FINANCE LEASE-LESSOR

Intermediate Accounting II: IFRS 16-Leases

On the part of Lessor, a finance lease may be either:
A. Direct Finance Lease
B. Sales type lease

A. Direct Finance Lease (Lessor’s books)

Computations/ Formulas:
Gross Investment= gross rentals for entire lease term + residual value whether guaranteed or not.*
*ignore the residual value and thus, do not include the computation of gross rentals, if there is a transfer of
ownership from lessor to lessee.
**Net Investment= Cost of Asset + initial Direct cost
**Net investment is also equal to Lease receivable, net per balance sheet at the inception/beginning of the
lease. (Gross receivables less unearned interest income)
TAKE NOTE: The present value of Gross investment is equal (close) to net investment using the implicit rate.
Unearned interest income= Gross Investment less Net investment
Interest income = Lease receivables, net (at the beginning) multiply by implicit rate

Example: In 2019, A lessor leased a machine to lessee costing P 1,518,650. The initial direct cost incurred by
lessor is P 66,300. The annual rental is 500,000 at the end of the year. The lease term is 4 years while the life
of asset is 6 years. Implicit rate is 10%.

Gross Investment = Gross rentals + Residual value

(500,000 x 4)+0
Gross Investment = 2,000,000 + 0 = 2,000,000
Net Investment = Cost of asset + Initial Direct Cost
Net Investment = 1,518,650+66,300=1,584,950*
Present value of gross investment =
PV of Gross rentals = Annual rental x PV Factor + PV of Residual value = Residual value x PV Factor
(500,000 x 3.17)**+ (0 x .68)
Net Investment = 1,585,000+0= 1,585,000*
*There is a difference due to rounding off of PV factor. We will use the Net investment
**Present value factor at 10% in 4 years (ordinary annuity)
Interest income = Lease receivable, net x Implicit rate
Interest income = 1,584,950 x 10% =158,495