Case Study on the Transition of MFRS 16 Leases

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Case Study on the Transition of MFRS 16 Leases

Background

ABC Sdn Bhd's financial statement is in accordance of Malaysian Financial Reporting Standards (MFRS).

The Company has signed a 5 years tenancy agreement since Year 2018 for the warehouse used in its business.

Struggles

The accountant of the Company is wondering whether

Ø They should apply for MFRS 16 Leases to comply the Standards?

Ø What is the corrective action if they fail to comply in Year 2019?

Ø What is accounting entries to recognise the MFRS 16 Leases?

Q1: They should apply for MFRS 16 Leases to comply the Standards?

Solution Exemption requirement

The Company can elect not to apply only if the lease contract is:-

1. Short-term lease

- less than 12 months

2. For low value assets

- Not highly dependent on, or highly interrelated with other assets

- Benefit from use of assets on its own or together with other sources that are readily available to the lessee

If the Company is not exempted, it has to apply the Standard and determine the following items:-

1. Discount rate

- Implicit interest rate; or

- Incremental borrowing rate

2. Application method

- Retrospectively to each prior reporting period; or

- Retrospectively with the cumulative effect

Q2: What is the corrective action if they fail to comply in Year 2019?

Solution The Company has to do the restatement of its financial statement for the reporting period by applying MFRS 129 Financial Reporting in Hyperinflationary Economies.

Q3: What is the accounting entries to recognise the MFRS 16 Leases?

Solution The accounting entries for recognition of right-of-use assets and lease liability will be as follow:-

Dr. Right-of-use assets

Cr. Lease liability

Dr. Depreciation

Cr. Accumulated depreciation

Dr. Interest on lease liability

Cr. Lease liability

Dr. Lease liability

Cr. Bank/Cash

Source:

MFRS 16 Leases https://www.masb.org.my/pdf.php?pdf=BV2018_MFRS%2016.pdf&file_path=pdf_file

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