FRS 116 Leases – Reassessing Lease Liability
In accounting, the term “lease liability” refers to a financial obligation of making payments that arise from a lease. This amount should be measured on a discounted basis. As a business owner, you can hardly get away from leases, and you need to know how you should manage the relevant accounting transactions. You, as a lessee, should measure the lease liability just like how you measure other financial (Also see How to Avoid Financial Ruin?) liability.
After the lease has started, do you assess the lease liability of the lease? Most of the lessees probably would not do this. However, reassessment of the lease liability helps in reflecting alterations that happen to the lease payments. If you are one of them who has run into this problem and you need help to ensure that the accounting treatment you have made complies with FRS 116, feel free to contact an accounting firm in Johor Bahru to get assistance from the professionals.
To remeasure the lease liability, the lessee should discount the revised lease payments by using a revised discount rate if the lease term or the assessment of an option of purchasing the underlying asset has changed. If the first situation takes place, the lessee should identify the revised lease payments according to the revised lease term. For the second situation, the lessee should assess the circumstances and events from the perspective of the purchase option. It should also identify the revised lease payments to show the alteration in the amounts payable for that purchase option.
When a lessee is remeasuring the lease liability, it should identify the interest rate implicit in the lease as the revised discount rate for the remaining lease term. This is what one should do if the rate can be identified readily. In some occasions, the lessee may not be able to identify the interest rate implicit in the lease. Hence, it should determine the revised discount rate as the lessee’s incremental borrowing rate at the time it performs the reassessment.
Besides, under certain situations, the lessee needs to perform the remeasurement of the lease liability by discounting revised lease (Also see FRS 116 Leases – Recognising and Measuring Operating Leases) payments. Firstly, the lessee should do so if the predicted payable amount under a residual value guarantee has changed. If this happens, the lessee should identify the revised lease payments so that it can show the change. The other situation would be the future lease payment has changed. This can be triggered by an alteration of a specific rate or index that people would use to identify the sum of the payments.
Under the second situation, the lessee should perform the remeasurement of lease liability to represent the revised lease payment only when the cash flow has changed. This refers to a situation when the adjustment made on those lease payments has taken effect. The lessee should identify the revised lease payments for the remaining lease term according to the amended contractual payments.
When remeasuring the lease liability, the lessee should use an unchanged discount rate. The only exception is when a change in the floating interest rates is the cause of the alteration of lease payments. If this happens, it should use a revised discount rate that can show the alterations in the rate of interest.