LEASE ACCOUNTING

I. About the Organizer and Speaker

The webinar was organized by Real Excellence Online CPA Review. I recently had the
honor of listening to a talk given by Sir Vhinson Jay S. Garcia, CPA, who achieved top rank in the
CPA board exam and is nationally recognized as a reviewer in Financial Accounting and Reporting
(FAR) and Auditing Theory (AT). He has served as a member of the technical team and academics
officer, lecturer, former auditor, and credit derivatives reviewer. Additionally, he graduated summa
cum laude with a BS in Accountancy from Wesleyan University-Philippines in Cabanatuan City. In
his earlier education, he excelled as the valedictorian of San Antonio Montessori School in San
Antonio, Nueva Ecija, and as the salutatorian of San Francisco Elementary School, also in San
Antonio, Nueva Ecija.

II. Summary of the Webinar

Lease Contract – it conveys the right to use an asset for a period of time in exchange for
consideration (PFRS 16).

The following are the two (2) parties in a lease contract:

1. Lessor – entity who leases out underlying asset and receives consideration.
2. Lessee – entity who uses the underlying asset and pays consideration.
 It should be noted that lease agreement between the lessor and the lessee is usually
documented in a contract which contains the duration of the lease, asset which is the object of
the lease, lease payments, lease conditions, and other matters concerning the lease.

Lessee Accounting for leases

- PFRS 16, Leases introduces a general lessee accounting model which requires a lessee
to recognize a right of use (ROU) asset.
 ROU asset – represent the control and the right of the lessee to us the asset during the lease
term but not the legal ownership of the underlying asset.
 Lease liability – represents the present value of lease payments to be made during the lease
term.
 Both ROU asset and lease liability are recognized on the commencement date.
 Commencement date is the date on which a lessor makes an underlying asset available for
use by a lessee.

The exceptions to this general lessee accounting model are the following;

a. Short-term leases (lease term of not more than 12 months)

b. Leases of low-value assets

Right of use asset – Initial Measurement

The lessee should initially measure the right of use of asset at cost.

a. Initial measurement of lease liability

b. Any lease payments made at or before the commencement date less any lease incentives
received;
c. Any initial direct cost incurred by the lessee; and
d. Asset retirement obligation that is to be incurred by the lessee in dismantling and removing the
underlying asset, restoring the site, on which it is located, or restoring the underlying asset to
the condition required by the terms and conditions of the lease, unless those costs are incurred
in producing inventories.

Note: Security deposit paid shall be recognized as separate asset and shall be excluded from the
cost of ROU asset since it can be recovered later on from the lessor.

Initial measurement;

a. Discount rate to be used in computing the present value of lease payments

b. Amounts and number of lease payments to be included in the lease liability
c. Extension and termination options on the lease term

Note: depending on the circumstances, the initial amount of lease liability can be either equal to or
lower (but not higher) than the initial amount of ROU asset.

During his discussion, he also provide some comprehensive problems.

Lease liability represent the present value of lease payments to be made during the lease term.
Amounts to be included in the present value are the following:

i. Fixed payments, less any lease incentives to be received

ii. Variable lease payments that depend on an index or a rate, initially measured using
the index or rate as the commencement date;
iii. Amounts expected to be payable by the lessee under residual value guarantees;
iv. Exercise price of a purchase option If the lessee is reasonably certain to exercise that
option; and
v. Payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease.

Discount rate;

a. First, the implicit rate on the lease, if known by the lessee

b. Otherwise, the lessee shall use its own incremental borrowing rate

Fixed Lease payments

- If the fixed lease payments are paid at the end of each period, PV of ordinary annuity shall
be used while PV of annuity due shall be used if these are paid at the beginning of each
period.

Residual Value Guarantees

 Shortfall = Guaranteed amount less expected value at the ned of the lease.
 Expected shortfall is the difference between the higher guaranteed residual value less the
lower expected value of the asset at the end of the leased term.

Subsequent measurement of Right of use Asset

- Measured using the cost model, which is cost:

a. Less accumulated depreciation and accumulated impairment losses; and ‘
b. Add or less the adjustments to the lease liability
Aside from the cost model, the ROU asset can also be subsequently measured under the following
models:

a. Revaluation model
b. Fair Value model
 Subsequent to the initial recognition, the carrying amount of the lease liability shall be measure
using an amortization table. Interest expense is also based on the amortization table.
 No ROU asset nor lease liability are required to be recognized for the following leases:
- Short term leases (not more than 12 months)
- Leases of low-value assets (roughly php250,000 or less)

In these cases, the lease payments are recognized as rent expense on straight-line basis over the
lease term, unless another systematic basis applies.
III. What I have learned from the webinar

Attending the webinar regarding leases and accounting has been beneficial for me
because it is part of what I need to know for my exam. Also, it was free lecture and I learnt a lot,
such as how leases work for both landlords and tenants. The webinar covered how to handle
leasing contracts and what to do with the money involved. I acquired an extensive understanding of
the principles set out in PFRS 16. This standard defines the roles of the lessor and lessee in lease
agreements, with a focus on lessees recognizing a right-of-use (ROU) asset and associated lease
responsibility. Particularly, the beginning date triggers the use of these accounting measures, with
the ROU asset indicating the lessee's control over the leased asset and the lease obligation
reflecting the present value of lease payments. Short-term leases and leases of low-value assets
are exceptions to the general accounting concept, as they require alternative accounting
approaches.

In conclusion, this session provided valuable insights into lease accounting practices,
equipping me with the knowledge to navigate complex financial scenarios with confidence. This
webinar not only provided me with the essential knowledge to confidently handle lease accounting
problems, but it also expanded my entire comprehension of financial fundamentals. I am glad for
the opportunity to attend such a wonderful session, which surely helped my academic preparation
and continued desire for knowledge.
IV. E-CERTIFICATE & DOCUMENTATION