1/11/2018

AUGUST STUDY SCHOOL

FAC4863/4861
LEASES & REVENUE

YUMNA ABED
CA(SA)

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Topics

 IFRS 15 Revenue from contracts

customers

 IFRS 16 Leases

IFRS 15
Revenue from Contracts
with Customers

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Revenue
Construction Contracts
Customer Loyalty
Programmes
Agreements
IFRS 15 = single framework Replaces the following oldfor the
Construction of Real
for revenue: standards and interpretations:
Transfer of assets
• Recognition and • IAS 18 Barter Estate
transactions
from Customers
• Measurement • IAS 11 involving advertising
services
• IFRIC 13
Types of questions? • IFRIC 15
• Discussion • IFRIC 18
• Journal entries • SIC-31
• Statement of P/L and OCI,
Statement of Financial
Position

5 – Step revenue model

1
• Identify the contract(s) with the customer

• Identify the performance obligations in the

2 contract

3
• Determine the transaction price

• Allocate the transaction price to the

4 performance obligations
• Recognise revenue as/when the entity
5 satisfies a performance obligation

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5 – Step revenue model

1. Identify the contract(s) with the customer

Step 1 Step 2 Step 3 Step 4 Step 5

A contract is an agreement between two or more parties that creates

enforceable rights and obligations. {.10}

A customer is a party that has contracted with an entity to obtain

goods or services that are an output of the entity’s ordinary
activities in exchange for consideration. {.6}

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Step 1 Step 2 Step 3 Step 4 Step 5

Approval can be written, oral or implied.

Contract exists if ALL of following criteria are met {.9}:
a) Parties to contract have approved contract and are committed to
perform their respective obligations {.10}
b) Each party’s rights can be identified (regarding the goods or
services to be transferred)
c) The payment terms for goods or services to be transferred can
be identified
d) Contract has commercial substance (risk, timing or amount of
future cash flows of entity is expected to change as result of the
contract)
e) The collection of consideration probable (consider only the
customer’s ability and intention To pay)

Step 1 Step 2 Step 3 Step 4 Step 5

Does a cash sale transaction meet the requirements for a contract?

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Step 1 Step 2 Step 3 Step 4 Step 5

a) Approved contract – yes agreeing to offer of goods or

services is a sign (implied) of acceptance of contract
(contract can be oral, written agreement or implied by
an entity’s customary business practices {.10})
b) Parties rights – customer entitled to goods or services,
entity entitled to receive payment
c) Payment terms – payment on receipt of goods, either
cash or on credit card etc
d) Commercial substance – entity receives cash and
makes profit from sale
e) Collectability of consideration probable – payment
in cash upon receipt of goods = probable

ILLUSTRATIVE EXAMPLE 1
• A real estate developer enters into a contract with a
customer for the sale of a building for R1 million.
• The customer intends to open a restaurant in the building in
an area where new restaurants face high levels of
competition and the customer has little experience in the
restaurant industry.
• The customer pays a non-refundable deposit of R50,000 at
inception of the contract and enters into a long-term
financing agreement with the entity for the remaining 95 per
cent of the promised consideration.
• The financing arrangement is provided on a non-recourse
basis, which means that if the customer defaults, the entity
can repossess the building, but cannot seek further
compensation from the customer, even if the collateral does
not cover the full value of the amount owed.
• The entity’s cost of the building is R600,000.
• The customer obtains control of the building at contract
inception.

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Step 1 Step 2 Step 3 Step 4 Step 5

Contract exists if ALL of following criteria are met {.9}:

a) Parties to contract have approved contract and are
committed to perform their respective obligations {.10}
b) Each party’s rights can be identified (regarding the goods
or services to be transferred)
c) The payment terms for goods or services to be transferred
can be identified
d) Contract has commercial substance (risk, timing or amount
of future cash flows of entity is expected to change as result
of the contract)
e) The collection of consideration probable (consider only
the customer’s ability and intention to pay) ???

ILLUSTRATIVE EXAMPLE 1 Solution

1) Does a contract exist in terms of IFRS 15?

 The customer’s ability and intention to pay is in doubt

due to following reasons:
• Customer intends to repay loan from income
derived from restaurant business (significant risks
due to high competition and limited experience);
• Customer lacks other income or assets that could
be used to repay loan; and
• Customer’s liability i.t.o loan is limited (non-
recourse).
To conclude, criteria is not met, and thus contract
does not exist as it is not probable that entity will
collect consideration it is entitled to in exchange for
the building (all five criteria has to be met).

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ILLUSTRATIVE EXAMPLE 1 Solution

2) How should the non-refundable deposit of
CU50,000 be recognised?

 {.15} If contract criteria is not met and consideration

is received it can be recognised as revenue if:
a) the entity has no remaining obligation to transfer
goods or services and all of consideration
promised by customer has been received and is
non-refundable; or
b) the contract has been terminated and
consideration received is non-refundable (IFRS
15.15).
Neither one of the above criteria is met, thus can’t be
recognised as revenue, should recognise as deposit
liability.

Step 1 Step 2 Step 3 Step 4 Step 5

Contract

Combined Contract
contract modification
(accounted for (Level1)
as a single {.18 - .21}
contract) {.17}

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5 – Step revenue model

2. Identify the performance obligations in the

contract

Step 1 Step 2 Step 3 Step 4 Step 5

At contract inception an entity shall assess the

goods or services promised in a contract with
a customer and shall identify as a
performance obligation each promise to
transfer to the customer either {.22}:

(a) A good or (b) Series of distinct

service (bundle of goods or services that
goods/services) are substantially the
that is distinct or same with same pattern
of transfer to the
customer {.23}

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Step 1 Step 2 Step 3 Step 4 Step 5

Promises in a contract with customers {.24}

• A contract with a customer generally explicitly
states the goods or services that an entity
promises to transfer to a customer.
• Promises may not be limited to those goods and
services explicitly stated in the contract.
• Promises can also be implied by an entity’s
customary business practices, published policies
or specific statements made and create a valid
expectation for a transfer of a promise to the
customer. {IE 12 – Free maintenance services}

Step 1 Step 2 Step 3 Step 4 Step 5

A good or service promised is distinct if both of the

following criteria are met {.27}:

The entity’s promise to

The customer can benefit transfer the good or
from the good or service either service to the
on its own or together with customer is
other resources that are
readily available to the
customer {.28}.

(If an entity regularly sells a good or service separately

separately it indicates that a customer can identifiable from
benefit from the good or service on its own
or with other readily available resources.) other promises in the
contract {.29}.

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Exam technique approach

DISCUSSION QUESTIONS

- Planning and layout is important

- Firstly refer to the applicable IFRS that your argument or
discussion will be on
- Prepare a well-focused answer by applying the information in
the scenario to the abovementioned IFRS you base your
argument or discussion on:
- Avoid just repeating facts in the scenario, you need to indicate
why these facts are important to your argument.
- Using contradicting statement
- Always conclude your argument
- Don’t use SMS style writing

Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 2

On 1 November 20.14 Builder Ltd entered into a

contract with Green Ltd to refurbish an old office
building in Sandton, which is owned by Green Ltd. The
refurbishment on all floors of the building includes the
following:

- Overall management of the project;

- Installation of new elevators;
- Providing electrical services; and
- Providing carpentry services.

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Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 2

Builder Ltd regularly provides each of the above

refurbishment services separately to other customers.
The total consideration payable by Green for the
refurbishment in terms of the contract amounts to
R15,000,000.
In terms of the contract the consideration must be paid
by Green based on the progress of the refurbishment
up until the completion date.
The date of completion of the refurbishment as per
contract is 31 March 20.15.

Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 2 required (a)

Identify and discuss the performance obligation/(s)

present in the contract entered into between Builder
Ltd and Green Ltd on 1 November 20.14. You are not
required to discuss the satisfaction of the performance
obligation/(s). (8)

Communication skills: Logical flow and conclusion. (1)

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Step 1 Step 2 Step 3 Step 4 Step 5

(Application and theory) In terms of the contract Builder
Ltd agreed to provide refurbishment services, which includes
the overall management of the project, installation of
elevators and providing electrical and carpentry services. As
a result this is an approved contract (½)

(Theory) At contract inception, an entity shall assess the

goods or services promised in a contract with a customer
and shall identify as a performance obligation each promise
to transfer to the customer either:

a) a good or service (or a bundle of goods or services) that

is distinct; or

b) a series of distinct goods or services that are

substantially the same and that have the same pattern of
transfer to the customer (IFRS 15.22). (1)

Step 1 Step 2 Step 3 Step 4 Step 5

(Application) In order for these goods and services to
each be accounted for as separate performance
obligations, one has to determine if they are distinct
(IFRS15.22(a)). (½)

(Theory) A good or service that is promised to a

customer is distinct if both of the following criteria
are met:
(a) the customer can benefit from the good or service
either on its own or together with other resources that
are readily available; and
(b) the entity’s promise to transfer the good or service
to the customer is separately identifiable from other
promises in the contract (IFRS 15.27). (1)

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Step 1 Step 2 Step 3 Step 4 Step 5

(Application) Green can benefit from the refurbishment
services either on their own or together with other
readily available resources. This is evidenced by the
fact that Builder regularly sells or provides these
refurbishment services separately to other customers
(IFRS 15.28). (1)

(Application) In addition, Green could generate

economic benefits from the individual goods and
services by using, consuming, selling or holding those
goods or services (IFRS 15.28). Therefore the first
criterion is met for the goods and services to be
distinct (IFRS 15.27(a)).(1)

Step 1 Step 2 Step 3 Step 4 Step 5

(Application) However, the second criterion for the
goods and services to each be distinct is not met since
they are not separately identifiable. They are not
separately identifiable as Builder provides a significant
service of integrating the different goods and services
into one combined output (the refurbished office
building) for which Green has contracted Builder for
(IFRS 15.27(a)). (2)

(Application) Because both criteria of IFRS 15.27 are

not met, the different goods and services provided are
not distinct. (1)

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Step 1 Step 2 Step 3 Step 4 Step 5

(Theory) If a promised good or service is not distinct,
an entity shall combine that good or service with
other promised goods or services until a distinct
bundle of goods or services is identified (IFRS 15.30).
(½)

(Application) Thus each different good or service

provided by Builder is not separately distinct on its own
but if it is combined into one output (the refurbished
office building) it becomes a distinct bundle of goods
or services. (1)

Conclusion:
TD should account for all of the goods and services
provided in the refurbishment contract as a single
performance obligation. (1) (10.5)

Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 6

3. 12-month warranty
A smartphone or tablet granted by Cellular to
customers is covered by a 12-month warranty provided
by Cellular. If a faulty device is returned within seven
days of purchase, the customer receives a new device
as a replacement. If it is returned after seven days,
Cellular will repair the device at Cellular’s expense. The
warranty only covers manufacturing defects and
excludes liquid contact damage and cosmetic damage
such as scratches, dents and broken screens or ports
as required by the Consumer Protection Act. Defective
devices returned after the 12-month warranty period
are still repaired, but at the cost of the customer.

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Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 6

3. 12-month warranty
Every smartphone has its own unique serial number.
Cellular’s systems link the serial number to the
warranty, the date of purchase and the customer’s
details. Customers do not have the option of
purchasing the 12-month warranty separately from
Cellular.

Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 6 required (a)(i)

Discuss the following with regard to a MyLife100

contract in terms of IRFS 15, whether the 12-month
warranty offered on the iFoni SP should be identified as
a separate performance obligation.

Do not discuss the seven-day returns policy. (9)

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Step 1 Step 2 Step 3 Step 4 Step 5

Solution
The first part of your discussion would be similar to
Question 2 above.

Over and above that discussion, the B paragraphs

needs to considered.

Step 1 Step 2 Step 3 Step 4 Step 5

Solution
(Theory) Furthermore, IFRS 15 gives specific guidance
to identify if a warranty should be identified as a
separate performance obligation in the contract. If a
customer does not have the option to purchase the
warranty separately, the entity shall account for the
warranty in terms of IAS 37 Provisions, Contingent
Liabilities and Contingent Assets, unless the promised
warranty, or part of the promised warranty, provides the
customer with a service in addition to the assurance
that the product complies with the agreed-upon
specifications (IFRS 15.B30). (1)

(Application) Customers do not have the option to

purchase the 12-month warranty separately. (1)

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Step 1 Step 2 Step 3 Step 4 Step 5

(Theory) In assessing whether the warranty provides
the customer with a service in addition to the assurance
that the product complies with the agreed-upon
specifications, the following facts should be considered
(IFRS15.B31): (1)

a) (Theory) Whether the warranty is required by law –

indicate that the warranty is not a separate
performance obligation. (½)
 (Application) The 12-month warranty provided by
Cellular is required by the Consumer Protection Act
of South Africa. (½)

Step 1 Step 2 Step 3 Step 4 Step 5

b) (Theory) The length of the warranty coverage

period – the longer the coverage, the more likely it is
that the warranty is a separate performance
obligation. (½)
 (Application) The warranty provided by Cellular is
for 12 months only, which is considered to be a
short period when compared to actual warranties on
electronics. (½)

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Step 1 Step 2 Step 3 Step 4 Step 5

c) (Theory) The nature of the tasks that the entity

promises to perform – if the entity has to perform
specified tasks to provide assurance that the
product complies with agreed-upon specifications,
then those tasks likely do not give rise to a separate
performance obligation. (½)
 (Application) Cellular will replace a defective iFoni
SP at its own cost within the first 12 months. This
suggests that Cellular is only providing assurance
that their product will function as intended for a
period of at least 12 months. (½)

Step 1 Step 2 Step 3 Step 4 Step 5

To conclude, the warranty does not provide a service

in addition to the assurance that the iFoni SP will
function as intended for a period of at least 12 months
and should not be identified as a separate performance
obligation in the MyLife100 contract, but should rather
be bundled with the sale of the iFoni SP. The warranty
should be treated in accordance with IAS 37. (1)

(9 marks from B paragraph and 7 marks from the

performance obligation discussion)

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Principal vs agent considerations

• If another party is involved in providing goods or

services to a customer, entity shall determine whether
the nature of its promise is a performance obligation
to provide the specified goods or services itself1 (i.e. =
principal) or to arrange for the other party to provide
those goods or services2 (i.e. = agent).{B34}

• An entity is a principal if it controls the specified good

or service before that good or service is transferred to
customer (legal title does not necessary equate
control)

Principal vs agent considerations

• Indicators that the entity controls goods or services

before it is provided to the client include, but are not
limited to the following {.B37}:
a) The entity is primarily responsible for fulfilling the
promise to provide the specified good or service;
or
b) The entity has inventory risk before the specified
good or service has been transferred to the
customer or after transfer of control to the
customer (e.g. if customer has right of return); or
c) The entity has discretion in establishing the price
for the specified good or service. However,
sometimes agents may also have this discretion.

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Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 1 required (a) – Agent / Principal
Sunset Cruises negotiates with major airline companies in
advance to buy a specific number of airline tickets at agreed-
upon lower rates compared with the rates offered directly to
the public. This allows Sunset Cruises to sell the airline
tickets at a specific discount percentage and realise a profit
on the sale. Sunset Cruises is however liable to pay for all
the airline tickets regardless of their ability to sell it.
Sunset Cruises is responsible to deliver or issue the airline
ticket to the customer (usually this is done electronically) and
will also assist the customer to resolve any complaints with
the airline’s services provided. The airline is ultimately
responsible for fulfilling all other obligations associated with
the airline ticket, including the flight and remedies for
dissatisfaction with the service.

Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 1 required (a) – Agent / Principal
(a) Discuss whether Sunset Cruises Ltd's promise to
provide an airline ticket to a customer (refer to matter 1),
when it is purchased separately by a customer (hence, the
airline ticket was not purchased as part of a cruise package),
is controlled by Sunset Cruises Ltd in terms of IFRS 15
Revenue from Contracts with Customers before it is
transferred to the customer. (7)

Please note:
• You may assume that the sale of an airline ticket meets all
the requirements to be accounted for as a contract within the
scope of IFRS 15 Revenue from Contracts with Customers.
• Sunset Cruises Ltd's promise to provide an airline ticket
(the right to fly) is a single performance obligation when
purchased separately by a customer. (exclusions)

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Step 1 Step 2 Step 3 Step 4 Step 5

Tut 105: Question 1 required (a) – Agent / Principal
Sunset Cruises negotiates with major airline companies in
advance to buy a specific number of airline tickets at agreed-
upon lower rates compared with the rates offered directly to
the public. This allows Sunset Cruises to sell the airline
tickets at a specific discount percentage and realise a profit
on the sale. Sunset Cruises is however liable to pay for all
the airline tickets regardless of their ability to sell it.
Sunset Cruises is responsible to deliver or issue the airline
ticket to the customer (usually this is done electronically) and
will also assist the customer to resolve any complaints with
the airline’s services provided. The airline is ultimately
responsible for fulfilling all other obligations associated with
the airline ticket, including the flight and remedies for
dissatisfaction with the service.

5 – Step revenue model

3. Determine the transaction price

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Step 1 Step 2 Step 3 Step 4 Step 5

When (or as) a performance obligation is satisfied, an entity

shall recognise as revenue the amount of the transaction
price

The transaction price is the amount of consideration to which an

entity expects to be entitled in exchange for transferring goods
or services to a customer.

Includes fixed and

Excludes amounts or variable amounts
collected on behalf of
third parties (VAT)

Step 1 Step 2 Step 3 Step 4 Step 5

Variable consideration
If the consideration promised in a contract includes a variable
amount (refunds, discounts, rebates, credits etc), an entity shall
estimate the amount of consideration to which the entity will be
entitled in exchange for transferring the promised goods or services
to a customer {.50–.54}.

Constraining estimates of variable consideration

An entity shall include in the transaction price some or all of an
amount of variable consideration estimated only to the extent that it is
highly probable that a significant reversal in the amount of
cumulative revenue recognised will not occur when the uncertainty
associated with the variable consideration is subsequently resolved
{.56–.58}.

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Step 1 Step 2 Step 3 Step 4 Step 5

Example on limiting estimates of variable consideration

W Ltd is an asset manager. The company receives an asset

management fee calculated as 2% of the average value of
assets under management. In addition, the company is
entitled to a 15% performance fee if the return exceeds the
agreed benchmarks. Both the asset management fee and
the performance fee represent variable consideration.

Why will there be limit on the estimate of variable

consideration?

- Both fees are dependant on market performance which is

outside the control of W Ltd
- Historical experience does not assist in predicting the
future performance of the market

Step 1 Step 2 Step 3 Step 4 Step 5

Example on limiting estimates of variable consideration

- As a result, W Ltd will cannot demonstrate that it is highly

probable that revenue recognised will not be
subsequently reversed.

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Step 1 Step 2 Step 3 Step 4 Step 5

Refund liabilities
Recognise a refund liability if the entity receives consideration
from a customer and expects to refund some or all of that
consideration to the customer. Measured at amount of
consideration entity expects to not be entitled to. Shall be
updated at end of each reporting period.

Exam technique approach

JOURNALS

Indicate your debits and credits clearly

Always classify your journals such as depending on whether it

is an SFP,P/L , OCI or Equity classification

You should have clear account descriptions and no unfamiliar

abbreviations are allowed.

You are allowed to provide short calculations in the journals,

however long calculations should be shown separately and
remember to reference as shown in this journal.

Always read the required very carefully and take note if you
have to date your journals and provide journal narrations as
shown in the journal

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Step 1 Step 2 Step 3 Step 4 Step 5

Question 6 (b)

5 – Step revenue model

4. Allocation of transaction price

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Step 1 Step 2 Step 3 Step 4 Step 5

The objective when allocating the transaction

price is:
 for an entity to allocate the transaction price
 to each performance obligation (or distinct
good or service)
 in an amount that depicts the amount of
consideration
 to which the entity expects to be entitled
 in exchange for transferring the promised
goods or services to the customer.

Step 1 Step 2 Step 3 Step 4 Step 5

• IFRS 15 requires the entity to allocate the

transaction price to each performance
obligations identified in the contract on a
relative stand alone selling price basis
{.76-.80}.
• Consider
• Allocating discounts {.81-.83}
• Allocating consideration that includes
variable amounts {.84-.86}

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5 – Step revenue model

5. Recognise revenue

Step 1 Step 2 Step 3 Step 4 Step 5

An entity shall recognise revenue when (or as) the

entity satisfies a performance obligation by
transferring a promised good or service (ie an asset)
to a customer. An asset is transferred when (or as)
the customer obtains control of that asset (IFRS
15.31 -34).

Control of an asset refers to the ability to direct the

use of, and obtain substantially all of the remaining
benefits from, the asset (includes ability to prevent
others from gaining benefits or using asset).

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Step 1 Step 2 Step 3 Step 4 Step 5

A performance obligation is satisfied…

Performance
Performance
obligation satisfied
obligation satisfied
at a point in time
over time {.35-.37}
{.38}

Step 1 Step 2 Step 3 Step 4 Step 5

Has to prove it can reasonably
measure progress towards
completion of performance
obligation {.44} (Input or output
Satisfied over time method)
{.35–.37}:
• Customer simultaneously receives and consumes the
benefits provided by the entity’s performance as the
entity performs; OR
• Entity’s performance creates or enhances an asset
(i.e work in progress) that the customer controls as
the asset is created or enhanced; OR
• Entity’s performance does not create an asset with
an alternative use and the entity has an enforceable
right to payment for performance completed to date.

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Step 1 Step 2 Step 3 Step 4 Step 5

Satisfied at a point in time {.38}:

• If not satisfied over time, then it is satisfied at a point
in time.
• To consider at what point in time customer obtains
control, consider requirements of control {.31–.34}

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IFRS 16
LEASES

1. What is a lease
2. Lessees
- Recognition and measurement
- Right of use asset
- Lease liability
- Presentation and disclosure
3. Sale and leaseback
4. Lessors
5. Tax implications

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Leases
1. What is a lease?

A contract is, or contains, a lease if

The contract conveys the right to control2 the use of
An identified asset1
For a period of time3
In exchange for consideration4

For 1 and 2, refer to IFRS 16.B31 Diagram

Leases

(1) IDENTIFIED ASSET

Explicitly Implicitly
E.g. HP Copier Asset No HP Copier Model FAC
4861
[B13]

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Leases
Pirates Ltd signs a contract in terms of
which Carribean Ltd will provide Pirates Ltd
with the right to use a cargo ship with an 80
ton capacity for 5 months. At the end of the
5 months Pirates Ltd will return the cargo
ship to carribean Ltd. Carribean Ltd owns 50
different cargo ships with a 80 ton capacity.

If can’t be determined
Must be determined at
whether
Excludes
right is
substitution
substantive
inception of lease, do not
–when
presume
in need
thatof
or substantive
asset is broken
it is
repairs
consider future events
[B19].
NOT
[B18]
Leases
[B15-B16]

SUBSTANTIVE SUBSTITUTION RIGHTS [B14]

Even if an asset is specified, a customer does not

have the right to use an asset if the supplier has the
substantive right to substitute the asset. A
supplier’s right of substitution is substantive only if
both of the following conditions exist:
• Supplier has the practical ability to substitute; and
• Supplier would benefit economically from
exercising the right to substitute

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Leases

(2) RIGHT TO CONTROL

If the customer has throughout the period of use the:
BOTH
Right to obtain substantially Right to direct the
all of the economic benefits use of identified
from direct or indirect use of asset.
identified asset. [IFRS 16.B24-.B30]
[IFRS 16.B21-.B23]

par .B23: Contract

requires customer
to pay supplier
Leases
ECONOMIC BENEFITS
(e.g. having exclusive use of asset throughout period of use)

In assessing the right to obtain substantially all of the

economic benefits, an entity shall consider the economic
benefits within a defined scope of a customer’s rights to
use the asset, e.g.:
- Contract limits use of motor vehicle to one particular
territory; or
- Contract limits number of kilometers during the period
of use
{IE4 and IE6B}

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Includes rent- Leases

free periods

(3) FOR A PERIOD OF TIME

(Lease term)
May also be described in terms of the amount of use
of an identified asset (E.g. the number of production
units that an item of equipment will be used to
produce)

Leases

LEASE TERM [B34-41]

Non-cancellable period PLUS

Option to Option to terminate

extend If:
If lessee • Only lessee has right, if reasonably
reasonably certain not to terminate
certain to • Only lessor has right, include
exercise option period covered by the option to
terminate

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Leases
A lease is no longer
enforceable when both parties
have the right to terminate the
LEASE TERM [B34-41]
lease without permission from
each other with no more than an
Non-cancellable period PLUS
insignificant penalty

Option to Option to terminate

extend If:
If lessee • Only lessee has right, if reasonably
reasonably certain not to terminate
certain to • Only lessor has right, include
exercise option period covered by the option to
terminate

Leases

(4) CONSIDERATION
Paragraph 27

REASSESSMENT
An entity shall reassess whether a contract is, or
contains, a lease only if the terms and conditions of
the contract are changed [IFRS 16.40]

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Leases
2. Initial Recognition and Measurement
WHEN?
At commencement date (date on which lessor makes
underlying asset available for use by the lessee)

WHAT?
Dr Right of use asset {.23-.24}
Cr Lease liability {.26-.27}

Leases
2. Subsequent Measurement
Lease Liability
• Increasing the carrying amount to reflect interest on the
lease liability
• Reducing the carrying amount to reflect the lease
payments made
• Re-measuring the carrying amount to reflect any
reassessment or lease modifications or revised fixed in-
substance lease payments

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Leases
2. Subsequent Measurement
Right-of-use-asset
• Cost model (and IAS 36) unless:
• IAS 40
• IAS 16 Revaluation model

• If there is any re-measurement of lease liability,

 Adjust right-of-use asset. If the right-of-use asset is
fully depreciated, take the balance to P/L [IFRS
16.39]

Leases
2. Par 5 Recognition exemptions
[IFRS 16.5] A lessee may elect not to apply the
requirements in par 22-49 (accounting for leases) to:
• Short-term leases; and
• Leases for which the underlying asset is of low
value
Lessee may then elect par 6:
The lessee shall recognise the lease payments associated
with those leases as an expense on either a straight-line
basis (equalise) over the lease term or another
systematic basis (if its more representative of the pattern
of the lessee’s benefit)

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Leases
2. Par 5 Recognition exemptions
[IFRS 16.5] A lessee may elect not to apply the
requirements in par 22-49 (accounting for leases) to:
• Short-term leases; and
• Leases for which the underlying asset is of low
value
Lessee may then electIf there
par 6:is a lease
The lessee shall recognise
modificationthe lease payments
or changes in associated
lease term, then consider
with those leases as an expense on either a straight-line
as new lease
basis over the lease term or another systematic basis
(if its more representative of the pattern of the lessee’s
benefit)

Leases

Difference between lease modification and lease

reassessment
Lease
At contract inception, R Ltd (lessee) determined that the
lease term will be 5 years as it was not reasonably certain
that it would exercise an option to extend the lease for
another 3 years.
After a year, R Ltd reassesses the lease term and now it is
reasonably certain to exercise the option for 3 years.

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Leases

Difference between lease modification and lease

reassessment
Lease
At contract inception, R Ltd (lessee) determined that the
lease term will be 5 years with no option to extend or
terminate.
After a year, R Ltd reassesses the lease term and now the
lease term is for a period of 7 years.

Leases
3. Sale and Leaseback
• [IFRS 16.100] First assess whether transfer of an asset
is a sale  apply IFRS 15, if so, then:
• The seller-lessee shall measure the right of use
asset arising from the leaseback at the proportion of
the previous carrying amount of the asset that
relates to the right of use retained by the sellor-
lessee. Accordingly, sellor-lessee shall recognise
only the amount of any gain or loss that relates to
the rights transferred to the buyer-lessor.

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Leases
3. Sale and Leaseback
• First assess whether transfer of an asset is a sale 
apply IFRS 15, if so, then:
• The buyer-lessor shall account for the purchase of
the asset applying applicable standards, and for the
lease applying the lease accounting requirements

• If IFRS 15 does not apply, ‘seller’ continues to

recognise the transferred asset and applies IFRS 9
(financial liability) to the proceeds received

Leases
3. Sale and Leaseback
Par 101
• If the fair value of the consideration for the sale of an
asset does not equal the fair value of the asset, or if the
payments for the lease are not at market rates, an entity
shall make the following adjustment to measure the sale
proceeds at fair value
• Any below-market terms shall be accounted for as a
prepayment of lease payments; and
• Any above-market terms shall be accounted for as
additional financing provided by the buyer-lessor to
the seller-lessee

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Leases
3. Sale and Leaseback
Par 102
• The entity shall measure any potential adjustment
required by par 101 on the basis of the more readily
determinable of:
• The difference between the fair value of the
consideration for the sale and the fair value of the
asset; and
• The difference between the present value of the
contractual payments for the lease and the present
value of payments for the lease at market rates.

21. Leases
Bonang Ltd (seller–lessee) sells its plant on 1 January 20.12 to Musq Ltd
(buyer-lessor) and immediately leases the right to use the plant back for five
years. The terms and conditions of the above mentioned transaction satisfy the
requirements for determining when a performance obligation is satisfied in
IFRS 15 Revenue from Contract with Customers. Accordingly, Bonang Ltd and
Musq Ltd account for the transaction as a sale and leaseback. The details of
which are as follows:

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21. Leases
Bonang Ltd (seller–lessee) sells its plant on 1 January 20.12 to Musq Ltd
(buyer-lessor) and immediately leases the right to use the plant back for five
years. The terms and conditions of the above mentioned transaction satisfy the
requirements for determining when a performance obligation is satisfied in
IFRS 15 Revenue from Contract with Customers. Accordingly, Bonang Ltd and
Musq Ltd account for the transaction as a sale and leaseback. The details of
which are as follows:

21. Leases
Required: Prepare the journal entries in the books of
Bonang on the 01 January 2012

Exam Technique: REMEMBER TO ALWAYS INDICATE IF IT

IS SFP OR P/L, OTHERWISE NO MARKS WILL BE
AWARDED.

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21. Leases
First account for the sale of the plant
Dr: Bank (SFP) R1800 000
Cr: Plant at cost (SFP) R1600 000
Dr: Accumulated Depreciation (SFP) R160 000
(R1 600 000*10%)
We need to account
for depreciation up
until the plant is sold

At this point we cannot account for the gain or loss , as we

need to apportion the gain or loss in accordance with the
rights transferred to the buyer (IFRS 16.100)

21. Leases
Let us calculate the rights retained by the lessee (i.e the
rights that are NOT transferred to the buyer)
Rights retained by the lessee = PV of the Lease liability
(excluding the amount that relates to additional financing)

In this case we have additional financing provided by the

lessor to the lessee because the cash selling price of
R1 800 000 exceeds the fair value of R1 700 000

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21. Leases
The additional financing component is calculated as the
difference between the FV of the asset and the cash selling
price (R1 800 000-R1 700 000)=R100 000

Therefore rights retained by the lessee=

R1 563 586-R100 000=R1 463 586

Rights transferred to the buyer = FV of the asset- PV of the

lease liability (excluding the additional financing component)
R1 700 000- R 1 463 586= R236 414

21. Leases
The right of use asset is measured at the proportion of the
previous carrying amount of the asset that relates to the
rights retained by the lessee
Carrying Amount = R1 600 000 –R160 000=R1 440 000
Rights retained by the lessee =R1 463 586
Fair Value =R1 700 000
R1 440 000 X R1 463 586
R1 700 000 = R1 239 743

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21. Leases
The gain or loss is measured at the proportion of the right
transferred to the buyer.
Gain = R1 440 000 –R1 700 000=R260 000
Rights transferred to the buyer =R236 414

R 260 000 X R 236 414

R1 700 000 = R36 157

Remember we use the FV of the asset and NOT

the cash selling price to determine the gain or loss.

21. Leases

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Leases
4. Lessors
Finance lease Operating lease
Substantially all risks & Substantially all risks &
rewards transferred rewards not transferred

{.67-.80} {.81-.88}
Measurement Measurement
- Initial - Initial
- Subsequent - Subsequent

Leases
5. Tax implications
When a lease agreement for accounting purposes is
also a lease agreement for tax purposes (therefore
excludes instalment sale agreements), the lease
payments are normally deductible for income tax
purposes, provided the comply with the normal
conditions for deduction.

Lessee not entitled to tax allowances

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Leases
5. Tax implications
Low value or Short-term leases
If par 5 was applied (low value/short term leases),
then deferred tax will arise as a result of the accrued
lease expense or prepaid lease expense due to
equalization.

Leases
5. Tax implications
If par 5 is not applicable:
• Deferred tax will arise as a result of
• The capitalised right-of-use-asset and the
corresponding lease liability (both recognised
for accounting purposes)
• The tax base of the right-of-use-asset and the
corresponding lease liability is Rnil (unless VAT
is financed)

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21. Leases
Tax implications
VAT
If VAT is financed, then the financed VAT will be the
tax base:
Example
Cash selling price = R66,000 (incl VAT) (assume
equal to lease liability)
There VAT = R66,000 x 14/114 = R8,105
Therefore lease liability includes VAT.

Leases
5. Tax implications
VAT
Lessor – Pays output VAT to SARS immediately =
R8,105

Lessee – Claims input VAT from SARS immediately =

R8,105 (but did not yet pay lessor)
Therefore  Lessor is financing the VAT claimed by
the lessee (which is included in the annual
instalments)

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21. Leases
Tax implications

Year Payments Interest Capital Balance

66,000
Y1 28,907 9,900 19,007 46,993
Y2 28,907 7,049 21,858 25,135
Y3 28,907 3,772 25,135 -
86,721 20,721 66,000

Includes VAT of Each instalment includes R2,702

R8,105 VAT (R8,105 / 3)

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