I was wondering if anyone has worked through the accounting for converting an existing operating lease to a finance lease under IFRS 16, where a prepayment exists.
The guidance I've seen states that the value of the newly recognised RoU asset should be adjusted by the value of the prepayment (i.e. Dr RoU Asset, Cr Prepayment). This would mean the value of the prepayment will be charged to the I&E over the remaining lease term as depreciation.
Assuming the MRP is equal to the repayment of the liability, this approach will leave a balance in the capital adjustment account at the end of the lease term (equal to the prepayment).
I suppose we could increase the MRP charge but this would increase the cost to revenue and will need to be budgeted for.
I think I'm missing something - does anyone have any thoughts?