PFRS 16 LEASES

I. NATURE
PFRS 16 prescribes the accounting and disclosure requirements for leases.
Objective:
To provide information that is faithfully represented, necessary for financial statement
users to assess the effect of leases on the financial position, financial performance and
cash flows of an entity
PFRS 16 applies to all leases, including subleases, except for:
a. Leases to explore for or use minerals and similar resources;
b. Leases of biological assets;
c. Service concession arrangements;
d. Licenses of intellectual property; and
e. Lessee’s rights under licensing agreements relating to motion picture films, video
recordings, plays, manuscripts, patents and copyrights. A lessee may apply
PFRS 16 to leases of intangible assets other than these items.

II. RECOGNITION
ACCOUNTING FOR LEASES BY LESSEE
A lessee recognizes a lease liability and a right-of-use asset at the commencement
date.
ACCOUNTING FOR LEASES BY LESSOR
Classification of lease by a lessor:
1. Finance lease (capital lease) is a lease that transfers substantially all the risks
and rewards incidental to ownership of an underlying asset.
2. Operating lease is a lease that does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset.

III. MEASUREMENT
ACCOUNTING FOR LEASES BY LESSEE
RIGHT OF USE OF
LEASE LIABILITY
ASSET
INITIAL MEASUREMENT
INITIAL MEASUREMENT
Fixed future payments Discounted at interest rate Initial amount of lease
(including in-substance implicit in the lease (or liability.
fixed), less any lease lessee’s incremental
incentives receivable, plus borrowing rate) +
payments in optional Lease payments made to
extension periods if lessor at or before
extension is ‘reasonably commencement.
certain’. -
+
 Variable payments linked Lease incentives received.
to an index/rate based on
level of index/rate at +
commencement.
+
Amounts expected to be Initial direct costs.
payable under residual
value guarantees. +
+
Exercise price of a Estimated cost of removing
purchase option if exercise and/or restoring leased
is ‘reasonably certain’ asset.
+
Termination penalties if
termination is ‘reasonably
certain’.
SUBSEQUENT MEASUREMENT SUBSEQUENT
MEASUREMENT
Similar to an amortized cost financial liability. Interest is
computed using the effective interest method. Payments Similar to a purchased
are apportioned to both interest and a reduction to lease asset, i.e., measured
liability. under cost model,
revaluation model or fair
value model, as
appropriate.

ACCOUNTING FOR LEASES BY LESSOR

Any of the ff. will lead to a finance lease classification:
1. Transfer of ownership
2. Bargain purchase option (BPO)
3. Lease term is at least 75% of the useful life of the leased asset
4. Present value of lease payments is at least 90% of the fair value of the leased
asset at the inception date
5. Leased asset is of specialized nature

IV. TRANSACTION
ACCOUNTING FOR LEASES BY LESSEE
a. Fixed payments, including in-substance fixed payments, less any lease
incentives receivable.
b. Variable lease payments that depend on an index or a rate, initially measured
using the index or rate as at the commencement date.
c. Amounts expected to be payable by the lessee under residual value guarantees.
d. The exercise of a purchase option if the lessee is reasonably certain to exercise
that option.
e. Payments of penalties for terminating the lease, if the lease terms reflects the
lessee exercising an option to terminate the lease.

ACCOUNTING FOR LEASES BY LESSOR

a. Fixed payments, including in-substance fixed payments, less any lease
incentives payable.
 b. Variable lease payments that depend on an index or a rate, initially measured
using the index or rate as at the commencement date.
c. Guaranteed residual value.
d. The exercise price of a purchase option if the lessee is reasonably certain to
exercise that option.
e. Payments of penalties for terminating the lease, if the lease term reflects the
lessee exercise an option to terminate the lease.

V. PRESENTATION
ACCOUNTING FOR LEASES BY LESSEE
Statement of financial position
Right-of-use of assets are presented either:
a. Separately from other assets
b. Together with other assets as if they were owned, with disclosure of the line
items that include the right-of-use assets.
Lease liabilities are presented either:
a. Separately from the liabilities.
b. Together with other liabilities, with disclosure of the line items that include the
lease liabilities.
Statement of profit or loss and other comprehensive income
Depreciation and interest expense are presented separately (i.e., offsetting is
prohibited). Interest expense on the lease liability is a component of finance costs.

ACCOUNTING FOR LEASES BY LESSOR

Underlying assets subject to operating leases are presented in the statement of
financial position according to their nature.

VI. DISCLOSURE
ACCOUNTING FOR LEASES BY LESSEE
Disclosure:
 Depreciation charge on right-of-use of asset
 Interest expense on the lease liability
 Expense relating to low-value and short term leases
 Expense relating to variable lease payments not included in lease liabilities
 Income from subleasing
 Total cash outflow for leases
 Additions to right-of-use assets
 Carrying amount of right-of-use assets by class of underlying asset
 Additional information on right-of-use of assets that are investment property or
rare revalued under PAS 16
 Maturity analysis of lease liabilities using the following time bands under PFRS 7
financial instruments: Disclosures
a. Not later than one month
b. Later than one month and not later than three months
 c. Later than three months and not later than one year
d. Later than one year and not later than five years

ACCOUNTING FOR LEASES BY LESSOR

Disclosure:
Finance leases
 Selling profit or loss
 Finance income on the net investment in the lease
 Income relating to variable lease payments not included in the measurement of
the net investment in the lease
 Qualitative and quantitative explanation of significant changes in net investment
in the lease
 Maturity analysis of lease receivable
Operating leases
 Lease income, separately disclosing income for variable lease payments that do
not depend on an index or rate
 As applicable for underlying asset, relevant disclosures in
- PAS 16 for leases of PPE, disaggregated by class
- PAS 36 impairment of assets, PAS 38 intangible assets, PAS 40 investment
property and PAS 41 agriculture
 Maturity analysis of lease payments