PFRS 16 - Leases

PFRS 16, Leases
Workshop
City Sports Club Cebu
Cardinal Rosales Ave., Cebu City
13 September 2019
#SGVforABetterPhilippines
Session Agenda
Overview and Scope Effectivity and Transition

1 6
Identifying the Lease Transition Considerations
2 Contract 7
Key Concepts Lease Workshop
3 8
Accounting for Lessees Tax Considerations
4 9
Accounting for Lessors
5
Page 3 PFRS 16, Leases Public Seminar
PFRS 16, Leases
Overview and Scope
• A New Leases Standard

• Not in scope
• Recognition Exemption
• Portfolio Approach

PFRS 16: A New Leases Standard
Overview
► Issued on 13 January 2016.
What changes can we expect?
► Replaces all previous PFRS provisions
on lease accounting (PAS 17, SIC 15,
SIC 27 and IFRIC 4). • The lessee will be required to
► Result of a joint project with FASB, recognize
2020
the majority of
which for its part issued new guidance leases in its balance sheet,
on lease accounting on 25 February apart from some exemptions.
2016. However, as the IASB and the
FASB reached different decisions in • Lessor
2019
accounting will remain
some areas as the project progressed, essentially unchanged.
differences still exist.
► Effective for annual periods beginning • Disclosure1requirements will
on or after 1 January 2019. 20 8
increase significantly.

Not in scope
What are not in scope?

► Leases to explore for, or use, minerals, oil,
natural gas and similar non-regenerative
resources (PFRS 6)
► Leases of biological assets within PAS 41,
Agriculture, held by a lessee
► Service concession arrangements within IFRIC
12, Service Concession Arrangements
► Licenses of intellectual property granted by a
lessor within the scope of PFRS 15, Revenue
from Contracts with Customers
► Rights held by a lessee under licensing
arrangements within the scope of
PAS 38, Intangible Assets

More than accounting - complexity
► Majority of current leases classified as operating leases

Less complex
► Long-term contracts, such as commercial property
► Lease contract data not readily available e.g., stored manually, in
multiple locations
► Decentralized operations and processes
► Lease contracts contain both lease and non-lease elements
► Lease portfolio contains dissimilar assets, terms and conditions
► Lease contracts contain variable consideration and renewal, purchase
and termination options

Recognition Exemption
Short-term leases Low-value assets

► Defined as a lease term of 12 months ► To be a low-value asset (on a
or less and do not contain a purchase lease-by lease basis):
option.
• a lessee must be able to benefit
► Shall be made by class of underlying from the asset on its own or
asset to which the right of use relates.
together with other resources that
are readily available to the lessee
• the asset must not be dependent
on, or highly interrelated with, other
assets
The lessee has the option to not recognize these leases on the balance sheet.
The related lease expense is recognized on a straight-line basis over the lease term or
another systematic basis.

Portfolio Approach
► PFRS 16 specifies accounting for

an individual lease The IASB decided to include the
► Practical expedient - apply PFRS 16 portfolio approach to be consistent
with PFRS 15.
to a portfolio of leases with similar
characteristics A decision to use the portfolio
► Similar remaining term approach would be similar to a
► Similar class of underlying asset decision some entities make today
to expense, rather capitalize,
► Similar economic environment certain assets when the accounting
difference is, and would continue to
► Can be applied only if the entity be, immaterial to the financial
reasonably expects that the effect statements.
on the financial statements would
not materially differ had
lease-by-lease application been
performed

Portfolio Approach
Illustrative example
Fact Pattern
► Lease of car under master lease agreements

► Lessee uses 8 types of car, assigned based on seniority and territory.
► Lessee has master lease agreement for each type of car.
► Similar start and end dates, but terms and conditions generally vary.
Analysis
► The lessee can apply the portfolio approach to each master agreement since the
individual leases within the master agreements are similar to each other.

PFRS 16, Leases
Identifying the Lease
Contract
• Definition of a Lease
• Identified Asset
• Right to Control the Use of
the Asset
• Separating Lease Components
• Separating Lease and Non-lease
Components
• Allocating Contract Consideration
Page 11 PFRS 16, Leases Public Seminar #SGVforABetterPhilippines

Determining Whether an Arrangement Contains a Lease
Definition of a Lease (1/2)
RIGHT-OF-USE ASSET
LESSOR LESSEE
LEASE PAYMENTS
A lease is a contract, or part of a contract, that conveys the right to

control the use of an asset (the underlying asset) for a period of time
in exchange for consideration.
A lease exists when a customer controls the right to use an identified

asset, which is when the customer has:
► the right to obtain substantially all the economic benefits; and
► the right to direct the use.

Definition of a Lease (2/2)
Definition of a lease
Identified asset and Right to control the use of

the identified asset
Right to obtain Right to direct

substantially all the use
economic +
benefits
Application of the definition of a lease will require significant judgment.

Identified Asset (1/4)
Explicitly or implicitly
identified in the
contract
When is a substitution right substantive?
When the supplier:

q has the practical ability to substitute
Identified AND
asset No substantive q benefits > costs
substitution rights
ü assess based on facts and
circumstances at inception
ü if the customer cannot readily
determine => presume the right
Physically distinct is not substantive

Identified Asset
• An asset is typically identified by being explicitly
Explicitly or implicitly specified in a contract.
identified in the
contract • However, an asset can also be identified by being
implicitly specified at the time that the asset is made
available for use by the customer. For example, asset
cannot be identified at contract date but is identifiable
at the start of the lease.
Physically distinct
No substantive
substitution rights

Identified Asset
A capacity portion of an asset can be an identified asset if:
Explicitly or implicitly
identified in the • it is physically distinct (for example, a floor of a building);
contract or
• it is not physically distinct, but the customer has the right

to obtain substantially all of the economic benefits from
use of the asset (for example, a capacity portion of a
Physically distinct fibre optic cable that is not physically distinct but
represents substantially all of the capacity of the cable).
No substantive
substitution rights

Identified Asset
A supplier’s substitution right is ‘substantive’ only if the
Explicitly or implicitly supplier both:
identified in the
contract 1. Has the practical ability to substitute alternative assets
throughout the period of use*; and
2. Would benefit economically from exercising its right to

substitute the asset.
Physically distinct
The evaluation of whether a supplier’s substitution right is
substantive is based on facts and circumstances at
inception of the contract and shall exclude consideration of
future events that, at inception of the contract, are not
considered likely to occur.
No substantive
substitution rights *If right arises only after the occurrence of a specified event, it is not
substantive.

Right to Control the Use of the Asset
Start here
Right to obtain substantially all
Does the customer have the right to No economic benefits from the use
obtain substantially all of the economic of the asset
benefits from use of the asset?
Yes
Customer Supplier
Who has the right to direct how and
for what purpose the asset is used?
Neither
Yes Right to direct the use of the

Does the customer have the right to identified asset
operate the asset?
No
Yes No
Did the customer design the asset?
Customer has the right to Supplier has the right to

control the use of the control the use of the
assets assets

Determination at Inception
• PFRS 16 requires an entity to determine whether a contract is a lease or

contains a lease at the inception of the contract.
Subsequent Reassessment
• An entity reassesses whether a contract is or contains a lease only if the

terms and conditions of the contract are changed.
• A change in the terms and conditions of a contract does not include the
exercise of an option (e.g., renewal option) or failure to exercise an option
that is included in the contract.

Definition of a Lease
Identified Asset - Example 1 (1/7)
Fact Pattern
► Entity A enters into a five-year contract with Supplier Y for the use of a rolling stock
specifically designed for Entity A.
► The rolling stock is designed to transport materials used in Entity A’s production
process and is not suitable for use by other customers.
► The rolling stock is not explicitly specified in the contract, but Supplier Y owns only
one rolling stock that is suitable for Entity A’s use. If the rolling stock does not operate
properly, the contract requires Supplier Y to repair or replace the rolling stock.
Analysis
► The rolling stock is an identified asset. While the rolling stock is not explicitly
specified in the contract (e.g., by serial number), it is implicitly specified because
Supplier Y owns only one rolling stock suitable for Entity A’s use and therefore it is
implicitly identified.

Fact Pattern
► Entity A enters into a five-year contract with Supplier Y for the use of a car. The
specification of the car is specified in the contract (brand, type, color, options, etc.).
At inception of the contract the car is not yet built.
Analysis
► The car is an identified asset. Although the car cannot be identified at inception of
the contract, it is apparent that it will be identifiable at the commencement of the
lease. The car is identified by being implicitly specified at the time that it is made
available for use by the customer (i.e., at the commencement date).

Fact Pattern
► Entity A enters into a 12-year contract with Supplier Y for the right to use three fibres
within a fibre optic cable between Area 1 and Area 2. The contract identifies three of
the cable’s 20 fibres for use by Entity A. The three fibres are dedicated solely to
Entity A’s data for the duration of the contract term.
Analysis
► The three fibres are identified assets because they are physically distinct and
explicitly specified in the contract.

Fact Pattern
► Scenario A
► Entity A enters into a five-year contract with Supplier Y for the right to transport
oil from Country A to Country B through Supplier Y’s pipeline. The contract
provides that Entity A will have the right to use of 95% of the pipeline’s capacity
throughout the term of the arrangement.
Analysis
► The capacity portion of the pipeline is an identified asset. While 95% of the pipeline’s
capacity is not physically distinct from the remaining capacity of the pipeline, it
represents substantially all of the capacity of the entire pipeline and thereby provides
Entity A with the right to obtain substantially all of the economic benefits from use of
the pipeline.

Fact Pattern
► Scenario B
► Assume the same facts as in Scenario A, except that Entity A has the right to
use 60% of the pipeline’s capacity throughout the term of the arrangement
Analysis
► The capacity portion of the pipeline is not an identified asset because 60% of the
pipeline’s capacity is less than substantially all of the capacity of the pipeline. Entity A
does not have the right to obtain substantially all of the economic benefits from use
of the pipeline.

Fact Pattern
► A coffee company (Customer) enters into a contract with an airport operator

(Supplier) to use a space in the airport to sell its goods for a three-year period. The
contract states the amount of space and that the space may be located at any one of
several boarding areas within the airport.
Analysis
► Although the amount of space Customer uses is specified in the contract, there is no
identified asset. The contract is for space in the airport, and this space can change at
the discretion of Supplier.

Fact Pattern
► Entity A owns a large warehouse that can be subdivided into numerous subsections
by inserting removable walls. It leases out different portions of storage space to its
customers based on their respective needs. Entity B contracts with Entity A to reserve
1,000 square feet of space to store its inventory for a three-year period.
► However, Entity A has the right to shift Entity B’s inventory to another location within
its warehouse at its discretion, as long as it is 1,000 square feet.
► The cost of reallocating space is low.
Analysis
► No. The asset is not identified because Entity A has a substantive substitution
right. Entity A has agreed to provide a specific level of capacity within its warehouse
but has the unilateral right to relocate entity B’s inventory and can do so without
significant cost.

Right to Direct the Use of the Asset - Example (1/2)
Fact Pattern
► Entity A enters into a contract with Supplier Y to use a vehicle for a three-year period.
The vehicle is identified in the contract. Supplier Y cannot substitute another vehicle
unless the specified vehicle is not operational (e.g., it breaks down).
► Under the contract:

q Entity A operates the vehicle (i.e., drives the vehicle) or directs others to operate
the vehicle (e.g., hires a driver).
q Entity A decides how to use the vehicle (within contractual limitations, discussed
below). For example, throughout the period of use, Entity A decides where the
vehicle goes as well as when or whether it is used and what it is used for.
Entity A can also change these decisions throughout the period of use.
q Supplier Y prohibits certain uses of the vehicle (e.g., moving it overseas) and
modifications to the vehicle to protect its interest in the asset.

Right to Direct the Use of the Asset - Example (2/2)
Analysis
► Yes. Entity A (lessee) has the right to direct the use of the identified vehicle
throughout the period of use.
► Entity A (lessee) has the right to direct the use of the vehicle because it has the right
to control the use of the vehicle, when or whether the vehicle is used, where the
vehicle goes and what the vehicle is used for.
► Supplier Y’s (lessor) limits on certain uses for the vehicle and modifications to it are
considered protective rights that define the scope of Entity A’s use of the asset but do
not affect the assessment of whether Entity A directs the use of the asset.

Identifying a Lease
Fact Pattern
► Lessee obtains the right to place an oil pipeline in underground space for 20 years in
exchange for consideration.
► The contract specifies the exact location and dimensions (path, width and depth) of
the underground space within which the pipeline will be placed.
► The landowner retains the right to use the surface of the land above the pipeline, but
it has no right to access or otherwise change the use of the specified underground
space throughout the 20-year period of use.
► Lessee has the right to perform inspection, repairs and maintenance work (including
replacing damaged sections of the pipeline when necessary).
Does the contract contain a lease?

Separating Lease and Non-lease Components
Paper, toner,
Inspection
inspection
• Lease and non-lease components must be separated

• Example: Payments for maintenance activities
• Practical expedient for lessees: Option to combine both components and
account for them as a single lease component
• The option applies for each class of underlying asset
• Amounts payable to the lessor for administrative tasks are not separate
components

Allocating Contract Consideration
Lease Consideration Inspection
20%
80%
► Lessees
► Allocate consideration on the basis of the relative stand-alone price
► If an observable stand-alone price is not readily available, the stand-alone price is
estimated
► Maximize the use of observable information
► Apply estimation methods in a consistent manner
► Lessors allocate consideration in accordance with the provisions of PFRS 15

Illustrative example (1/2)
Fact Pattern
► Scenario A
► A lessee enters into a three-year lease of equipment, with fixed annual
payments of CU12,000. The contract itemizes the fixed annual payments as
follows: CU9,000 for rent, CU2,500 for maintenance and CU500 of
administrative tasks.
Analysis
► The contract contains two components – one lease component (lease of
equipment) and a non-lease component (maintenance). The amount paid for
administrative tasks does not transfer a good or service to the lessee. Therefore, the
total consideration in the contract of CU36,000 will be allocated to the lease
component (equipment) and the non-lease component (maintenance).

Fact Pattern
► Scenario A
► Assume the fact pattern as in scenario A except that, in addition, the contract
requires the lessee to pay for the restoration of the equipment to its original
condition.
Analysis
► The contract still contains two components – one lease component (lease of
equipment) and a non-lease component (maintenance). Similar to the amount
paid for administrative tasks, the restoration does not transfer a good or service to
the lessee as it is only performed at the end of the lease term. Therefore, the total
consideration in the contract will be allocated to the lease component (equipment)
and the non-lease component (maintenance).

Separating Lease Components
Parking lot
Storage space
• Contracts may contain rights to use several assets (e.g., storage space and parking lot)
• Rights to use individual assets must be accounted for separately when:
• Benefits can be obtained from the use of the underlying asset (either individually or
collectively with other resources); and
• The underlying asset is neither highly dependent nor highly interrelated with other
underlying assets in the contract

Fact Pattern
► Scenario A
► Assume that a lessee enters into a lease of an excavator and the related
accessories (e.g., excavator attachments) that are used for mining purposes.
The lessee is a local mining company that intends to use the excavator at a
copper mine.
Analysis
► From the perspective of the lessee, the contract contains one lease component. The
lessee would be unable to benefit from the use of the excavator without also using
the accessories. Therefore, the excavator is dependent upon the accessories.

Fact Pattern
► Scenario B
► Assume the same facts as in Scenario A, except that the contract also conveys
the right to use an additional loading truck. This loading truck could be deployed
by the lessee for other uses (e.g., to transport iron ores at another mine).
Analysis
► From the perspective of the lessee, the contract contains two lease components: a
lease of the excavator (together with the accessories) and a lease of the loading
truck. Because the loading truck could be deployed for other uses independent of the
excavator, the lessee can benefit from the loading truck on its own or together with
other readily available resources. The lessee can also benefit from the use of the
excavator on its own or together with other readily available resources.

Contract Combinations
The contracts are negotiated as a package with

an overall commercial objective that cannot be
understood without considering the contracts
PFRS 16 requires that two together
or more contracts entered
into at or near the same
time with the same The amount of consideration to be paid in one
counterparty (or related contract depends on the price or performance
parties of the counterparty) of the other contract
be considered a single
contract if any one of the
following criteria is met: The rights to use the underlying assets conveyed
in the contracts (or some of the rights to use
underlying assets conveyed in each of the
contracts) are a single lease component

PFRS 16, Leases
Key Concepts
• Lease Term
• Lease Payments
• Discount Rate
• Initial Direct Costs

Lease Term
Determining the Lease Term (1/2)
Periods covered by Periods covered by

Non-cancellable
options to extend the options to terminate
periods
lease (*) the lease (**)
(*) if the lessee is (**) if the lessee is

reasonably certain reasonably certain
to exercise not to exercise
Rent-free
period
Commencement date

Lease Term
Determining the Lease Term (2/2)
► Reasonably certain
► Assessed at commencement date
► Consider all facts and circumstances that create an economic
incentive
► Including any expected changes in facts and circumstances
between the commencement date and until the exercise date
Contractual terms Costs related

and conditions for to termination
the optional
Conditionality
periods compared
associated with
to market rates
Importance of the option
Significant underlying asset
leasehold to lessee’s
improvements operations

Lease Term
Identifying Lease Term - Example 1 (1/7)
Fact Pattern
► Assume that Entity A enters into a lease for equipment that includes a non-
cancellable term of four years and a two-year market-priced renewal option of lessee.
There are no termination penalties or other factors indicating that Entity A is
reasonably certain to exercise the renewal portion.
Analysis
► At the lease commencement date, the lease term would be four years.

Lease Term
Fact Pattern
► Assume that Entity A enters into a lease for a building that includes a non-cancellable
term of four years renewable for another two yeas at market at option of lessee.
Before it takes possession of the building, Entity A pays for leasehold improvements.
The leasehold improvements are expected to have significant value at the end of four
years, and that value can only be realized through continued occupancy of the leased
property.
Analysis
► At lease commencement, Entity A determines that it is reasonably certain to exercise
the renewal option because it would suffer a significant economic penalty if it
abandoned the leasehold improvements at the end of the initial non-cancellable
period. Thus, at lease commencement, Entity A would conclude that the lease term
is six years.

Lease Term
Fact Pattern
► Assume that Entity A enters into a lease for an identified retail space in a shopping
center. The retail space will be available to Entity A for only the months of October,
November and December during a non-cancellable term of five years. The lessor
agrees to provide the same retail space for each of the five years.
Analysis
► At the lease commencement date, the lease term is fifteen months (three months
per year over the five annual periods specified in the contract).

Lease Term
Fact Pattern
► A lease contract has an initial non-cancellable period of one year and an extension
for an additional year if both the lessee and the lessor agree. There is no penalty for
either party if they do not agree to extend for the additional year.
Analysis
► The initial one-year non-cancellable period meets the definition of a contract because
it creates enforceable rights and obligations.
► However, the one-year extension period does not meet the definition of a
contract because both the lessee and the lessor could unilaterally elect to not
extend the arrangement without a more than insignificant penalty. That is, at
lease commencement, neither party has enforceable rights and obligations beyond
the initial non-cancellable period.

Lease Term
Fact Pattern (1/2)
► Entity A (lessee) enters into an indefinite lease of land that can be terminated by
mutual agreement by both parties. There are no termination penalties to be paid by
any party on termination.
Analysis
► It depends. In the absence of any term, since this involves an indefinite lease of land,
par. B34 will be considered.
► “In determining the lease term and assessing the length of the non-cancellable period of a lease,
an entity shall apply the definition of a contract and determine the period for which the contract is
enforceable. A lease is no longer enforceable when the lessee and the lessor each has the right
to terminate the lease without permission from the other party with no more than an insignificant
penalty. If each party would suffer economically to exit the lease then there is likely some kind of
penalty to take into account and the contract would be enforceable on those follow on periods.”

Lease Term
Fact Pattern (2/2)
► Will the answer change if the termination at no penalty stipulated in the contract can
be made anytime by any party?
Analysis
► It depends. There is a need to check the substance of the transaction and look into
the qualitative factors. Also, there is a need to assess the incentive of continuing or
not continuing the lease at point of view of lessee and lessor.

Lease Term
Practical examples (7/7)
What is the lease term for the following?

1. Lease for twelve months without renewal option but lessee has historically
renewed the lease
2. Zero penalty lease - lessee
► Example: Assume a 14-year lease that can be terminated by the lessee every
two years without incurring any penalty.
3. Zero penalty lease - both parties
► Example: A similar example in 2, but this time, either party can terminate the
lease for zero penalty.
4. Evergreen lease - Lease continues to be renewed until either party terminates
► Example: A lease has an initial term of 12 months and gets automatically
renewed for an indefinite period unless cancelled by either the lessee or lessor.
5. Rolling 12-month extension options
► Example: A lease has an initial period of 10 years and the lessee can extend
the contract on a rolling basis for 12 months thereafter. Also, there are no
termination payments if the extensions are not taken.

Lease Payments
Lease Payments
Residual value
guarantees – Variable lease
Purchase
amounts Termination payments that
Fixed payments options*
expected to be option penalties* depend on an
(exercise price) payable index or rate
(lessees only)
* Include only if reasonably certain of exercise.

• Fixed payments also include variable payments if they are in-substance fixed**, e.g.,
► Minimum payments or minimum purchase volumes
► Penalties for failure to meet to minimum purchase volumes, minimum amounts, etc.
**These payments may, in form, contain variability but that, in substance, are unavoidable.
• Lessors include lessee residual value guarantees (whether provided to the lessor by
the lessee, a party related to the lessee or a third party unrelated to the lessee) only
when they are in-substance fixed payments.

Lease Payments
Fact Pattern
► Entity A (lessee) enters into a lease and guarantees that the lessor will realize
CU15,000 from selling the asset to another party at the end of the lease. At lease
commencement, based on Entity A’s estimate of the residual value of the underlying
asset, Entity A determines that it expects that it will owe CU6,000 at the end of the
lease.
Analysis
► Because it is expected that it will owe the lessor CU6,000 under the residual value
guarantee, Entity A includes that amount as a lease payment.

Lease Payments
Variable Lease Payments
Which variable lease payments are included in the lease liability?
Payments that depend on Performance or usage-based

an index or rate payments
• Add in the initial measurement • Recognized in profit or loss:

• Based on index or rate that exists • Expense (lessees)
at commencement • Income (lessors)

Fact Pattern
► Assume that Entity A enters into a 10-year lease of property. The lease payment for
the first year is CU1,000. The lease payments are linked to the consumer price index
(CPI), i.e. not a floating interest rate. The CPI at the beginning of the first year is 100.
Lease payments are updated at the end of every second year. At the end of year one,
the CPI is 105. At the end of year two, the CPI is 108.
Analysis
► At the lease commencement date, the lease payments are CU1,000 per year for 10
years. Entity A does not take into consideration the potential future changes in the
index. At the end of year one the payments have not changed, so the liability is not
updated. At the end of year two, when the lease payments change, Entity A
updates the remaining eight lease payments to CU1,080 per year (CU1,000 /
100 × 108) and does not change its discount rate to remeasure the lease
liability (and right-of-use asset).

Fact Pattern
► Entity A (Lessor) is a medical equipment manufacturer and a supplier of the related

consumables. Customer B (Lessee) operates a medical center. Under the agreement
entered into by both parties, Entity A grants Customer B the right to use a medical
laboratory machine at no cost and Customer B purchases consumables for use in the
equipment from Entity A at CU100 each. The consumables can only be used for that
equipment and Customer B cannot use other consumables as substitutes. There is
no minimum purchase amount required in the contract.
► Based on its historical experience, Customer B estimates that it is highly likely to

purchase at least 8,000 units of consumables annually. Customer B has appropriately
assessed that the arrangement contains a lease of medical equipment. There are no
residual value guarantees or other forms of consideration included in the contract.

Analysis
► There are two components in the arrangement, a lease of equipment and the
purchase of consumables.
► Even though Customer B may believe that it is highly unlikely to purchase fewer than
8,000 units of consumables every year, in this example, there are no lease payments
for purposes of initial measurement (Entity A and Customer B) and lease
classification (Entity A).
► Entity A and Customer B would allocate the payments associated with the future
payments to the lease and consumables component of the contract.

Discount Rate
Discount Rate
• Rule: Interest rate implicit in the lease (IRR)
• If no IRR can be readily determined: Incremental borrowing rate (IBR)* (lessees only)
*The rate of interest that a lessee would have to pay to borrow over a similar term, and with a
similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset
in a similar economic environment.
• IRR = interest rate at which:
Present value of lease payments

Fair value of underlying asset
+
Present value of unguaranteed
= +
Initial direct costs
residual value
• Lessees reassess the discount rate upon:

• Change to lease term (even if impact in change in lease term is small; no distinction)
• Changes in assessment of an option to purchase the underlying asset
• Lessees do not reassess the discount rate upon:
• Changes in the amounts expected to be payable under a residual value guarantee
• Changes in future lease payments resulting from a change in an index or a rate used to determine those
payments, unless the change in lease payment results from a change in floating interest rates

Discount Rate
How can an entity price an IBR?
Benchmark rates Financing and Security Component

Observable inputs: Unobservable inputs:
► Sovereign borrowing The financing component will vary

rates depending on how the lender perceives the
► Interbank market lessee and the asset. The lender may
(e.g., LIBOR rates, consider the following characteristics when
IBR = Overnight index rates, + determining the financing component
Swap rates) ► Credit rating of the ► Security of the
► Currency specific borrower asset in case of
adjustments ► Borrower specific default
► All taken for appropriate KPIs ► Guarantees or
tenor ► Industry the comfort letters
borrower
operates in

Initial Direct Costs
Initial Direct Costs

• Initial direct costs (IDCs) are incremental costs that would not have been incurred
if the lease had not been executed. Such costs include commissions or some
payments made to existing tenants to obtain the lease.
• Consistent with PFRS 15 and PAS 17
• Lessees must include IDCs in the measurement of the right-of-use asset
• Lessors differentiate as follows:
Operating leases –
Finance leases without Finance leases with
recognize IDCs as an
recognized selling recognized selling
expense over the lease
profit – include IDCs in profit – expense at lease
term on the same basis
net investment commencement
as lease income

PFRS 16, Leases
Accounting for Lessees
• Recognition and Measurement

Recognition and Measurement
• Initially measure right-of-use (ROU) asset1 and lease liability at present

Initial recognition
value of lease payments (using interest rate implicit in the lease, or if
and measurement not readily determinable, lessee’s incremental borrowing rate or IBR)
Subsequent • Accrete the lease liability based on the effective interest method using
measurement of a discount rate determined at lease commencement2
lease liability • Reduce lease liability by payments made
Subsequent • Depreciate ROU asset based on PAS 16, Property, Plant and
Equipment (e.g., straight-line, double-declining, etc.)
measurement of ROU
• Alternative measurement of ROU asset under PAS 16 and
asset
PAS 40, Investment Property
• Generally “front-loaded” expense for individual

Profit and loss lease
• Separate presentation of interest and depreciation
1 Initial measurement of the ROU asset would also include the lessee’s initial direct costs (IDCs),
prepayments made to the lessor less lease incentives received from the lessor, if any, and restoration,
removal and dismantling costs.
2 As long as lease modifications are accounted for as a separate lease.

Initial Measurement of Lease Liability
Present value of
Lease liability lease payments
Subsequent measurement
Discount
(-) payments made rate
(+) accretion of interest
(+/-) remeasurements
Interest rate implicit If this cannot be Lessee’s incremental

in the lease readily determined borrowing rate
Present value of
Present value of Fair value of the Initial direct costs
unguaranteed
lease payments underlying asset of lessor
residual value

Initial Measurement of Right-of-use (ROU) Asset
At the commencement date, a lessee shall measure ROU at cost. The cost of ROU shall
comprise of:
Lessee’s
Prepaid Lease initial
ROU Lease Dismantling
lease incentives direct
asset liability
payments received costs
costs (**)
(IDCs) (*)
(*) Incremental costs of obtaining a lease that would not have been
incurred if the lease had not been obtained
(**) Restoration, removal and dismantling costs: similar to PAS 16
requirements for dismantling costs recognized and measured according
to PAS 37, Provisions, Contingent Liabilities and Contingent Assets
(-) accumulated depreciation
Cost model
(-) impairment losses
(+/-) remeasurements of lease liability Fair value model in certain
OR
circumstances
Revaluation model in certain
OR
circumstances

Behavior of Expense (PAS 17 vs. PFRS 16)
Minimum
Lease
Payments
PAS 17 – lease payments (straight-line)

Accretion of Lease Liability
Rent
PF R
S1
Expense 6–
Acc
reti
on
of l
eas
e lia
PFRS 16 – Amortization of ROU
b
Amortization of ROU
Lease Term

Effect on Lessee’s Financial Statements
STATEMENT OF STATEMENT OF
BALANCE SHEET
INCOME CASH FLOWS
All type of leases Right-of- Amortization Cash paid for

(exemptions for use asset of right-of-use principal
short-term leases asset (financing)
and leases of Lease Interest and interest
low- value assets) liability expense (operating or
financing)
ASSETS
LIABILITIES
EQUITY
NET INCOME BEFORE TAX
OPERATING EXPENSES
FINANCE COSTS
EBITDA
OPERATING PROFIT
OPERATING CASH FLOWS
FINANCING CASH FLOWS

Illustrative Example (1/3)
Fact Pattern
► Three-year lease of branch retail space in a shopping center

► Payments at the end of each year: CU10,000 in Year 1, CU12,000 in Year 2,
CU14,000 in Year 3
► Initial measurement of right-of-use of asset and lease liability is CU33,000
(present value of lease payment using a discount rate of 4.235%)
Cash payment PV Factor Present value Lease liability
Carrying
10,000 0.95937 9,594
Payment Interest Amount
12,000 0.92039 11,044 33,000
14,000 0.88300 12,362 10,000 1,398 24,398
Total 33,000 12,000 1,033 13,431
14,000 569 ‒
► Uses incremental borrowing rate because rate implicit in the lease cannot be readily
determined
► Depreciates the right-of-use asset on a straight-line basis over the lease term.

Analysis (1/2)
At commencement date:
Right-of-use asset CU33,000
Lease liability (CU33,000)
To initially recognize the right-of-use asset and lease liability
Year 1:
Interest expense CU1,398
To record interest and accrete the lease liability using interest method (CU 33,000 x 4.235%)
Depreciation expense CU11,000

Right-of-use asset (CU11,000)
To record depreciation expense on right-of-use asset (CU33,000 / 3 years)
Lease liability CU10,000

Cash (CU10,000)
To record lease payment

Analysis (2/2)
► A summary of the accounting of the lease (assuming no changes due to
reassessment, lease modification or impairment) is as follow:
Year 1 Year 2 Year 3
Cash lease payments CU10,000 CU12,000 CU14,000
Income Statement
Depreciation CU11,000 CU11,000 CU11,000
Interest 1,398 1,033 569
Total periodic expense CU12,398 CU12,033 CU11,569
Balance Sheet
ROU asset CU33,000 CU22,000 CU11,000 CU‒
Lease liability (33,000) (24,398) (13,431) ‒
► Immaterial differences may arise in the re-computation of the amounts in the

example above due to rounding.

Variable Lease Payment based on an Index - Illustrative Example (1/7)
Fact Pattern
► 10-year lease of property with annual payments of CU50,000, payable at the

beginning of each year
► Lease payments will increase every two years on the basis of the increase in the
Consumer Price Index (CPI)
► *CPI at the commencement date = 125
► *CPI at year 3 = 135
► Implicit rate is not readily determinable
► Lessee’s incremental borrowing rate is 5% per annum

Analysis (1/6)
Amortization schedule prior to change:

Period Payment PVF* DCF** Lease liability
Payment Interest Carrying Amount
1 50,000 1.0000 50,000
355,391
2 50,000 0.9524 47,619 50,000 17,770 323,161
3 50,000 0.9070 45,351 50,000 16,158 289,319
50,000 14,466 253,785
4 50,000 0.8638 43,192 50,000 12,689 216,474
5 50,000 0.8227 41,135 50,000 10,824 177,298
50,000 8,865 136,162
6 50,000 0.7835 39,176 50,000 6,808 92,971
7 50,000 0.7462 37,311 50,000 4,649 47,619
50,000 2,381 -
8 50,000 0.7107 35,534
9 50,000 0.6768 33,842
10 50,000 0.6446 32,230
Lease liability 405,391
*Present value factor
**Discounted cash flows

Analysis (2/6)
At commencement date:
Cash (CU50,000)
To recognize initial lease payment for the 1st year, right-of-use asset and lease liability
Year 1:
To record interest and accrete the lease liability using interest method (CU355,391 x 5%)

To record depreciation expense on right-of-use asset (CU405,391 ÷ 10)

Analysis (3/6)
Beginning of Year 2:
Cash (CU50,000)
To recognize lease payment for 2nd year
Year 2:
To record interest and accrete the lease liability using interest method (17,770 + 355,391 = 373,161 -
50,000 = 323,161 x 5%)

To record depreciation expense on right-of-use asset (CU405,391 ÷ 10 ×2 years)

Analysis (4/6)
► Accounting for the change in future lease payments on Year 3:
► Lease liability balance = CU339,319 (PV of 8 payments of CU50,000
discounted at the interest rate of 5% per annum = CU355,391 + CU33,928 –
CU50,000)
► CPI at commencement date = 125
► CPI at year 3 = 135
► Payment for the 3rd year should be adjusted for the change in CPI
= Annual lease payments on commencement date x (New CPI over Old CPI)
= CU50,000 × 135 ÷ 125
= CU54,000
► The entity re-measures the lease liability to reflect the revised lease payments of
CU54,000

Analysis (5/6)
Amortization schedule after the change:

Period Payment PVF* DCF** Lease liability
Payment Interest Carrying Amount
1 54,000 1.0000 54,000
312,464
2 54,000 0.9524 51,429 54,000 15,623 274,087
3 54,000 0.9070 48,980 54,000 13,704 233,792
54,000 11,690 191,481
4 54,000 0.8638 46,647 54,000 9,574 147,055
5 54,000 0.8227 44,426 54,000 7,353 100,408
54,000 5,020 51,429
6 54,000 0.7835 42,310 54,000 2,571 -
7 54,000 0.7462 40,296
8 54,000 0.7107 38,377
Carrying amount of lease liability - new 366,464
*Present value factor

**Discounted cash flows

Analysis (6/6)
► At the beginning of the third year, the entity re-measures the lease liability at the
PV of 8 payments of CU54,000 discounted at an unchanged discount rate of 5% per
annum.
Remeasured lease liability CU366,464

Previous carrying amount CU339,319
Difference CU27,145
Beginning of Year 3:
To record remeasurement of lease liability

Cash (CU54,000)
To recognize lease payment for 3rd year

PFRS 16, Leases
• Recognition and Measurement

• Classifying Sublease

Accounting for Lessors - same as under PAS 17
Recognition and Measurement
Initial recognition and measurement

• Finance leases - similar to today’s finance leases
• Derecognize underlying asset, recognize net investment and selling profit
or loss (if any)
• Recognize selling profit upon transfer of control from lessor perspective
• Operating leases - similar to today’s operating leases
• Finance leases - similar to today’s finance leases
• Recognize interest income on net investment, reduce net investment for
lease payments received (net of interest income)
• Recognize income for variable lease payments not included in net
investment
• Operating leases - similar to today’s operating leases

Sublease
Head lease (as lessee) and sublease (as lessor) generally

accounted for as two separate leases.
► In classifying a sublease, an intermediate lessor shall classify the sublease as a finance

lease or an operating lease as follows:
► If the head lease is a short-term lease that the entity, as a lessee, has applied the
short-term lease exemption, the sublease shall be classified as an operating lease.
► Otherwise, the sublease shall be classified by reference to the ROU asset
arising from the head lease, rather than by reference to the underlying asset.
► If a lessee subleases an asset, or expects to sublease an asset, the head lease does
not qualify as a lease of a low-value asset.

Sublease – classified as operating lease
Fact Pattern
► Head lease - An intermediate lessor enters into a five-year lease for 5,000 square
meters of office space (the head lease) with Entity A (the head lessor).
► Sublease - At commencement of the head lease, the intermediate lessor subleases
the 5,000 square meters of office space for two years to a sublessee.
► The intermediate lessor classifies the sublease by reference to the right-of-use asset
arising from the head lease. The intermediate lessor classifies the sublease as an
operating lease.
Analysis
► When the intermediate lessor enters into the sublease, the intermediate lessor
retains the lease liability and the right-of-use asset relating to the head lease in its
statement of financial position.
► During the term of the sublease, the intermediate lessor:
► recognizes a depreciation charge for the right-of-use asset and interest on the
lease liability; and
► recognizes lease income from the sublease.

Sublease – classified as finance lease
Fact Pattern
► Head lease - An intermediate lessor enters into a five-year lease for 5,000 square
meters of office space (the head lease) with Entity A (the head lessor).
► Sublease - At the beginning of Year 3, the intermediate lessor subleases the 5,000
square meters of office space for the remaining three years of the head lease to a
sublessee.
► The intermediate lessor classifies the sublease by reference to the right-of-use asset
arising from the head lease. The intermediate lessor classifies the sublease as a
finance lease.
Analysis
► When the intermediate lessor enters into the sublease, the intermediate lessor:
► derecognizes the right-of-use asset relating to the head lease that it transfers to
the sublessee and recognizes the net investment in the sublease;
► recognizes any difference between the right-of-use asset and the net
investment in the sublease in profit or loss; and
► retains the lease liability relating to the head lease in its statement of financial
position, which represents the lease payments owed to the head lessor.

PFRS 16, Leases
Effectivity and Transition
• Available Adoption Methods

• Modified Retrospective Approach
• Presentation and Disclosures

Available Adoption Methods
PY CY
31 December 2018 31 December 2019
Option 1
Cumulative
catch-up
Full retrospective
As if PFRS 16 has always Contracts under new standard
applied
Contracts restated
Modified retrospective
Liability = PV lease
Cumulative catch-up
payments and ROU
either:
Option 2
Existing and new

(a) Carrying amount of
Contracts not restated contracts under new
ROU asset as if PFRS 16
standard
had always been applied
(b) Carrying amount of

ROU asset = lease liability

Modified Retrospective Approach
Under modified retrospective approach, lessees:

• Do not restate comparatives (e.g., for 2018)
• Recognize lease liabilities and right-of-use assets in the opening balance
sheet for the year under review
• Lease liability: Measure at present value of remaining lease payments,
discounted using lessee’s incremental borrowing rate
• Choose between two measurement approaches for the right-of-use of
asset (on a lease-by-lease basis):
• As if new standard had always been applied, OR
• At an amount equal to the lease liability (adjusted by previously
recognized prepaid or accrued lease payments)
• Recognize cumulative effect of initially applying PFRS 16 in opening
retained earnings

Modified Retrospective Approach - Additional Transition Disclosure
► If the modified retrospective approach is adopted, a lessee must disclose:

An explanation of any difference between:
(i) operating lease commitments disclosed applying PAS17 at the end
of the annual reporting period immediately preceding the date of
initial application, discounted using the incremental borrowing rate
at the date of initial application;
(ii) lease liabilities recognised in the statement of financial position at

the date of initial application.
See Illustrative examples in the handouts PM 1.1

and PM 1.2

Presentation
Balance sheet Income statement Statement of cash flows
Finance leases: Both lease types: Both lease types:
• Lease assets (i.e., lease • Depreciation charge and • Cash lease payments
receivables and residual income from variable received presented within
assets) presented separately lease payments (that do operating activities
from other assets; or, not depend on an index
• If presented together, or rate [lessee] or not
disclosed separately in the included in the
notes to the FS. measurement of the net
investment [lessor])
Finance leases:
Operating leases:
• Profit or loss recognized
• Underlying assets presented at commencement
in accordance with other presented in accordance
applicable standards with PAS 1
• Interest on net
investment presented as
interest income

Presentation
Balance sheet Income statement Statement of cash flows

ROU asset: • Depreciation charge and • Principal payments within
• Separately from other assets; interest expense not financing activities
or, combined • Interest payments
• Together with other assets, (pursuant to PAS 7*)
providing relevant disclosures • Payments for leases “not
in the notes to the FS. included in the lease
liability” within operating
activities
Lease liability:
• Short-term leases
• Separately from other
liabilities; or, • Low value leases
• Together with other liabilities, • Supplemental non-cash
providing relevant disclosures disclosure of new leases
in the notes to the FS.
*IAS 7.33 “Interest paid and interest and dividends received may be classified as operating cash flows because they enter
into the determination of profit or loss. Alternatively, interest paid and interest and dividends received may be classified as
financing cash flows and investing cash flows respectively, because they are costs of obtaining financial resources or
returns on investments.”

Disclosure Requirements
Quantitative/Qualitative Information (1/6)
Extracts from PFRS 16
53 A lessee shall disclose the following amounts for the reporting period:
a) depreciation charge for right-of-use assets by class of underlying asset;
b) interest expense on lease liabilities;
c) the expense relating to short-term leases accounted for applying paragraph 6. This expense
need not include the expense relating to leases with a lease term of one month or less;
d) the expense relating to leases of low-value assets accounted for applying paragraph 6. This
expense shall not include the expense relating to short-term leases of low-value assets
included in paragraph 53(c);
e) the expense relating to variable lease payments not included in the measurement of lease
liabilities;
f) income from subleasing right-of-use assets (PAS 17, total of future minimum sublease
payments expected to be received);
g) total cash outflow for leases (PAS 17, total of future MLP);
h) additions to right-of-use assets;
i) gains or losses arising from sale and leaseback transactions; and
j) the carrying amount of right-of-use assets at the end of the reporting period by class of
underlying asset.
54 A lessee shall provide the disclosures specified in paragraph 53 in a tabular format, unless
another format is more appropriate. The amounts disclosed shall include costs that a lessee has
included in the carrying amount of another asset during the reporting period.

Illustrative Disclosure (1/2)
(h)
(a)
(b)
(g)
(j)
(c)
(d)
(e)

(a)
(b)
(c)
(d)
(e)

50 In the statement of cash flows, a lessee shall classify:
a) cash payments for the principal portion of the lease liability within financing activities;
b) cash payments for the interest portion of the lease liability applying the requirements in IAS
7 Statement of Cash Flows for interest paid; and
c) short-term lease payments, payments for leases of low-value assets and variable lease
payments not included in the measurement of the lease liability within operating activities.
59 In addition to the disclosures required in paragraphs 53–58, a lessee shall disclose additional
qualitative and quantitative information about its leasing activities necessary to meet the disclosure
objective in paragraph 51 (as described in paragraph B48). This additional information may include,
but is not limited to, information that helps users of financial statements to assess:
a) the nature of the lessee’s leasing activities;
b) future cash outflows to which the lessee is potentially exposed that are not reflected in the
measurement of lease liabilities. This includes exposure arising from:
(i) variable lease payments (as described in paragraph B49);
(ii) extension options and termination options (as described in paragraph B50);
(iii) residual value guarantees (as described in paragraph B51); and
(iv) leases not yet commenced to which the lessee is committed.
c) restrictions or covenants imposed by leases; and
d) sale and leaseback transactions (as described in paragraph B52).



Additional Entity-specific Information
58 A lessee shall disclose a maturity analysis of lease liabilities applying paragraphs 39 and B11 of
PFRS 7 Financial Instruments: Disclosures separately from the maturity analyses of other financial
liabilities.
60 A lessee that accounts for short-term leases or leases of low-value assets applying paragraph 6
shall disclose that fact.

Other Disclosures required by PAS 1 (1/5)
PAS 1 provides specific guidance on an entity’s disclosure related to:

• Significant accounting policies
• Judgements that management has made in the process of applying the
entity’s accounting policies
• Assumptions it makes about the future and other major sources of
estimation uncertainty at the end of the reporting period





Summary: PAS 17 compared to PFRS 16
PAS 17 PFRS 16
Definition of a A lease is an agreement whereby A lease is contract, or part of a
lease the lessor conveys to the lessee, in contract, that conveys the right to
return for a payment or series of control the use of an asset (the
payments, the right to use an asset underlying asset) for a period of
for an agreed period of time. time in exchange for consideration
► Not necessary for an set
arrangement to convey the right ► The right to control the
to control the use of an asset identified asset is conveyed to
to be in scope of PAS 17 the customer
Recognition Not applicable ► Short-term leases
exemptions for ► Lease of low-value assets
lessees
Lessee Dual model approach: Generally recognize all leases on
accounting asset balance sheet
► Operating lease (off balance
sheet)
► Finance lease (on balance
sheet)

Summary: PAS 17 compared to PFRS 16
PAS 17 PFRS 16
Lessor accounting Dual model approach Dual model approach (same as PAS
17)
Lease term More or less same with PFRS 16 More or less same with PAS 17
Lease payments - More or less same with PFRS 16 More or less same with PAS 17
lessees
Lease liability Not dealt with in PAS 17 Required when there is lease
reassessment - modification
lessees
Disclosure - Quantitative and qualitative More detailed disclosures including
lessees and disclosures are required, but the format of disclosure, are
lessors generally fewer disclosures are required
required than under PFRS 16
Tabular disclosure for amounts
required unless a more appropriate
type of disclosure is applicable

Key Points
► PFRS 16 introduces key changes affecting lessees, including:

► Single on-balance sheet accounting model for most leases
► New presentation and disclosure requirements
► Definition of a lease focuses on the notion of control used in PFRS 10

and PFRS 15
► PFRS 16 is effective for annual periods beginning on or after

1 January 2019:
► Lessees are permitted to use either a full retrospective or a
modified retrospective approach
► Lessors (other than intermediate lessors in a sublease) are not
required to make any adjustments on transition

PFRS 16, Leases
Transition Considerations
• Options and Expedients
• Other Exemptions and Considerations

Full Retrospective Approach – Practical Expedients
Practical expedients
Grandfather Lessees are able to ‘grandfather’ previous conclusions reached
under IFRIC 4 and PAS 17 as to whether contracts existing at
rule
transition are, or contain, leases, although this exemption must be
applied either for all contracts or none.
Short-term Optional lessee exemption for short-term leases – i.e. leases for
which the lease term as determined under the new standard is 12
leases
months or less (discussed in earlier slides)
Low-value Optional lessee exemption for leases of low-value items – i.e.

underlying assets with a value of USD 5,000 or less when they are
assets
new – even if they are material in aggregate (discussed in earlier
slides)
Portfolio Portfolio-level accounting permitted if the effect on the financial

statements does not differ materially from applying the
approach
requirements to individual leases (discussed in earlier slides)

Definition of a Lease – Transition Relief
IFRIC 4 / PAS 17
Lease?
Yes No
Can continue to apply

accounting as services
Yes Apply new standard
contract under PAS 17
PFRS 16
[Grandfathered]*
Not required to apply

New standard is not
No new standard, but can
applicable
elect to*
* Accounting policy decision - applied to all ongoing contracts

Not be permitted to apply on a lease-by-lease basis

Modified Retrospective Approach – Practical Expedients
Option/Expedient Application Available to
Practical expedients when using Lease-by-lease basis Lessee only

the modified retrospective
approach:
► Discount rates
► Impairment and onerous leases
► Leases with short remaining term
► Initial direct costs
► Use of hindsight

Modified Retrospective Approach – Practical Expedients (1/8)
Under modified retrospective approach, lessees are permitted to:

• Apply a single discount rate to a portfolio of similar leases (portfolio
approach)
• Adjust the right-of-use asset by the amount of any previously recognized
onerous lease provisions (alternative to impairment review)
• Apply recognition and measurement exemption for leases for which term
ends within 12 months or less of transition
• Not include initial direct costs in the measurement of the right-of-use asset
• Use hindsight in accounting (e.g., in determining if contract contains options
to extend the lease)

Discount Rate
• A company may apply a single discount rate to a portfolio of leases with
reasonably similar characteristics.
• The practical expedient refers to leases with ‘a similar remaining lease
term’.
• The expedient is expected to provide cost savings to lessees and will not
have a significant effect on reported information.

Impairment and onerous leases

• A lessee may rely on its assessment of whether leases are onerous
applying PAS 37 Provisions, Contingent Liabilities and Contingent Assets
immediately before the date of initial application as an alternative to
performing an impairment review.
• If a lessee chooses this practical expedient, the lessee shall adjust the
right-of-use asset at the date of initial application by the amount of any
provision for onerous leases recognised in the statement of financial
position immediately before the date of initial application.

Leases with a short remaining term

• a lessee may elect not to apply the requirements in paragraph C8 to leases
for which the lease term ends within 12 months of the date of initial
application. In this case, a lessee shall:
• account for those leases in the same way as short-term leases as
described in paragraph 6; and
• include the cost associated with those leases within the disclosure of
short-term lease expense in the annual reporting period that includes
the date of initial application.
• For a lessee that does not restate its comparative information, leases for
which the term ends within 12 months of the date of initial application are
very similar in effect to those captured by the short-term lease
exemption and thus similar considerations apply.

Illustrative example – Leases with short remaining term
► Company A leases an equipment for use in its business for an annual rental of
CU100.
► The lease commenced on 1 January 2018 and includes a two-year noncancellable
period, renewable at Company A’s option for a further one year at the same rate.
► At commencement date, Company A assesses that it is reasonably certain to
exercise the renewal option and that the lease term is for three years.
► Upon adoption of PFRS 16, Company A elected to use the modified retrospective
approach.
► There is no change regarding Company A’s assessment of exercising the renewal
option.
► As of transition date (i.e., 1 January 2019), the remaining lease term is one year.

Analysis
► Company A may choose to:
► Apply the PFRS 16 model to the lease and recognize an ROU asset
(i.e., retrospectively or equal to the lease liability, using the same incremental
borrowing rate used to measure the lease liability) and a lease liability; or
► Use the practical expedient to account for the lease as a short term lease.

Initial direct costs

• A lessee may exclude initial direct costs from the measurement of the right-
of-use asset at the date of initial application.
• This expedient will be relevant when an entity adopts using Option A
(i.e., the entity retrospectively calculates the right-of-use asset).
• The use of this practical expedient is expected to reduce the cost of
transition for entities. The impact will be a reduction in the carrying amount
of the entities’ right-of-use assets at the date of initial application.

Use of hindsight
• A lessee may use hindsight, such as in determining the lease term if the
contract contains options to extend or terminate the lease.
• Permitting lessees to apply hindsight on transition to PFRS 16 will result in
useful information, particularly with respect to areas of judgement such as
the determination of lease term for contracts that contain options to extend
or terminate a lease.

Other Exemptions
Under modified retrospective approach, other exemptions include:

• Entities do not have to reassess historical sale and leasebacks
• Seller-lessees do not perform any retrospective accounting specific to sale
and leaseback transactions
• Seller-lessee accounts for:
• Finance leasebacks on transition in same way as for any other finance
lease ongoing at the date of initial application
• Operating leasebacks
• On transition in same way as for any other operating lease ongoing at
the date of initial application
• Any deferred gains or losses are accounted for as an adjustment to the
leaseback right-of-use asset

Prepaid Rent/Rent Liability from PAS 17 (1/2)
Question:
How would a lessee account for any existing prepaid rent or rent
liability arising from straight-lining of an operating lease
under PAS 17?

Prepaid Rent/Rent Liability from PAS 17 (2/2)
Analysis
► The answer would depend on the transition approach elected by the lessee.
Transition Approach Impact of PAS 17 straight-lining

Full retrospective ► Under this method, a lessee will assume that PFRS 16 had always
been applied and accordingly, will adjust any effect of transition
(including any effect of reversing any outstanding prepaid rent or
rent liability arising from straight-lining under PAS 17) to retained
earnings as of the beginning of the earliest period presented.
Modified retrospective ► Under this method, the right-of-use asset will be measured at an
(Option A) amount as if PFRS 16 had been applied since commencement date,
but discounted using the lessee’s incremental borrowing rate at date
of initial application. Therefore, there may be adjustments to
retained earnings at transition date.
Modified retrospective ► Under this method, the right-of-use asset will be measured at an
(Option B) amount equal to the lease liability, adjusted by the amount of any
prepaid or accrued lease payments relating to that lease recognized in
the statement of financial position immediately before the date of initial
application. There is therefore no expected adjustment to retained
earnings in so far as straight-lining effect under PAS 17 is
concerned.

Impairment Considerations (1/2)
Question:
What kind of impairment test is a lessee expected to perform at
the date of initial application?
• A company applies PAS 36 Impairment of Assets to ROU assets at

the date of initial application. However, this does not mean that a
company is required to test each individual ROU asset for impairment
separately.

1
Impairment Considerations (2/2)
• First, a company should follow the guidance in PAS 36 to

determine whether impairment testing should be performed:
§
§ at the single asset level: i.e. for a single right-of-use asset;

§
or
§ at the cash-generating unit (CGU) level: i.e. for the

smallest identifiable group of assets that generates cash
flows largely independently of other assets or groups of
2
assets, which may include multiple right-of-use assets as
§
well as other assets.
• Second, if a company determines that impairment testing

should be performed at the CGU level, then an impairment
test is required only when there is an indicator of possible
impairment – i.e. a triggering event.

Break time!

PFRS 16, Leases
Lease Workshop

Case Study
Case objectives
► Apply the requirements of PFRS 16, specifically on the transition
approaches
► Evaluate the accounting consequences of each transition approaches
allowed by PFRS 16
Kindly refer to PM 2.1 and PM 2.2 for the case study.

PFRS 16, Leases
Tax considerations

Tax Considerations (1/3)
► PFRS 16 will not affect the classification of lease contracts for tax purposes
► More likely affect the lessees’ accounting for income taxes rather than the
lessor’s
Income tax implications of Operating Lease contracts
q Deductible expense
Ø Rent paid or accrued, including all expenses which under the terms
of the agreement the lessee is required to pay to, or for the account
of, the lessor
Ø Related expenses for accounting purposes may be different (e.g.,
depreciation expense and accretion expense)
ITR Recon items:

1. ADD the depreciation expense recognized for accounting purposes
2. ADD the interest expense on lease obligation for accounting purposes
3. LESS the rent expense deductible for income tax purposes

Fact Pattern:
An entity (lessee) enters into a lease agreement to which the recognition
exemptions in paragraphs 5-8 of PFRS 16 for short-term leases or for
leases for which the underlying asset is of low value do not apply. For tax
purposes, neither a right-of-use asset nor a lease liability is considered to
exist. Rather, lease payments are tax deductible on a straight-line basis
over the lease term or when paid.
Issue:
Does an entity (lessee) recognise deferred tax on the temporary
difference that arise from the initial recognition of the lease asset and
liability, if the lease payments are expensed for tax purposes on a
straight-line basis over the lease term or when paid?

Conclusion
Approach 1A:
Recognise deferred tax on initial recognition – consider asset and liability separately
Yes, the entity recognises:

(1) a deferred tax asset for the temporary difference on the lease liability and
(2) a deferred tax liability for the temporary difference on the right-of-use asset.
Approach 1B:
Recognise deferred tax – consider asset and liability as in-substance linked to each other
Yes, the entity regards the right-of-use asset and the lease liability as a single item. On this basis,
the net asset or liability is compared to its tax base and deferred tax is recognised on that net
amount.
Approach 2:
Apply the IRE. The entity recognizes neither the deferred tax asset for the temporary difference
on the lease liability nor the corresponding deferred tax liability for the temporary difference on
the right-of-use asset.

Questions?

Speaker Profile
Benjamin N. Villacorte
Partner, Financial Accounting Advisory Services
Tel: +632 878 7969

Mobile: +63 (920) 978-7969; +63 (917) 560-6742
Email: benjamin.n.villacorte@ph.ey.com
Benjie is a Partner in Assurance. He is PFRS/PFRS accredited based on EY/SGV requirements. He obtained his bachelor’s
degree in Accountancy from the San Beda College and place 3rd in the May 2004 CPA licensure examinations. He is also
Certified Internal Auditor and a member of PICPA.
Relevant experience
► Benjie has extensive experience in the audit and providing advisory services. His major clients are publicly-listed and
include companies in power distribution, power generation, real estate, retail operations, education institutions,
healthcare, telecommunications and semiconductor industries.
► He is a member of the Accounting Standards Group and specializes in issues dealing with revenue recognition, leases,
business combinations, impairment, intangible assets and provisions, contingent liabilities and contingent assets.
► Benjie has handled audits of companies reporting under International Financial Reporting Standards, US GAAP and
SOX 404 audits of internal control over financial reporting
► He has also conducted various seminars for clients and regulators covering accounting standards (IFRS and PFRS) and
industry updates.

Thank you!

Financial Accounting
Advisory Services
List of services
13 September 2019
The SGV Purpose

Nurture leaders and enable businesses for a better Philippines. #SGVforABetterPhilippines
List of Financial
Accounting Advisory
Services for PFRS 16,
Leases
FAAS Services
Managed Services
A What can SGV do for you? Benefits for you
Contract structuring • Perform contract analysis and prepare an accounting • Identifying possible lease arrangements
memo for lease or other service contracts that may or
and analysis may not contain a lease
•
•
Ensuring compliance with new leasing standard
Readily available documentation for audit support
What needs to be provided? SGV solution deliverable
• Accounting policies and objectives • Contract structuring advice

• Potential (embedded) lease arrangement • Contract evaluation results based on PFRS 16 or
• Service agreements, other relevant contracts any other accounting standard
• Accounting memo
FAAS Services
Managed Services
B What can SGV do for you? Benefits for you
Data • Perform data quality and integrity assessment • Highly reliable data quality and integrity
quality review • Provide remediation to minimize data errors

and identify data gaps
• Efficient way to reduce risk of errors from
data abstraction
• Access to Client Lease Database • Error/ issue log with significance report
• Improved data capturing guidance
FAAS Services
Managed Services
C What can SGV do for you? Benefits for you

Lease data
management • Prompt alerts for your portfolio regarding
renewals, options, end purchases, right of first
•
•
Customized reports and alerts
Prompt assessment/ reassessment of lease
and payment refusal, and so on Improve business and cash options
flow planning
monitoring • Monitoring of payment of lease and non-lease
• Improved business planning
• Assurance on lease payments
components (completeness, overpayments, and
so on) • Secure data storage and management
• Client Lease Database • Customized reports

• Frequency and kind of reports / alerts needed • Lease Payment Assurance Report
• Lease payment data • Customized checklist for reassessment of
options
FAAS Services
Accounting support on PFRS 16
D What can SGV do for you? Benefits for you

Support on
• Provide insights and observations to • Assurance on quantified data for right of
quantification of management on its transition method election, use asset, lease liability, amortization
cut-off recasting of historical information when
required by the selected transition method and
expense and interest expense
• Compliance with the new leasing standard
adjustments illustrative calculation of adjustments
• Comprehensive adoption of key policy
• Read, discuss and provide insights and choices and management judgments
observations on the approach and illustrative
calculations developed by the management
• Provide insights and observations on the cut-
off adjustments and balances calculated by the
management
• Lease schedules/ working papers • Comments on transition method election,

• Client Lease Database policy choices and key judgments of
• Accounting policies, key judgments and management
objectives for PFRS 16 transition • Comments on reasonableness of cut-off
adjustments and balances
• Data quantification guidance
FAAS Services
Accounting support on PFRS 16
E What can SGV do for you? Benefits for you
• Read, discuss and provide insights and • Assurance on completeness of financial

Support observations on the management’s draft of statements disclosure
on disclosures leases disclosures in the financial statements • Compliance with the new leasing standard
• Read, discuss and provide insights and disclosures
development observations on the management’s final version
of its leases financial statement disclosures
• Prior year financial statements • Comments on completeness of disclosures

• Management-prepared PFRS 16 disclosure prepared by the management
• Accounting policies and objectives for PFRS 16
transition
Financial Accounting Advisory Services Partners
Aris C. Malantic
Tel: +63 2 894-8351

Mobile: +63 (917) 894-8351
Email: aris.c.malantic@ph.ey.com
Bok is a partner at SGV & Co. and is the Leader of the ► He also led Treasury management engagements of corporates -
Financial Accounting Advisory Services sub-service line for review of treasury organization, liquidity and fund management,
ASEAN and Philippines. He obtained his bachelor’s degree working capital, among others and conducted lectures on IFRS with
in Accountancy from the University of Santo Tomas. He is a focus on the financial instruments standard (IAS 39, IAS 32, IFRS 7,
Certified Public Accountant and a member of PICPA. He is IFRS 9), IFRS 15 and IFRS 16
also a member of the EY Global FAAS Operations Board. ► He has extensive experience in the review of hedge accounting
treatment including reviews of hedge documentation and hedge
Relevant experience effectiveness test for banks and corporates (in various industries).
He also has extensive experience in corporate structuring, equity
► Bok has led various FAAS engagements related to restructuring, and valuation of financial instruments including debt,
Accounting Changes, Audit Remediation, Accounting Policy equity and plain vanilla derivative instruments.
Review, Transaction Accounting, Financial Reporting and ► He has also conducted business combination implementation
Financial Instruments. review of publicly listed banks and non-bank clients including step
► He led IFRS conversion engagements for various universal, acquisitions, reverse acquisitions and purchase price allocation
commercial, thrift, development, and rural banks and other reviews.
financial institutions such as investment houses, stock ► He has extensive experience on audits of local and multinational
brokerage houses, finance companies, and investment financial institutions (banks, investment house, stock brokerage) and
companies corporate and conglomerate entities across various industries –
banking and financial services, real estate, construction, toll road
operations, educational, hospital, retail manufacturing
Financial Accounting Advisory Services Partners
Benjamin N. Villacorte
Tel: +63 2 878-7969

Mobile: +63 (920) 978-7969; +63 (917) 560-6742
Email: benjamin.n.villacorte@ph.ey.com
Benjie is a Partner in Assurance. He is PFRS/PFRS accredited ► He has led audits of publicly-listed companies from various
based on EY/SGV requirements. He obtained his bachelor’s industries such as power distribution, power generation, real estate,
degree in Accountancy from the San Beda College and retail operations, education institutions, healthcare,
place 3rd in the May 2004 CPA licensure examinations. He telecommunications and semiconductor
is also Certified Internal Auditor and a member of PICPA. ► He also has extensive experience on financial statement audits of
companies reporting under International Financial Reporting
Relevant experience Standards, US GAAP and SOX 404 audits of internal control over
financial reporting
► Benjie has led various accounting support and advice to ► He is a member of Accounting Standards Group and specializes in
various clients and public listed entities on: issues dealing with revenue recognition, leases, business
► Audit remediation and readiness combinations, impairment, intangible assets and provisions,
► New accounting standards (i.e., PFRS 15, Revenue;
contingent liabilities and contingent assets.
PFRS 9, Financial Instruments; PFRS 16, Leases) ► He is also a member of the Capital Markets Center team and assists
► Service concession arrangements
clients in domestic and cross-border capital raising transactions
(IPOs and public bond offerings).
► Share or asset purchase agreements
► Financial Instruments accounting (business model
assessment and development)
► Transaction accounting
► Corporate treasury
► Finance digital transformation (data analytics, data
visualization, robotics and process automation)
SGV | Assurance | Tax | Transactions | Advisory
About SGV & Co.

SGV is the largest professional services firm in the
Philippines. We provide assurance, tax, transaction and
advisory services. In everything we do, we nurture leaders
and enable businesses for a better Philippines. This Purpose
is our aspirational reason for being that ignites positive
change and inclusive growth. Our insights and quality
services help empower businesses and the economy, while
simultaneously nurturing our people and strengthening our
communities. All this leads to building a better Philippines,
and a better working world. SGV & Co. is a member firm of
Ernst & Young Global Limited.
SGV refers to the global organization, and may refer to one

or more, of the member firms of Ernst & Young Global
Limited, each of which is a separate legal entity. Ernst &
Young Global Limited, a UK company limited by guarantee,
does not provide services to clients.
For more information about our organization, please visit

www.SGV.com/ph.
© 2019 SyCip Gorres Velayo & Co.

All Rights Reserved.
APAC No. 10000447
This publication contains information in summary form and

is therefore intended for general guidance only. It is not
intended to be a substitute for detailed research or the
exercise of professional judgment. Neither SGV & Co. nor
any other member of the global Ernst & Young organization
can accept any responsibility for loss occasioned to any
person acting or refraining from action as a result of any
material in this publication. On any specific matter,
reference should be made to the appropriate advisor.

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PFRS 16, Leases

Overview and Scope Effectivity and Transition

• A New Leases Standard

Page 4 PFRS 16, Leases Public Seminar

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What are not in scope?

Page 6 PFRS 16, Leases Public Seminar

► Majority of current leases classified as operating leases

Page 7 PFRS 16, Leases Public Seminar

Short-term leases Low-value assets

Page 8 PFRS 16, Leases Public Seminar

► PFRS 16 specifies accounting for

Page 9 PFRS 16, Leases Public Seminar

► Lease of car under master lease agreements

Page 10 PFRS 16, Leases Public Seminar

Page 11 PFRS 16, Leases Public Seminar #SGVforABetterPhilippines

A lease is a contract, or part of a contract, that conveys the right to

A lease exists when a customer controls the right to use an identified

Page 12 PFRS 16, Leases Public Seminar

Identified asset and Right to control the use of

Right to obtain Right to direct

Application of the definition of a lease will require significant judgment.

Page 13 PFRS 16, Leases Public Seminar

When is a substitution right substantive?

When the supplier:

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• it is not physically distinct, but the customer has the right

Page 16 PFRS 16, Leases Public Seminar

2. Would benefit economically from exercising its right to

Page 17 PFRS 16, Leases Public Seminar

Yes Right to direct the use of the

Customer has the right to Supplier has the right to

Page 18 PFRS 16, Leases Public Seminar

• PFRS 16 requires an entity to determine whether a contract is a lease or

• An entity reassesses whether a contract is or contains a lease only if the

Page 19 PFRS 16, Leases Public Seminar

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► A coffee company (Customer) enters into a contract with an airport operator

Page 25 PFRS 16, Leases Public Seminar

► The cost of reallocating space is low.

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► Under the contract:

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Does the contract contain a lease?

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• Lease and non-lease components must be separated

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Lease Consideration Inspection

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The contracts are negotiated as a package with

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Periods covered by Periods covered by