BLM52055 - IFRS 16 Leases: IFRS 16 Lessees: Example 4

Early Bird Ltd adopts IFRS 16 in its accounting period beginning on 1 July 2018, having previously prepared its accounts under IAS 17.

Its accounts for the year ended 30 June 2019 recognise a right of use asset and a lease liability in respect of a lease which was, under IAS 17, an operating lease. The accounts show a transitional adjustment, a credit of £100,000, in respect of this lease.

Early Bird Ltd’s profit and loss account includes debits of £5,000 in respect of a finance charge, and £10,000 in respect of depreciation, relating to the newly recognised right of use asset.

Early Bird Ltd’s accounts for the year ended 30 June 2020 show profit and loss account debits of £4,500 in respect of a finance charge and £10,000 in respect of depreciation, relating to the right of use asset.

Year ended 30 June 2019

Early Bird Ltd’s accounts recognise a transitional adjustment of £100,000 arising as a result of the adoption of IFRS 16. As Early Bird Ltd has adopted IFRS 16 early, s53 FA11 applies and the adjustment is ignored for tax purposes.

The tax computations should add back £15,000 in respect of the finance charge and the depreciation relating to the newly recognised right of use lease.

The tax computations should show a deduction in respect of the rents that would have been recognised under GAAP on a straight line basis, but for the adoption of IFRS 16..

Year ended 30 June 2020

Early Bird Ltd’s tax computations should include a spreading adjustment, calculated using the transitional adjustment that would have been shown in the accounts if IFRS 16 had been adopted on 1 July 2019.

The spreading adjustment is not based on the transitional adjustment that appeared in the accounts for the year ended 30 June 2019. It is based on the adjustment that would have appeared in Early Bird Ltd’s accounts for the year ended 30 June 2020 if the accounts for the year ended 30 June 2019 had been prepared under IAS 17.

In early adoption cases, you should ensure that any spreading computations have been prepared using the correct transitional accounting adjustment.