IFRS 16 – Leases – was issued in January 2016 and applies to accounting periods beginning on or after 1 January 2019. However, earlier application is permitted. IFRS 16 replaces IAS 17 – Leases. IFRS 16 makes substantial changes to the requirements for the recognition of rights and obligations under leasing arrangements for lessees.
Required:
(a) Explain:
(ii) How IFRS 16 requires lessees to recognise and measure rights and obligations under leasing arrangements. (4 marks)
Kappa prepares financial statements to 30 September each year. On 1 October 2016, Kappa began to lease a property on a 10-year lease. The annual lease payments were $500,000, payable in arrears – the first payment being made on 30 September 2017. Kappa incurred initial direct costs of $60,000 in arranging this lease. The annual rate of interest implicit in the lease is 10%. When the annual discount rate is 10%, the present value of $1 payable at the end of years 1–10 is 6·145 dollars.
Required:
(b) Explain and show how these transactions would be reported in the financial statements of Kappa for the year ended 30 September 2017 under IFRS 16 – Leases. (8 marks)