CONCEPTUAL FRAMEWORK

&
ACCOUNTING STANDARDS
2019 Edition

Lecture Aid
By: Zeus Vernon B. Millan

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PFRS 16 Leases

Learning Objectives
• Identify a lease.
• Describe the general recognition and recognition exemption
relating to the accounting for leases by a lessee.
• State the lease classifications by a lessor.
• State the indicators of a finance lease.
• Describe the accounting for finance leases and operating
leases by a lessor.

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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)

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Standards (by: Zeus Vernon B. Millan)
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.

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 Conceptual Framework & Acctg.
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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.

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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.

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Standards (by: Zeus Vernon B. Millan)
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

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Standards (by: Zeus Vernon B. Millan)
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.

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Standards (by: Zeus Vernon B. Millan)
GENERAL RECOGNITION

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Standards (by: Zeus Vernon B. Millan)
Discount rate

• Discount rate is the interest rate implicit in the lease; if not

determinable, then the lessee’s incremental borrowing rate.

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Classification of lease by the lessor

1. Finance lease - a lease that transfers

substantially all the risks and rewards
incidental to ownership of an asset. Title may or
may not eventually be transferred.
2. Operating lease - a lease other than a finance
lease.

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Indicators of a finance lease

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Accounting for Finance Leases by Lessors

• Initial recognition
Lessors recognize assets from a finance lease as receivable measured
at an amount equal to the net investment in the lease.

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Lease payments

1. Fixed payments, including in-substance fixed payments, less any

lease incentives payable;
2. Variable lease payments that depend on an index or a rate, initially
measured using the index or rate as at the commencement date;
3. Guaranteed residual value;
4. The exercise price of a purchase option if the lessee is reasonably
certain to exercise that option; and
5. Payments of penalties for terminating the lease, if the lease term
reflects the lessee exercising an option to terminate the lease.

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Discount rate

• The discount rate to be used in calculating the present value of the

lease payments is the interest rate implicit in the lease.

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Accounting for operating lease

• The accounting for operating leases is straight-forward. The lessor

recognizes the lease payments as rent income on a straight line
basis over the lease term, unless another systematic basis is more
representative of the time pattern of user’s benefit.

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 APPLICATION OF CONCEPTS
 

PROBLEM 2: FOR CLASSROOM DISCUSSION

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OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

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 END
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