measurement:

The lessor recognizes assets held under a finance lease as a receivable in the statement of financial position, measured at an amount equal to the net investment in the lease.

2)  Income Recognition:

Finance income must be recognized over the lease term, reflecting a constant periodic rate of return on the lessor's net investment in the lease.

3)  Manufacturer or Dealer Lessors:

These lessors recognize revenue (the fair value of the underlying asset or the present value of lease payments, whichever is lower) and a selling profit or loss (the difference between revenue and the cost of sale) at the commencement date, applying principles consistent with outright sales under NFRS 15.

Operating Leases:

1)  Recognition and Measurement:

The lessor recognizes underlying assets subject to operating leases in its statement of financial position according to the nature of the asset. Lease payments are recognized as income (usually straight-line) over the lease term. Costs incurred, including depreciation (calculated in accordance with NAS 16 and NAS 38), are recognized as an expense.

2)  Manufacturer or Dealer Lessors:

These lessors do not recognize any selling profit when entering into an operating lease, as this is not the equivalent of a sale.

Sale and Leaseback Transactions

NFRS 16 requires the seller-lessee to apply the requirements of NFRS 15 Revenue from Contracts with Customers to determine whether the transfer of the asset qualifies as a sale.

• If the transfer is a sale: The seller-lessee measures the right-of-use asset at the proportion of the previous carrying amount that relates to the retained right of use and recognizes only the gain or loss related to the rights transferred.

• If the transfer is not a sale: The seller-lessee continues to recognize the transferred asset and recognizes a financial liability equal to the transfer proceeds, accounted for by applying NFRS 9. The buyer-lessor recognizes a financial asset equal to the transfer proceeds, accounted for by applying NFRS 9