The standard setters have given some allowances when adopting IFRS 16, and those are available when the modified retrospective approach is adopted. The extent of these allowances will depend on what practical expedients you decide to take. Here at Cradle, we’ve called them the “simplified” method or the “modified retrospective.”

The modified retrospective method is a more intensive method of adoption compared to simplified. As per the diagram, you need to start accounting for the ROU Asset at the commencement of the lease, but what that means is you also need to calculate the lease liability as that is the key input in the ROU Asset. By doing this from a calculation perspective, you’re essentially following the exact process of full retrospective, the only difference being you’ll use a discount rate at transition.

You’ll have to keep track of all modifications of the lease liability between commencement and transition as they impact the ROU Asset. As a result, this requires a far greater amount of work than simplified.

When the transition happens, you’ll pick up an ROU Asset value that’s not in line with the lease liability, resulting from the ROU Asset being depreciated from commencement. The difference between those two values goes to retained earnings.