IFRS 16 -

LEASES
Lessor Accounting
FINANCE LEASE - LESSOR
Direct Finance lease
▪ Engaged in the financing business.
▪ Income of the lessor = Interest Income only
▪ Fair Value and cost of the asset are equal – (No dealers profit/ gross profit)

Sales Type Lease

▪ Lessor is a manufacturer or dealer.

▪ Income of the lessor = Interest Income only and Gross profit

FINANCE LEASE - LESSOR
Direct Financing Lease
Gross Investment Gross Rentals (Annual Rental x
Lease Term) + Residual
Value/Option to purchase*
Sales Type Lease
Gross Rentals (Annual Rental x Lease
Term) + Residual Value/Option to
purchase*

Residual Value (Guaranteed / Unguaranteed Value) – Only considered if there is NO transfer of ownership
and purchase option.
Annual rental = (Cost of the Asset LESS PV of residual value or option to purchase) divided by PV Factor
FINANCE LEASE - LESSOR

Direct Financing Lease Sales Type Lease

Net Investment Cost of the Asset + Initial Direct PV of Gross Investment
Cost paid by the lessor

At the commencement date, a lessor shall recognise assets held under a finance lease in its statement of
financial position and present them as a receivable at an amount equal to the net investment in the lease.

Direct Financing Lease Sales Type Lease

Unearned Interest Gross Investment – Net Investment Gross Investment – Net Investment
Income
FINANCE LEASE - LESSOR
Direct Financing Lease Sales Type Lease
Sales None Net Investment or Fair Value of the
Asset which ever is lower

Sales Computation for Lease with Residual Value

❑ Residual Value is Guaranteed

Net Investment or Fair Value of the Asset which ever is lower

❑ Residual Value is Unguaranteed

Net Investment or Fair Value of the Asset which ever is lower and less PV of Unguaranteed
Residual Value
FINANCE LEASE - LESSOR
Direct Financing Lease Sales Type Lease
Cost of Goods Sold None Costs of the Asset + Initial Direct Cost
paid by the lessor.

CGS Computation for Lease with Residual Value

❑ Residual Value is Guaranteed

Costs of the Asset + Initial Direct Cost paid by the lessor.

❑ Residual Value is Unguaranteed

Costs of the Asset + Initial Direct Cost paid by the lessor - PV of unguaranteed Residual Value.
Illustrative Example – Initial Direct Cost
On January 1, 2022, Tupper Company leased a machinery with following details:
Cost of Machinery P1,518,650
Lease term 4 years
Useful life of the machinery 4 years
Initial Direct cost paid by Tupper 66,300
Implicit rate before initial direct cost 12%
Implicit rate after initial direct cost 10%

Required:
1. Compute for the annual rental P500,000

2. Compute for the gross investment P2,000,000

3. Compute for the net investment P1,584,950

4. Compute for the unearned interest Income. P415,050

4. Compute for carrying amount of Lease Receivable on December 31, 2022. P1,243,445
Illustrative Example
On January 1, 2022, Buboy Company leased a machinery with following details:
Cost of Machinery P3,760,100
Lease term 4 years
Useful life of the machinery 4 years
Residual value guarantee 400,000
Implicit rate 10%
The annual rental is payable in advance on January 1 of each year starting January 1, 2022.

Required:
1. Compute for the annual rental P1,000,000

2. Compute for the gross investment P4,400,000

3. Compute for the net investment P3,760,100

4. Compute for the unearned interest Income. P639,900

Illustrative Example
Cross Company used leased as a method of selling products. At the beginning of 2022 Cross leased a
machinery with following details:
Annual Rental P800,000
Cost of the machinery 2,000,000
Lease term 5 years
Residual value guaranteed 200,000
Initial direct cost 100,000
Implicit rate 10%
The annual rental is payable at the end of each year.
Required:
1. Compute for the gross investment P4,200,000

2. Compute for the net investment P3,156,814

4. Compute for the sales for 2022. P3,156,814

5. Compute for the cost of good sold. P2,100,000

Illustrative Example
Cross Company used leased as a method of selling products. At the beginning of 2022 Cross leased a
machinery with following details:
Annual Rental P800,000
Cost of the machinery 2,000,000
Lease term 5 years
Residual value unguaranteed 200,000
Initial direct cost 100,000
Implicit rate 10%
The annual rental is payable at the end of each year.
Required:
1. Compute for the gross investment P4,200,000

2. Compute for the net investment P3,156,814

4. Compute for the sales for 2022. P3,032,636

5. Compute for the cost of good sold. P1,975,816

Illustrative Example
Hisoka Company used leases as the primary method of selling products. The entity’s main product is a small
aircraft that is very popular among government officials and corporate executives. Hisoka constructed such
aircraft for President of Spider Corporation at a cost of P8,000,000. The terms of the lease provided for annual
rental of P3,328,710 to be paid over 5 years every December 31 of each year with the ownership of the
aircraft transferring to the lessee at the end of the lease term. It is estimated that the aircraft will have a
residual value of P500,000 after 5 years. Hisoka incurred initial direct costs of P200,000 in finalizing the lease.
Financing the construction was at 12% rate. The present value of an ordinary annuity of 1 for 5 periods at 12%
is 3.605.

Required:
1. Compute for the gross investment P16,643,500

2. Compute for the net investment P12,000,000

4. Compute for the sales for 2022. P12,000,000

5. Compute for the cost of good sold. P8,200,000