Lease Accounting Under IFRS 16

IFRS 16 requires lessees to recognize:

• A right-of-use asset at cost, which includes initial direct costs and lease liability.
• A lease liability at the present value of future lease payments, discounted using the incremental borrowing rate (12%).

The right-of-use asset is subsequently depreciated over the lease term. The lease liability is adjusted for finance costs, lease payments, and remeasurements due to changes in discount rate or foreign exchange rates.

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(i) Initial Recognition of Lease Liability

The lease liability is measured at the present value of future lease payments as follows:

Calculation of Lease Liability (At Initial Recognition in Euros)

$$\text{Lease Liability}=(\text{Fixed Payments}\times \text{Annuity Factor})+(\text{Residual Value Guarantee}\times \text{Single-Period Factor})$$ $$=(€6M\times 5.65)+(€15M\times 30\%\times 0.32)$$ $$=€33.9M+€1.44M$$ $$=€35.34M$$

Translation at 1 January 2023 (Initial Recognition in Ghana Cedis):

$$€35.34M\times 10=GH¢353.4M$$

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(ii) Lease Liability Subsequent Measurement at 31 December 2023

Year	Lease Liability (€’000)	Interest (12%) (€’000)	Lease Payment (€’000)	Closing Balance (€’000)
2023	35,340	4,241	(6,000)	33,581
2024	33,581	4,030	(6,000)	31,611

Translation of Lease Liability at 31 December 2023:

$$\text{Closing Lease Liability}=€33.581M\times 12=GH¢402.972M$$

Exchange Loss:

$$\text{Exchange Loss}=(\text{Closing Lease Liability}-\text{Opening Lease Liability})=(GH¢402.972M-GH¢353.4M)=GH¢49.572M$$

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(iii) Right-of-Use Asset Measurement

$$\text{ROU Asset}=\text{Initial Lease Liability}+\text{Initial Direct Costs}$$ $$=GH¢353.4M+GH¢0.5M=GH¢353.9M$$

Depreciation Charge (Straight-Line Over 10 Years):

GH¢353.9M10=GH¢35.39M\frac{GH¢353.9M}{10} = GH¢35.39M10GH¢353.9M​=GH¢35.39M

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(iv) Additional Lease Payment (Variable Payment at Year-End)

Since environmental conditions were met, an additional lease payment of 5% (€6M) was due.

$$\text{Variable Lease Payment}=5\%\times €6M=€0.3M$$ $$\text{Translation at Average Rate}=€0.3M\times 11=GH¢3.3M$$

This variable lease payment is expensed, as it is not included in the initial lease liability.

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(v) Journal Entries for 31 December 2023

Initial Lease Recognition (1 January 2023)

• Dr Right-of-Use Asset GH¢353.9M
• Cr Lease Liability GH¢353.4M
• Cr Bank (Initial Direct Costs) GH¢0.5M

Depreciation Charge (31 December 2023)

• Dr Depreciation Expense GH¢35.39M
• Cr Accumulated Depreciation GH¢35.39M

Lease Payment (31 December 2023)

• Dr Lease Liability GH¢72M (€6M * 12)
• Cr Bank GH¢72M

Finance Cost (Interest on Lease)

• Dr Interest Expense GH¢46.65M (€4.241M * 11)
• Cr Lease Liability GH¢46.65M

Exchange Loss Adjustment

• Dr Exchange Loss (P&L) GH¢49.57M
• Cr Lease Liability GH¢49.57M

Variable Lease Payment

• Dr Lease Expense GH¢3.3M
• Cr Bank GH¢3.3M

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Financial Statement Extracts

Statement of Financial Position (31 December 2023)

Assets	GH¢’000
Right-of-Use Asset	318,510

Liabilities	GH¢’000
Lease Liability (Non-Current)	379,332
Lease Liability (Current)	23,640

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Conclusion

The lease is recognized as a right-of-use asset and lease liability, with exchange losses and variable lease payments expensed.