ACCO 20103

IFRS 16 – Leases
Notes Part III – Accounting by Lessor (Manufacturers’ Lease)

Manufacturers or Dealer’s Lease

- This was previously referred to as sales-type lease. The lessor is a manufacturer or dealer
that uses lease as a means of selling its products. In short, the asset is being sold through
a contract lease.
- The cost of the asset is not equal to its fair market value.
- The lessor records the lease as a sale of property on a deferred payment contract.
- The lessor recognizes two classes of income, namely
a. Manufacturers or dealer’s profit — this is referred to as gross profit (sales less
cost of sales) that is recognized in full on the date of the lease inception.
b. Interest revenue — this is recognized over the lease term using effective interest
method.
Note that manufacturers lease and direct finance lease have different entries made at initial
recognition or at the date of the inception of the contract. However, subsequent entries such as
collections, amortizations using effective interest method, etc. are the same for a manufacturers
lease and direct financing lease.
- Executory costs are charged to expense when incurred.
- Initial direct costs are charged to expense when incurred, either as a charge to selling
expense or an addition to cost of sales.
- The gross amount of the bargain purchase option (BPO) and the residual value, whether
guaranteed or unguaranteed, are added to the receivable account (or gross investment).
- The present value of the BPO or guaranteed residual value is added to sales and the
difference between the gross amount and the present value is added to unearned interest
revenue.
- When the residual value is not guaranteed by the lessee, the present value is deducted
from cost of sales.

Computations:
- Determine gross investment. This is the sum of the minimum lease payments, excluding
contingent rent and executory costs, plus guaranteed or unguaranteed residual value
accruing to the lessor.
- The difference between the gross investment and the present value of the two
components of the investment (lease payments and residual value) is recorded as
unearned finance revenue or unearned interest revenue or discount on finance lease
receivable.
- Unearned finance revenue is to be amortized and recognized as interest revenue over the
lease term using the interest method.
- The selling price is equal to the lower of the fair value of the leased asset or the sum of
the present value of the lease payments and the present value of bargain purchase option,
guaranteed residual value or unguaranteed residual value.
- Gross profit on sale is recognized for the difference between the selling price and the
amount computed as cost of goods sold.

作成した/終わった: 05-09-2021
Alcera, Vincent Luigil C.
Pro-forma entries:

XX

Note that the carrying value of the asset may be its cost depending on the problem.
Inventory is not deducted by other costs.
Unearned Interest Revenue related to the cost of goods sold is recognized as the difference
between the present value and the gross amount of the unguaranteed residual value.

Example 1: Manufacturers or Dealer’s Lease

Boombayah Corp. leased its manufactured equipment to another company. The lease term is 5
years, starting on January 2, 2020. Equal annual payments under the lease are P1,150,000 and are
due on January 2 of each year. The first payment was made on January 2, 2020. There was an
unguaranteed residual value of the asset of P100,000 at the end of the lease term. The equipment
has a cost of P4,200,000. The implicit rate in the lease is 10%. (FV is not given, so it is assumed
that the pv = fv)

PV of Lease Collections (1,150,000*3.1699) 3,645,385

Initial collection 1,150,000
Selling Price 4,795,385

作成した/終わった: 05-09-2021
Alcera, Vincent Luigil C.
 (the 9,035 is the remaining
unearned interest revenue
from the unguaranteed
residual value)

Example 2: Manufacturers or Dealer’s Lease

On January 1, 2020, Kill This Love (KTL) Company leased equipment to So Hot Company for a
four-year period ending December 31, 2023. The equipment cost KTL P300,000 and has an

作成した/終わった: 05-09-2021
Alcera, Vincent Luigil C.
expected useful life of five years. Annual payments are P109,046 (including executory costs of
P10,000). The equipment’s fair value is P368,606. The lessee guarantees the residual value of
P80,000. Lease payment is due every December 31 and So Hot made the first payment on
December 31, 2020. Kill This Love Company’s implicit rate (known to So Hot) is 10%. KTL
incurred P15,000 in consummating the lease contract on January 1, 2020.

PV of the lease collections (P99,046 x 3.1699) 313,966

PV of the guaranteed residual value (P80,000 x 0.6830) 54,640
Selling price 368,606

作成した/終わった: 05-09-2021
Alcera, Vincent Luigil C.
Example 3: Manufacturers or Dealer’s Lease
B Company leased its manufactured equipment to another company. The lease term is 5 years,
starting on January 2, 2020. Equal annual payments under the lease are P1,150,000 and are due
on January 2 of each year. The first payment was made on January 2, 2020. There was purchase
option of P100,000 at the end of the lease term which is significantly lower than its fair value.
The equipment has a cost of P4,200,000. The implicit rate in the lease is 10%.

PV of the lease collections (P1,150,000 x 3.1699) 3,645,385

PV of BPO (P100,000 x 0.6209) 62,090
Initial Collection 1,150,000
Selling price 4,857,475

作成した/終わった: 05-09-2021
Alcera, Vincent Luigil C.
Summary for lessor’s treatment for initial direct cost:
- Operating Lease (par. 83)- added to the carrying amount of the leased asset which will be
amortized over the lease term.
- Direct Finance Lease (par. 69)- add to the net investment and amortized over the life of
the lease (deduction to the unearned income or the discount).
- Dealer’s/Manufacturer’s Lease (par. 74)- are recognized as expense.

作成した/終わった: 05-09-2021
Alcera, Vincent Luigil C.