Lease Part 1

PFRS 16 - Leases
Learning Objectives
• Identify a lease.
• Account for leases by a lessee using the general
recognition.
• Account for leases by a lessee using the
recognition exemption.
Identifying a lease
• “A contract is, or contains, a lease if the
contract conveys the right to control the
use of an identified asset for a period of
time in exchange for consideration.” (PFRS
16.9)
Right to Control
An entity has the right to control the use of an
identified asset if it has both of the following
throughout the period of use:
1. the right to obtain substantially all of the economic
benefits from use of the identified asset; and
2. the right to direct the use of the identified asset.
Identified asset
• An asset can be identified by being explicitly
stated in the contract or by being implicitly
specified at the time the asset is made available
for use by the customer.
• A portion of an asset can be identified if it is
physically distinct.
Substantive substitution rights
• A customer does not have the right to use an identified asset if the
supplier has the substantive right to substitute the asset throughout
the period of use.
• A supplier’s right to substitute an asset is substantive if both of the
following conditions exist:
1. the supplier has the practical ability to substitute alternative assets
throughout the period of use; and
2. the supplier would benefit economically from the exercise of its
right to substitute the asset.
Right to direct the use
• The customer has the right to direct how
and for what purpose the asset is used
throughout the period of use
Accounting for leases by Lessee
GENERAL RECOGNITION
• Lessee recognizes both:
1. Lease liability; and
2. Right-of-use asset

RECOGNITION EXEMPTION
(for ‘short-term” and ‘low value’ leases)
• Lessee recognizes lease payments as expense over the lease term using
straight line basis, or another more appropriate basis.
Discount rate
• Discount rate is the interest rate implicit in the
lease; if not determinable, then the lessee’s
incremental borrowing rate.
Separate Components of a Contract
• An entity accounts for each lease component of a contract separately
from the non-lease components of the contract.
• A lessee allocates the consideration in the contract to each lease
component on the basis of the relative stand-alone price of the lease
component and the aggregate stand-alone price of the non-lease
components.
• Payments for activities or costs that do not transfer goods or services
to the lessee are not a separate component of the contract. The
payments for these items are included in the total consideration that
is allocated to the separately identified components of the contract.
Initial direct costs
• A lessee capitalizes initial direct costs as follows:
Lease payments made to lessor at or before
commencement date
Thank you!
• See you in the guided exercises!