IFRS 16

Option periods – these are years at the formal end of the lease but, should the lessee choose to, the lease period may be extended “at the option of the lessee”

When calculating the obligation under a lease, it is relatively straight forward to separate out from the next instalment the amount of interest that is included within that instalment and the remainder is then the capital element that is being repaid within that instalment amount

Assume these figures:

Capital cost of the asset (cash price, fair value … however it’s called) $17,040 on 1 January, 2017
Annual instalments paid at the year end (first instalment paid 31 December, 2017) $3,500
Financial statements year end 31 December
Implicit rate of interest within the contract 10%
Lease term 7 years

Set up 3 columns:

Capital amount outstanding + interest for the period – instalment paid

Then a table of figures under these three headings

17,040; 1,704; (3,500)
15,244; 1,524; (3,500)
13,268; 1,327; (3,500)
11,095; 1,110; (3,500) and so on

Can you see that, after that first instalment had been paid on 31 December, 2017, there was a capital amount outstanding of 15,244 and that, after the second instalment had been paid on 31 December, 2018, there was a capital amount outstanding of 13,268

So during the year ended 31 December, 2018 the amount of capital repaid was (15,244 – 13,268 =) 1,976 and that figure therefore must be the current liability as at 31 December, 2017 and 13,268 is the deferred liability as at 31 December, 2017

OK?