IFRS 16, LEASES 3) Lease Term is for major part of the

economic life of the asset

 Lease is a contract, or part of a contract, that
Lease Term/ Remaining Life of Asset =
conveys the right to use an asset for a period of
75%
time in exchange for consideration.
Note: Remaining life should be atleast 25%
 Contract is/or contains a lease if:
4) PV of lease payments is substantially all of
a. There is an identified asset the FV of the leased asset
b. Right to control the use
Minimum lease payment/ FV asset at
o Right to direct how and for what inception of the lease = 90%
purpose the asset is used throughout the
period use. MINIMUM LEASE PAYMENTS:
o Predetermined before inception o DV of lease payment + DV of
BPO/GRV
 Lease Term is a non-cancelable period of lease;
with periods covered by an option to + payment of termination, if certain.
renew/terminate.
5) Qualifying Asset

NOTE:
LESSEE POV:
If 1, 2 and 5  useful life; lessee
OPERATING LEASE If 3 and 4  lease term; lessor
 Election to apply the operating lease INITIAL MEASUREMENT OF RIGHT OF USE
accounting and not recognize an asset and ASSET
lease liability in two optional exemptions:
 Lessee shall measure the right of use asset AT
a. Short-term lease – term of 12 months COST at commencement date
or less at the commencement date of the
lease.
 Provides that the cost of right of use asset
b. Low value lease – immaterial amount
comprises:
 Shall be recognize lease payments as RENT
a. Initial measurement of lease liability
EXPENSE in either straight line basis over
b. Lease payment made to lessor at or before
the lease term or another systematic basis.
commencement date—lease bonus, less any
lease incentives receive
FINANCE LEASE
c. Initial direct costs
d. Estimate cost of dismantling (present
 In substance, a purchase of property by the
obligation)
lessee from the lessor.
 Transfer of RISK & REWARD but not
 Leasehold improvements are not initial direct
(may) the title.
costs and not included in the cost of the right of
 Lessee shall recognize RIGHT OF USE
use asset.
ASSET and LEASE LIABILITY at the
commencement date.
 Security deposit refundable accounted for as
an asset upon the lease expiration.
 Criteria for Finance Lease
MEASUREMENT OF LEASE LIABILITY
1) Transfer of ownership
2) It has a bargain purchase option (BPO)
 PV of the lease payments; discounted using
the interest rate implicit in the lease
 Finance Lease Receivable xx
COMPONENTS OF LEASE PAYMENTS

a. Fixed lease payments

b. Variable lease payments  Payment of Initial Direct Cost:
c. BPO exercise price (if reasonably certain)
d. GRV amount to be payable Discount on FLR xx
e. Termination penalties (if the term reflects Cash xx
the exercise of termination)
NOTES:
 Executory costs are expensed immediately
when incurred. Gross Rentals

Includes: maintenance taxes and insurance for Cost of Assets xx

the underlying asset. PV of GRV/UGRV (xx)
PV of BPO (xx)
__________
LESSOR POV: PV of rentals xx
PV factor OA/AD /xx
__________
DIRECT FINANCE LEASE
Annual Rentals xx
 Income of the lessor is only in the form of
*PV of rentals = NI to be recovered*
interest income.
SALES TYPE LEASE
 FV = cost of asset
 Involves the recognition of a manufacturer or
 Accounting considerations:
dealer profit on the transfer of the asset to the
lessee in addition to the recognition of interest
 Gross Investment – gross rentals (entire
income.
lease term) + absolute amount of
GRV/UGRV (and BPO ata??)
 Accounting considerations:
Also known as FLR
 Gross Investment – gross rentals (entire
lease term) + absolute amount of the
 Net Investment – cost of asset + any initial
GRV/UGRV
direct cost paid by the lessor
Also known as FLR
 Unearned Interest Income – difference
between GI and NI
 Net Investment – PV of gross rentals + PV
of GRV/UGRV + PV of BPO
Also known as Discount on FLR
 Unearned Interest Income – difference of
 Initial Direct Cost – would effectively
GI and NI
spread the initial direct cost over the lease
term and reduce the amount of interest
Also known as Discount on FLR
income
 Sales – lower of Net Investment and FV of
JOURNAL ENTRIES:
the asset
 Commencement of the Lease:
GRV: PV of AP + DV of GRV
Finance Lease Receivable xx
UGRV: PV of AP
Asset for Lease xx
Discount on FLR xx

Cash xx
  Cost of Goods Sold – cost of asset sold  A lease that does not transfer substantially the
minus PV of UGRV plus initial direct cost risks and rewards incidental to the ownership of
paid by the lessor. the asset.

GRV: as it is  Otherwise stated, the periodic rental received by

UGRV: remove PV of UGRV
*Initial DC can be part of selling expense*
 Gross Profit – Sales less COGS
JOURNAL ENTRIES:
 Commencement of the Lease:
Finance Lease Receivable
Cost of Goods Sold
Discount on FLR
Sales
Inventory
Cash
Finance Lease Receivable
NOTES:
 If FV exceeds CV, then STL
 If no RV or GRV: SP = NI
 If RV is UGRV: SP < NI
lessor is RENT INCOME.
 Initial Direct Cost – added to the carrying
amount and recognized as expense over the lease
term.
 Security Deposit Refundable – upon the lease
expiration shall be accounted for as LIABILITY
by lessor.
 Lease Bonus – received by the lessor from the
xx lessee is recognized as UNEARNED RENT
xx INCOME to be amortized over the lease term.
xx
xx  Contingent Rentals – added to rent revenue in
xx the period in which they arise.
xx  Executory Cost – charged to expense when
xx incurred
Includes: Depreciation, maintenance, taxes, etc.
 Lease payment – income
Rent income every period must be the same

 If UGRV, based on NI in making amortization SALES AND LEASEBACK:

table. If GRV based on SP
 One party sells an asset to another party then
Total Income STL immediately leases the asset back from the new
owner.
PV of LP xx
PV of GRV/UGRV xx  No physical transfer of asset
PV of BPO xx
__________  Lease rent and sales price are usually
Total PV xx interdependent
CV Asset (xx)
__________  Lease Liability – PV of the lease liability
Gross Profit xx
Expenses (xx)  Right Retained –
Income xx
__________ PV of lease payment
Total Income xx Less: Additional Financing (SP > FV)
Add: Pre-payments (SP < FV)

OPERATING LEASE  Right of Use of Asset –

Carrying Amount x Right Retained/ FV Asset

  Total Gain – FV less CV

Operating Lease Accounting: recognize in full

Finance Lease Accounting:

o Gain to be recognize:

Total Gain x Right transferred/ FV Asset

o Gain not to be recognize:

Total Gain x Right retained/ FV Asset

OR Total Gain less Gain to be recognize

 Right Transferred – FV less Right Retained

JOURNAL ENTRIES:

 S & LB – LESSEE

Cash xx
Right of Use of Asset xx
Machine xx
Lease Liability xx
Gain on right transferred xx

 S & LB – LESSOR

Equipment xx
Cash xx

Cash xx
Rent Income xx

Depreciation Expense xx
Accumulated Depreciation xx