IFRS 16- Leases:

Company A Company B
Lessor Lessee
Legal owner of asset Uses of asset
Receive income Pay expenses/capital

Combined contract:

Lessor may offer asset for lease along with additional services to lessee against a combined payment.
For accounting purpose both costs should be separate using costs offered by same lessor for each item
as:

MV of lease
Lease payment = × Payment
MV of lease+ MV of additional services

MV of additional services
Nonlease payment= × Payment
MV of lease+ MV of additional services

Low value exemption:

Low value exemption leases are expensed through profit and loss, LVE apply on leases where:

- Asset has very low value, e.g. laptop, chair etc,

- There is no purchase option,
- Lease term is ≤ 12 month,
- Lease payment is spread over lease period on straight line basis,
- There is no free period in lease, if there is first period is free then it means,
- Payment of first month is spread over remaining lease period,
- This first payment will be recorded as accrued income (income receivable),
- Each payment will include first month’s payment on straight line basis, and monthly payment.
- Same method is used for lessor’s accounting, where:
- Lessor record lease payments as income instead of expense.

Accounting for lessee:

Simple LVE lease:

LVE lease expense Dr.

LVE lease expense payable Cr.

LVE lease expense payable Dr.

Cash/Bank Cr.

LVE with free period:

Find average lease payment for each period:

( Payment × No . of payments )
Average lease payment ( ALP)=
No. of periods
Recognize free period expense payable:

LVE free period expense @ALP Dr.

LVE free period expense Cr.
At reporting date from period 2 to onward:

LVE lease expense @ALP Dr.

LVE lease expense payable Cr.
At payment date:

LVE lease expense payable @ALP Dr.

LVE free period expense (β) Dr.
Cash/Bank Cr.
Lessor accounting:

Simple LVE lease:

LVE lease expense Dr.

LVE lease expense payable Cr.

LVE lease expense payable Dr.

Cash/Bank @ Actual payment Cr.

LVE with free period:

Find average lease payment for each period:

( Payment × No . of payments )
Average lease Income( ALI )=
No. of periods
Recognize free period income receivables:

LVE free period income receivables Dr.

LVE free period income @ALI Cr.

At reporting date from period 2 to onward:

LVE free period income receivables @ALI Dr.

LVE lease expense Income Cr.
At payment date:

Cash/Bank @ Actual payment Dr.

LVE lease income @ALI Cr.
 LVE free period income receivables (β) Cr.
Finance and operating lease:

- For lessee, there is no difference between finance lease or operating lease, but
- Lessor still categorized lease into finance and operating lease.

Lessee accounting:

For each lease, lessee recognize following two items:

- Right of use asset (asset being leased), and

- Lease liability (as it is payable against leased asset use).

Lease liability includes:

- PV of lease payments payable that includes:

- Fixed payment,
- Variable payments,
- Expected residual value guaranteed,
- Penalty on termination,
- Exercise price of purchase option.
- Over the lease period,
- Discount factor is implicit rate, if available otherwise incremental borrowing rate,
- Lease liability is carried on amortized cost.

Right of use asset includes:

- Lease liability,
- Initial direct cost,
- Estimated cost for dismantling,
- Payment less incentives before commence date,
- Right of use asset is depreciated over lower of:
- Lease period, or
- Useful life.

Payment modes:

- Advance payment,
- Arrears payment.

Advance payment:

- At the start of each period cash is paid,

- Cash paid is deducted from lease liability,
- Interest is charge on lease liability,
- Interest is added into lease liability,
- Each year lease liability is amortized,
- Right of use asset is depreciate.

Recognize the lease:

 Right of use asset Dr.
Lease liability Cr.

Reporting date: Recognize cash payable:

Lease liability Dr.

Lease expense payable Cr.

Reporting date: Recognize interest expense and amortization of right of use and lease liability:

Lease expense @lease payment Dr.

Lease liability @LL × Int. Rate Cr.
Right of use asset (β) Cr.

Payment date: Recognize cash payment:

Lease liability @ Actual payment Dr.

Cash/Bank Cr.

Arrears payment:

- At the end of each period cash is paid,

- Interest is charge on lease liability,
- Interest is added into lease liability,
- Each year lease liability is amortized,
- Right of use asset is depreciate,
- Cash paid is deducted from lease liability.

Recognize the lease:

Right of use asset Dr.

Lease liability Cr.

Reporting date: Recognize interest expense and amortization of right of use and lease liability:

Lease expense @lease payment Dr.

Lease liability @LL × Int. Rate Cr.
Right of use asset (β) Cr.

Reporting date: Recognize cash payable:

Lease liability Dr.

Lease expense payable Cr.

Payment date: Recognize cash payment:

 Lease liability @ Actual payment Dr.
Cash/Bank Cr.
Lessor accounting:

For lessor’s account, lease is categorized in any one of the following lease:

- Operating lease, or
- Finance lease.

Operating lease:

Operating lease is:

- If there is no purchase option,

- Lessor still has substantial control over asset,
- All leases other than finance lease.

Operating lease accounting:

Operating lease’s treatment is same as low value exemption accounting.

Finance lease:

Finance lease is:

- Risk and reward transferred to lease,

- Ownership passes at end of lease,
- Reasonable certain option to buy the asset below its FV,
- Lease asset is specialized in nature,
- Lease term represents major life of asset.

Finance lease accounting:

- Asset is derecognized,
- Recognize:
- Receivables @ net investment in lease,
- Finance lease receipts are a reduction in receivables,
- Interest income on receivables.

Lease investment =Grossinvestment discounted @ implicit rate

Gorss investment =Money receivable ¿ lessee+ scrap value
Recognize the lease:

Lease receivables @ PV Dr.

Leased asset Cr.

Recognize payment as finance income and capital repayment:

Cash Actual payment Dr.

Lease receivables (β) Cr.
 Finance income @ Cash × Int. Rate Cr.
Sales and leaseback:

- If company A, sells the asset to company B,

- Company B provide same asset to company A on lease immediately, then
- It is not classified as lease but it will be considered as:
- Company A received loan against asset security from company B, and
- Company B provided loan to company A against security of asset.

If this is the case, then:

Company A-Seller Company-B Buyer

Continue to recognize the asset Never recognize the asset
Recognize a finance liability Recognize a finance asset