FRS 116 Leases – Subsequent Measurement of Right-of-use Asset and Lease Liability by the Lessee

At the date of commencement of a lease, a lessee may have done the recognition and initial measurement process, and he may think that he has completed all the necessary process. Nevertheless, this is not true. According to FRS 116: Leases, there are some other accounting treatments related to the lease, which are subsequent measurement, presentation and disclosure. The accountants may be quite familiar with this, but if you are a business (Also see Using Activity Ratios for Business Efficiency) owner who does not know how to handle leases (Also see New IFRS 16 Leases now comes into play in Singapore) and their accounting treatment, hiring an accounting firm in Johor Bahru can be a good way of solving this problem.

For the subsequent measurement for the right-of-use asset, a lessee should measure the right-of-use asset by using a cost model after the commencement date. If not, it should use the fair value model in FRS 40 or the revaluation model in FRS 16. When implementing a cost model, a lessee should measure the related right-of-use at cost, minus any accumulated depreciation or impairment losses and the cost needs to be adjusted for any remeasurement of the lease liability.

There are some occasions where the lease will transfer ownership of a particular underlying asset to the lessee when the lease term comes to an end. Another condition may be the cost of the right-of-use asset shows that the lessee may implement an option of purchasing that asset. In such cases, the lessee needs to depreciate the right-of-use asset starting from the date of commencement till the end of the underlying asset’s useful life. If the situations mentioned above did not happen, then the lessee should depreciate the right-of-use asset (Also see Understanding Contra Asset Accounts) starting from the date of commencement till the end of the lease term or the end of the right-of-use asset’s useful life, whichever earlier.

When dealing with the depreciation of the right-of-use asset, the lessee should comply with the related requirement in FRS 16. If it wants to identify whether the right-of-use asset has experienced an impairment, as well as to manage any identified impairment loss, it needs to implement FRS 36.

Other than the cost models, there are some other measurement models that the lessee can apply. If it chooses to implement the fair value model as stated in FRS 40 to its investment property, it should apply the same model to the right-of-use assets which meet the investment property’s definition in FRS 40. Apart from that, if a right-of-use asset is relevant to a particular category of property, plant and equipment where the lessee has implemented the revaluation model specified in FRS 16, the lessee can choose to implement that model to all the right-of-use assets which are related to that type of property, plant and equipment.

For the subsequent measurement of lease liability, a lessee should measure the liability after the date of commencement of the lease. The lessee can do so by increasing the lease liability’s carrying amount to show interest and decreasing its carrying amount to represent the paid lease payments. Besides, they can remeasure the carrying amount to illustrate any lease modification, reassessment or revised in-substance fixed lease payments.

In every period throughout the lease term, the interest on the lease liability should be the sum which produces a fixed periodic interest rate on the remaining lease liability. After the lease has commenced, the lessee should recognise the interest on the lease liability and the variable lease payments which are not included in the measurement of lease liability in periods that the condition or event that bring to those payments happen. The lessee should recognise these amounts in profit or loss. However, it does not need to do so if the carrying amount of another asset that implements other standards has included the costs.