Variable lease payments in a nutshell

Hi all!

 

Introducing a New Model for Variable Lease Payment Adjustments under IFRS 16 / Ind AS 116

 

Today, we’re unveiling a unique and advanced model for handling variable lease payment adjustments under IFRS 16 and Ind AS 116. This model goes beyond the conventional lease schedule in arrears and incorporates index-linked remeasurements and impairment considerations.

 

Let’s walk through it step-by-step. (Note: This assumes you’re already familiar with how to create a basic lease amortization schedule using fixed payments in arrears.)

 

1.      Opening Balance = PV of lease payments and for subsequent years, its C/B.

2.      Interest = Implicit rate & won’t change throughout the schedule in this problem.

3.      Variable Lease Payments = It is revised for the next year. Therefore, the revised payment for 2018 is €161,458 (i.e. €155,000 x 125/120). The same methods is followed subsequently.

4.      Lease Payments = Current liability (My personal choice for CL & NCL adjustments).

5.      Remeasurement amount = The adjustment is €22,437, being the difference between the revised and original lease payments over the remaining four-year lease term discounted at 5.89%, i.e. €161,458 — €155,000 = €6,458 x 3.474 (PVOA)= €22,437 (rounded). No need to discount the last year cause as per IFRS 16, Para 36–46: Remeasurement happens when future lease payments change. If there are no future payments, there’s nothing to discount, so the PVOA used to calculate remeasurement in 2021 is nil or use 1 if you want to still want to remeasure last year.

6.      Closing balance = Remeasurement amount + O/B + Finance charge - Lease payment. The 2021 closing balance = €39,821 + Remeasurement amount + Finance charge. This must be redeemed as per the lease contract as the payments were set low. Remember, even if we optimise the annual payments, the closing balance will still not be 0.

7.      We have to derecognise ROU & Lease obligations. So, I setoff both outstanding balances, took gain/(loss) to SPLOCI.

 

This is over! For Excel based examples click/download here: Lease Schedule

 

Unsure if tally can be used for 500 crore net worth IndAS compliance companies, but I have tried to adjust the schedule like this

 

Based upon the above, the following entries should be recorded in tally for 2017:

 

DR Right-of-use asset €693,449 (statement of financial position)

CR Lease liability €693,449 (statement of financial position)

(To recognise the lease on 1 January 2017.)

 

DR Interest expense €40,821 (SPLOCI — P/L)

CR Lease liability €40,821 (statement of financial position)

(To recognise the finance cost for 2017 (€693,449 x 6%).)

 

DR Lease liability €155,000 (statement of financial position)

CR Bank €155,000 (statement of financial position)

(To recognise the payment in 2017)

 

DR Depreciation expense €143,177 (SPLOCI — P/L)

CR Right-of-use asset €143,177 (statement of financial position)

(To recognise the depreciation for 2017 (€693,449 / 5))

 

DR Right-of-use asset €22,437 (statement of financial position)

CR Lease liability €22,437 (statement of financial position)

(To recognise the remeasurement)

 

In this model, although I typically create journal entries based on individual events and transactions, we’re taking a simplified approach for presentation purposes. Specifically, we’ll record a lease payment entry at the end of the schedule. This helps clearly depict the current lease liability in our demonstration.

Additionally, it’s important to note the following: Post-Impairment Depreciation Reset: After recognizing an impairment loss on the Right-of-Use (ROU) asset, the depreciation expense must be recalculated. This is based on the revised carrying amount and the remaining useful life of the asset.

Note: It’s a self-developed model born out of curiosity and a desire to support fellow IFRS and IndAS enthusiasts. This schedule is not available in many professional curriculums. So, I took the initiative to build a framework that’s both technically sound and presentation-friendly. It’s designed to simplify complex concepts while remaining compliant with the standards. I hope you can finish off the rest of the subsequent transactions with ease.

 

Feel free to contact me anytime...