MFRS 16 Leases – Accounting & Tax Impact
How does the new MRFS 16 affecting accounting and tax? Here are the summary:
| Effective date | 1 January 2019 |
| Main features | Lessee accounting applies a “right-of-use” approach: lessee to recognize assets & liabilities for the rights & obligations created by lease contractsno longer be a distinction of finance leases & operating leases for lessee accounting Lessor accounting retains the “rights and rewards” approach as MFRS 117no significant changes to lessor accounting, except for some improved or enhanced disclosures |
| Key requirements | A lease exists when the customer controls the use of the identified asset throughout the period of use. When the customer has the right to: (a) obtain substantially all of the economic benefits from the use of the identified asset throughout the period of use; and (b) direct the use of the identified asset throughout that period |
| Accounting | Lessee recognizes a right-of-use asset (measured initially at cost) & a lease liability subsequently, it shall be measured at cost, unless the lessee elects to apply the fair value model for leases of investment property or the revaluation model for leases of particular classes of property, plant and equipment. Lease liability is measured by applying the amortized cost-effective interest method in accordance with MFRS 9. As a consequence, a lessee recognizes depreciation of the right-of-use asset and interest on the lease liability Assets & liabilities arising from a lease are initially measured on a present value basis. The measurement includes non-cancellable lease payments (including inflation-linked payments), & also includes payments to be made in optional periods if the lessee is reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. |
| Income Tax implication | Annual amortization of the right-of-use: not be tax deductibleAccretion of lease interest expenses: not be tax deductibleActual contractual lease payment incurred: claim tax deduction |
| Exemption | Exemptions for lessees short-term leases (12 months or less) low-value assets A lessee may elect to recognize the lease payments as expense in the profit or loss on a straight-line basis (or another systematic basis) over the lease term |