LEASES (IFRS 16)

 If only a portion of an asset:

LEASE
Lease is a contract, or part of a contract, that conveys
the right to use (lessee) an asset (the underlying asset)
for a period of time in exchange for consideration.
Three factors in identifying a lease:
I. The existence of an identified asset.
2. The lessee's right to obtain substantially all of the NOTE: If there’s no identified asset, there’s no lease to
economic benefits from use of the identified asset. account for.
3. The lessee' right to direct the use of the identified
asset when: LEASE TERM
 The customer gets to decide how the asset is used The lease term includes:
and why it's used during that time;  The non-cancelable period of the lease;
 The way the asset is used has already been  Any renewal period, if the lessee is reasonably
decided in advance, and the supplier isn’t allowed certain to use the renewal option;
to change it.  Any early termination period, if the lessee is
PARTIES IN LEASE reasonably certain not to end the lease early.

1. Lessor To decide if the lessee will renew or not terminate the

The entity that provides the right to use an underlying lease, all relevant facts must be considered, such as:
asset for a period of time in exchange for consideration.  Whether the lease terms are better than market
2. Lessee rates (e.g., lower rent in renewal period).
The entity that obtains the right to use an underlying  Penalties for ending the lease early;
asset for a period of time in exchange for consideration.  An option to buy the asset at the end of the lease;
CLASSIFICATION OF LEASES  Major improvements made or planned by the
lessee;
1. Finance Lease: A lease that transfers substantially  How important the asset is to the lessee’s
all of the risks and rewards incidental to the operations;
ownership of the asset  Costs of ending the lease and relocating.
2. Operating Lease: A lease that allows for the use of
an asset but does not convey ownership rights of Usually, the lease term is measured in time (like months
the asset or years), but in some cases, it may be based on units of
IDENTIFIED ASSET production the asset can produce economically.

 An asset can be identified by being explicitly stated

in the contract or by being implicitly specified at the ACCOUNTING FOR LEASE: LESSEE’S
time the asset is made available for use by the POV
customer. At the commencement date, a lessee shall recognize a
 An asset is not an identified asset if the supplier right-of-use asset (ROUA) and a lease liability.
(lessor) has the substantive right to substitute it  Commencement Date: The date on which a lessor
throughout the period of use. A supplier's right to makes an underlying asset available for use by a
substitute an asset is substantive if both the lessee
following conditions exist:  Inception Date:
o The supplier has the practical ability to
substitute alternative assets throughout the
period of use; principal terms and conditions of the lease. The
o The supplier would benefit economically from
the exercise of its right to substitute the asset.
 LEASES (IFRS 16)
time which we classify if it is finance or operating of the underlying asset and (ii) any initial direct
lease. costs of the lessor.
PV of LP + URV = FV + IDC
LEASE RECOGNITION (2) Lessee's Incremental Borrowing Rate: The rate of
 All leases shall be accounted for by the lessee as a interest that a lessee would have to pay to borrow
finance lease. over a similar term, and with a similar security, the
Exceptions: funds necessary to obtain an asset of a similar value
a. Short-term Lease: A lease that has a term of 12 to the right-of-use asset in a similar economic
months or less at the commencement date of environment.
the lease.
INITIAL MEASUREMENT: RIGHT-OF-USE
b. Low-value lease: This is a matter of professional
judgement as the standard did not provide The right-of-use asset is initially measured at cost. The
quantitative threshold for low value asset. A cost comprises the following:
lessee shall assess the value of the asset based  The amount of the initial measurement of the lease
on the value of the asset when it is new liability
regardless of the age of the asset being leased.  Advance rental payment: Any lease payments made
at or before the commencement date, less any
INITIAL MEASUREMENT: LEASE LIABILITY lease incentives received
At the commencement date, a lessee shall measure the  Any initial direct costs incurred by the lessee
lease liability at the present value of the lease payments  The present value of any decommissioning and
that are not paid at that date. restoration costs for which the entity has incurred
The lease payments included in the measurement of the an obligation, unless those costs are incurred to
lease liability comprise the following payments for the produce inventories. The rate shall be given in the
right to use the underlying asset during the lease term problem. But, if there’s no given, the rate shall be
that are not paid at the commencement date: based on incremental or implicit that was used in
(1) PV of Fixed payments (including in-substance fixed Lease Liability
payments), less any lease incentives receivable.
(2) Variable lease payments that depend on an index SUBSEQUENT MEASUREMENT: LEASE
or a rate. If the variable lease payment does not LIABILITY
base on an index or rate are not included. After the commencement date, a lessee shall measure
(3) PV of Amounts expected to be payable by the the lease liability by:
lessee under residual value guarantees by Lessee a. Increasing the carrying amount to reflect interest on
(4) PV of Exercise price of a purchase option if the the lease liability
lessee is reasonably certain to exercise that option b. Reducing the carrying amount to reflect the lease
(Bargain purchase option) payments made; and
(5) Payments of penalties for terminating the lease, if c. Remeasuring the carrying amount to reflect any
the lease term reflects the lessee exercising an reassessment or lease modifications or to reflect
option to terminate the lease. revised in- substance fixed lease payments.

The lease payments shall be discounted using the

interest rate implicit in the lease, if that rate can be
readily determined. If that rate cannot be readily
determined, the lessee shall use the lessee's
incremental borrowing rate.
(1) General Rule: Interest Rate Implicit in the Lease:
The rate of interest that causes the present value of
(a) the lease payments and (b) the unguaranteed
residual value to equal the sum of (i) the fair value
 LEASES (IFRS 16)
Lease liabilities must be adjusted if there are changes to
the lease agreement, such as lease modifications or
ACCOUNTING FOR LEASE: LESSOR’S
updates to fixed payments.
POV
A lease modification is any change to the lease that A lessor shall classify leases as:
wasn’t part of the original agreement. Examples (1) Operating Lease; or
include: (2) Finance Lease
 Adding or removing leased assets
BASIS OF CLASSIFICATION OF LEASE
 Extending or shortening the lease term
Classification of lease is based on the substance of the
If the modification: transaction rather than the form of the contract
(1) Adds more assets and Increases payment fairly for
INDICATORS OF FINANCE LEASE
those added assets,
→ it is treated as a new, separate lease. a. Transfer of Ownership
b. Bargain Purchase option
(2) If not, the lease must be re-measured, which c. Lease Term – Economic/Useful Life x 75%
involves: d. The Present Value of Minimum Lease Payment is
a. Updating the lease liability and interest rate equal to the 90% of the FV of Lease Asset
b. Adjusting the right-of-use asset if part or all of NOTE: If one of them is met, it is already enough
the lease ends indicator to classify that lease as finance lease.
c. Recording any gain or loss in profit or loss due If none is met, we will classify it as operating lease.
to the change
CLASSIFICATION OF FINANCE LEASE
SUBSEQUENT MEASUREMENT: RIGHT OF a. Direct Financing – You do not need to recognize
USE ASSET Dealer’s or Manufacturer’s Profit
The right-of-use asset may be subsequently measured o The initial direct cost is being added to Net
using cost model or revaluation model depending on Lease Receivable
the nature of the leased asset. b. Sales Type - You need to recognize Dealer’s or
Manufacturer’s Profit
o The initial direct cost is being added to Cost
of Goods Sold

ACCOUNTING FOR OPERATING LEASE

 The lessor shall recognize lease payments from

operating lease as lease (or rent) income on a
straight-line basis over the lease term
 Any lease bonus is recognized as unearned lease
income to be amortized over the lease term
 Initial direct costs incurred by the lessor shall be
capitalized as cost of the leased asset and
recognized as expense over the lease term on the
same basis as the lease
 Executory (or ownership) costs are recognized as
expense
 LEASES (IFRS 16)
 Depreciation of the depreciable asset shall be
consistent with the lessor’s depreciation policy
 Any refundable security deposit shall be accounted
for as liability by the lessor
 LEASES (IFRS 16)
o Cost of asset and Initial direct cost
ACCOUNTING FOR FINANCE LEASE
 At the end of the lease term, the amount debited to
the asset is the amount lower between the FV and
INITIAL MEASUREMENT
the RV whether guaranteed or unguaranteed.
 At the commencement date, the lessor recognizes  The lease receivable credited at the end of the lease
an asset from finance lease as receivable measured term should be the amount of residual value that is
at an amount equal to the net investment in the guaranteed by the lessee
lease (present value of the lease payments)  If at the end of the lease term, the FV of the asset is
o The lessor shall use the interest rate implicit in lower than the guaranteed residual value of the
the lease to measure the net investment. lessee, the lessee should pay the difference.
Always choose the implicit rate after initial
direct cost.

GROSS INVESTMENT IN THE LEASE

Undiscounted amount of:
 Annual lease payments
 Residual value (whether guaranteed or
unguaranteed)
 Exercise price of purchase option (only if it is
reasonably certain that the lessee will exercise the
option)

NET INVESTMENT IN THE LEASE

Discounted amount of:
 Annual lease payments
 Residual value (whether guaranteed or
unguaranteed)
 Exercise price of purchase option (only if it is
reasonably certain that the lessee will exercise the
option)
NOTE: If the residual value is present purchase option
should be absent, and vise vera. Only one of them
should be included

SUBSEQUENT MEASUREMENT
 The net investment in the lease is subsequently
measured the effective interest method

DIRECT FINANCING LEASE

 The lessor is a financing company

 A direct financing lease recognizes only interest
income
 No manufacturer’s/dealer’s profit (gross profit) is
recognized because the fair value and the cost of
the leased asset are equal
 Initial direct cost is capitalized
 Net investment is simply equal to the of the:
 LEASES (IFRS 16)

SUMMARY FOR RESIDUAL VALUES:

Actual FV > Guaranteed residual value → Difference is
not accounted
Actual FV < Guaranteed residual value → Lessee must
pay cash to make up for the deficiency
Actual FV > Unguaranteed residual value → Difference is
not accounted
Actual FV < Unguaranteed residual value → Lessor must
recognize a loss

SALES-TYPE LEASE
 The lessor is a manufacturer or a dealer
 Recognizes two types of income:
o Gross Profit
o Interest Income
 Initial direct cost is expensed

DETERMINATION OF SALES
 Lower amount between:
o Present Value of Lease Payments

o Fair Value of leased asset

DETERMINATION OF COST OF GOODS SOLD

LEASES (IFRS 16)
Gross Investment:
Total Minimum Lease Payment xxx
+ Unguaranteed Residual Value xxx
xxx
WHERE:
Total Minimum Lease Payment = Lease Payment +
Guaranteed Residual Value

Net Investment:
PV of Minimum Lease Payment xxx
+ PV of URV xxx
xxx
Unearned Interest Income xxx

Operating Lease
All the rental payment shall be recognized as income
(lessor) or expense (lessee)
(1) Lessor
(2) Lessee
a. Short-term Lesse
b. Low Valued Asset

WARNING:
 Lease Bonus should be amortized over the lease
term
 Initial Direct Cost should be amortized over the
lease term
 Contingent Rent as incurred; whenever earned
should only be recognized
 Security Deposit is a non-current liability of a lessor
which is a non-current asset for a lessee
 Executory Cost include repair, utilities,
maintenance, tax and insurance that should be
made by the lessor. Thus, if it has paid