RIGHT TO DIRECT THE USE (REQUISITES)

CHAPTER 7 – LEASES PT.1

1. Right to direct how and for what purpose the asset is
LEASE
• A contract, or a part of a contract, that conveys the
right to use an asset (the underlying asset) for a
period of time in exchange for consideration.
PARTIES OF A LEASE CONTRACT
1. Lessee
• Entity that obtains the right to use an underlying asset
used throughout the period
• Rights that signify existence:
a. Change type of output that is produced
b. Change when output is produced
c. Change where output is produced
d. Change whether the output is produced and
quantity of output
• Right to operate or maintain asset does not
necessarily grant the right to direct

2. Lessor 2. Asset's use is predetermined and the supplier is

• Entity that provides the right to use an underlying precluded from changing that predetermined used
asset
PROTECTIVE RIGHT
RIGHT TO CONTROL THE USE • Include contractual restrictions designed to protect he
1. Right to obtain substantially all of the economic supplier's interest in the asset or its personnel, or to
benefits from the use of the identified asset ensure compliance with laws or regulations.
2. right to direct the use of the identified asset • It defines the scope of the customer's right of use
• Does not prevent the customer from having the right
IDENTIFIED ASSET to direct the use of an asset
• An asset can be identified by being explicitly stated in
the contract or being implicitly specified at the time
7.1 LEASE TERM
• Physically distinct portion of an asset is an identified
asset LEASE TERM
• Not Physically distinct portion of an asset is not an • Non-cancellable period of a lease, together with both:
identified asset unless it represents substantially all 1. Period with Option to Extend
of the capacity of the asset • Lessee is reasonably certain to exercise that
option
IDENTIFIED ASSET NOT IDENTIFIED ASSET 2. Period with Option to Terminate
Being explicitly stated in • Lessee is reasonably certain not to exercise that
the contract or being option
implicitly specified at the
time NON-CANCELLABLE PERIOD (NCP)
Portions of Asset • Period in which the contract is enforceable
Physically distinct portionNot Physically distinct • Lease is no longer enforceable when each of the
of an asset is an portion unless it lessor and the lessee can terminate the lease without
identified asset represents substantially permission from the other and subject only to an
all of the capacity of the insignificant penalty
asset
• The shorter the NCP, the morel likely that a lessee
Substantive Substitution Rights
will exercise its right to extent (or not exercise its right
If Supplier does not have If Supplier has
to terminate)
substantive right if it substantive right to
substitute it throughout • Lease term begins at the Commencement date and
substitution is made:
includes any rent-free periods
a. Only a particular date the period
or upon the occurrence a. Supplier has practical
ability to substitute REASONABLY CERTAIN TO EXERCISE AN OPTION
of a specified event
alternative assets TO EXTEND THE LEASE IF:
b. Only during repairs,
maintenance, or
throughout the period • Lease payments on the extended period are
b.Supplier would benefit expected to be below market rate
upgrading
economically from the • Lessee made significant leasehold improvements
exercise of its right to with useful life longer than the original lease term
substitute the asset
REASONABLY CERTAIN NOT TO EXERCISE AN
RIGHT TO OBTAIN ECONOMIC BENEFIT FROM USE OPTION TO EXTEND THE LEASE IF:
Economic Benefit
• Cost of terminating the lease are significant
• Include potential inflows from the asset's output,
• Leased asset is important to the lessee's operations
which can be obtained directly or indirectly from
using, holding, or sub-leasing the asset.
• Entity considers only the economic benefits within the
defined scope of its rights to use the asset
• Stipulation in a contract requiring the customer to pay
additional consideration based on a portion of the
cash flows derived from use of an asset DOES NOT
prevent the customer from having right to obtain
economic benefit from use
 7.2 ACCOUNTING FOR LEASE BY LESSEE
RECOGNITION
• Lessee recognizes a lease liability and a right-of-use
asset at the commencement date
7.3 INITIAL MEASUREMENT OF LEASE
LIABILITY
• Initially measured at present value of the lease
payments that are not yet paid as at the
commencement date.
INCLUDED IN LEASE PAYMENTS
• Fixed payments ( + in-substance fixed payments -
lease incentives receivable)
• Variable lease payments measured on an index or a
rate as at commencement date
• Amounts expected to be payable by the lessee under
residual value guarantees
• Exercise price of a purchase option if lessee is
reasonable certain to exercise that option
• Payment of penalties for terminating the lease
EXCLUDED IN LEASE PAYMENTS
• Payments for non-lease elements
• Payment in optional extension periods, unless it is
reasonably certain
• Future changes in variable payments that depend on
index or rate
• Variable payments linked to the lessee's future sales
or usage of the underlying asset
DISCOUNT RATE
• Lease payments uses the implicit interest rate (IIR) in
the lease.
• Use incremental borrowing rate if IIR is not readily
determinable
• Incremental borrowing rate is the rate of interest that
a lessee would have to pay to borrow over a similar
term
7.4 INITIAL MEASUREMENT OF RIGHT OF
USE ASSET
• Initially measured at cost
• Cost comprises:
a. Initial measurement of lease liability
b. Lease payments made at or before the
commencement date, less any lease incentives
received
c. Initial direct costs incurred by the lessee
d. Present value of decommissioning and
restoration costs, unless incurred to produce
inventories
7.5 SUBSEQUENT MEASUREMENT OF
LEASE LIABILITY
• Similar to an amortized cost financial liability
(remeasured to reflect any reassessment or lease
modifications)
• Interest in lease liability is computed using effective
interest method (EIM) and recognized
• Lease payments are appointed between the interest
and a reduction to the lease liability
7.6 SUBSEQUENT MEASUREMENT OF THE
RIGHT-OF-USE ASSET
• Similar to a purchased asset, measured at Cost
Model
• Exceptions of Subsequent Measurement
• If related to a class of PPE, asset may be measured
under Revaluation Model
• If meets definition of an Investment Property, asset
may be measured under Fair Value Model
COST MODEL
• Right-of-use asset is measured at Cost
• Less accumulated depreciation and accumulated
impairment loss
• Adjusted for any remeasurement of the lease liability
DEPRECIATION
• Lessee depreciated over its useful life if:
• Contract provides for the transfer of ownership to the
lessee by the end of the lease term
• Reasonably certain that lessee will exercise a
purchase option
• In any other case, lessee depreciates the underlying
asset over the shorter of asset's useful life and lease
term
• Depreciation states from commencement date of
lease
7.7 RECOGNITION EXEMTPIONS
• These may be elected to recognize as an expense on
a straight-line basis over the lease term
1. Short-term lease
2. Low valued assets in Leases
SHORT-TERM LEASE
• Lease that, at commencement date, has a lease term
of 12 months or less.
• A lease that contains a purchase option is not a short-
term lease
LOW VALUED ASSET
• Assessment of value is based on the value of the
asset when it is new, regardless of the age of the
asset being leased.
• Ex. Old car cannot be a low-valued asset because it
is not considered low-valued when it was new
• Example of low-valued asset include tablet and
personal computers, small items of office furniture
and telephones
• Election of leases of low valued assets can be made
on a lease-by-lease basis
7.8 SEPARTING THE COMPONENTS OF A
CONTRACT
• Each lease component of a contract is accounted for
separately from the non-lease components of the
contract
• Based on relative stand-alone price of the lease
component and the aggregate stand-alone price of
the non-lease component
RELATIVE STAND ALONE PRICE
• Price that the lessor or similar supplier would change
for a component separately.
 7.10 VARIABLE LEASE PAYMENTS
LEASE OF MULTIPLE ASSETS
• The right to use each asset is considered a seprate • The portion of payments made by a lessee to a less
lease component if both of the following criteria are or for the right to use an underlying asset during a
met: lease term that varies due to other facts that occur
• Lessee can benefit from the use of the asset either on after the commencement date.
its own or together with other resources that are
readily available to the lessee ACCOUNTING FOR VARIABLE LEASE
• Underlying asset is neither highly dependent on, nor PAYMENTS
highly interrelated with other underlying assets in the Type of
Initial Subsequent
contract. Variable
Accounting Accounting
Payment
NON-LEASE ELEMENTS Include lease
Adjust lease liability
• A separate element if its transfers goods or services liability and right-
and right-of-use
to the lessee of-use-asset
asset when the
Based on based on level of
revised index or rate
index or rate index or rate at
EXAMPLES OF NON-LEASE ELEMENTS changes the lease
the
• Maintanance (repairs, garbage collection,etc) commencement
payments (using
• Security Servces date
original discount rate
• Supply of utilities (water, electricity, internet, etc.) Recognized as
Others Exclude from
• Supply of goods (consumables for manufacturing expense when event
(based on lease liability
equipment) or condition that
sales or and right-of-use
• Supply of operational serivices (driver for leased usage) asset
triggers payment
vehicle, machine operator for leased equipment) occurs
In substance
Treat as fixed Treat as fixed lease
NOT EXAMPLE OF NON-LEASE ELEMENTS fixed
lease payments payments
payments
• These are included in the total consideration that is
allocated to the separetely identified components of
the contract. 7.11 RESIDUAL VALUE GUARANTEE
1. Payments for activities or costs that do not
transfet goods or services to the lessee RESIDUAL VALUE (OF AN ASSET)
2. Administrative tasks • The estimated amount that an entity would currently
3. Real property taxes where lessor is liable obtained from disposal of an asset, after deducting
regardless of whether it has leased the property the estimated cost of disposal, if the asset were
4. Insurance costs that protect the lessor's already off the age and in the condition expected at
investment in the asset the end of its useful life
• Lessee accounts for the residual value of an
underlying asset in the measurement of the lease
7.9 IN-SUBSTANCE FIXED LEASE liability only if the residual value is guaranteed
PAYMENTS
• Payments that are variable in legal form, but are RESIDUAL VALUE GUARANTEE (LESSOR)
unavoidable in substance. • A guarantee made to a lessor by a party unrelated to
the lessor that the value of an underlying asset at the
EXAMPLE OF IN-SUBSTANCE FIXED LEASE end of the lease will be at least a specified amount.
PAYMENTS
• Payment that must be made only if an asset is proven RESIDUAL VALUE GUARANTEE (LESSOR)
to be capable of operating during the lease, or only if • Guaranteed by the lessee
an event occurs that has no genuine possibility of not • Guaranteed by a party related to the lessee
occurring • Includes the amount expected to be payable
• Payments that are initially variable but for which the • If residual value is not expected to fall below the
variability which will be resolved in the future guaranteed amount, then none is included in the
• Arrangement in which there is more than one set of lease payments
payments that are lessee could make, but only one of
the payments is realistic
7.12 PURCHASE OPTION
LEASE INCENTIVES • The exercise price of a purchase option is included in
• Payments made by a lessor to a lessee associated the lease payments if the exercise is reasonably
with the lease certain
• The reimbursement or assumption by a lessor of
costs of a lessee
7.13 CURRENY & NONCURRENT PORTIONS
• CURRENT – Amortization in subsequent year
• NONCURRENT – Present value in subsequent year
 2. Remeasured by discounting the UNCHANGED lease
7.14 INITIAL DIRECT COSTS
payment using a revised discount rate if there is a:
• Incremental costs of obtaining a lease that would not a. CHANGE IN THE RESIDUAL VALUE
have been incurred at the lease had not been GUARANTEE
obtained - The revised lease payment shall reflect the
change in the amount expected to be payable
• Except for such costs incurred by a manufacturer or
under the residual value guarantee
dealer that's or in connection with a finance lease
• A lessee capitalizes initial direct cost as follows: b. CHANGE IN FUTURE LEASE PAYMENTS
RESULTING FROM A CHANGE IN AN INDEX
GENERAL RECOGNITION OR A RATE USED TO DETERMINE THOSE
RECOGNITION EXEMPTION PAYMENTS
Treat us part of the cost of Treat us prepaid rent and - Change in the contractual cashflows resulting
the right of use asset and recognize as expense on a from the occurrence of the specified event or
include in depreciation straight line basis
condition

7.15 LEASE PAYMENTS MADE TO LESSOR 7.16 LEASE MODIFICATIONS

AT OR BEFORE COMMENCEMENT DATE
• A change in the scope of a lease, or the consideration
for a lease, that was not part of the original terms and
RECOGNITION conditions of the lease
GENERAL RECOGNITION
EXEMPTION • Example is adding or terminating the right to use one
ADVANCE RENT or more underlying asset
• Arises when rentals are payable at • Example 2 is extending or shortening the contractual
the beginning of each period • Treated as
prepaid rent and lease term
• Excluded from the initial
measurement of lease liability
recognized as • Depending on its nature, a lease modification is
expense on a accounted for as a:
• Included in the initial
straight line basis 1. Separate lease; or
measurement of right of use asset
LEASE BONUS 2. Remeasurement of the existing least liability and
• Is an additional payment made by right of use asset
a lessee to a less or to induce
granting of leasehold rights to the • Same accounting SEPARATE LEASE
lessee as advanced rent • If both the scope and consideration and the lease are
• It is the opposite of lease incentive above increased due to the addition of a right to use one or
• Same accounting as advance rent more underlying assets and the increase in the
above
consideration reflects the standalone price for the
increase in scope
SECURITY DEPOSIT
• No adjustment is made on the existing lease liability
• Intended to compensate for any damages caused to
and right-of-use asset from the original contract
the leased property
• Lessee accounts it as a receivable measured at NOT A SEPARATE LEASE
amortized cost
• If it does not result in a separate lease, the lease
• It does not affect the lessee’s lease liability and right- modification is accounted for as a re measurement of
of-use asset the existing lease liability and write up use asset
• Initial recognition can result to a “Day 1 gain or loss” • Lease liability is remeasured by discounting the
• Deposits to be applied as rental payment at the end revised these payments using a revised discount rate
of the lease term are not security deposits but rather
advanced payment 1. For lease modifications that decrease the scope of
the lease, the carrying amount of the right of use
REASSESSMENT OF THE LEASE LIABILITY asset is decreased to reflect the partial or full
• The lessee remeasures the lease liability if there is a termination of the lease
subsequent change to the lease payments - Any gain or loss is recognizing profit or loss
• If carrying amount of the right of his asset is zero, the
excess adjustment is charged to profit or loss 2. For all other lease modifications, a corresponding
1. Remeasured by discounting the REVISED lease adjustment to the right-of-use assets is made
payment using a revised discount rate if there is a:
a. CHANGE IN THE LEASE TERM
- Changes in the certainty or uncertainty of the 7.17 LEASEHOLD IMPROVEMENTS
lessee exercising and extension option, or not • Recognized as asset, separate from the right-of-use
exercising a termination option, resolved to a asset, and depreciated over the shorter of the life of
change in the lease term the improvements and the remaining lease term
b. CHANGE IN THE ASSESSMENT OF A PRESENTATION OF
PURCHASE OPTION 1. Statement of Financial Position (Right-of-use
- Revised discount rate as the interest rate implicit assets)
in the list for the remainder of the lease term a. Separately from other assets
- If not determinable the revised discount rate is the b. Together with other assets as if they were owned,
lessees incremental borrowing rate at the date of with disclosure of the line items that include the
reassessment right of his assets
c. If it needs the definition of investment property,
then it is presented as investment property
2. Statement of Financial Position (Lease Liabilities)
a. Separately from other liabilities
b. Together with other liabilities, with disclosure of
the line items that include the lease liabilities

3. Statement of Profit or Loss and Other

Comprehensive Income
a. Depreciation and interest expense are presented
separately (Offsetting is prohibited)
b. Interest expense on the leased liability is a
component of finance costs