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Module 2. Lease Accounting Finance Lease Lessee

The document defines key terms related to lease accounting under IFRS 16. It states that a lease is a contract that conveys the right to use an asset for a period of time in exchange for consideration. For a lessee, all leases will be accounted for as finance leases, requiring recognition of a right-of-use asset and lease liability. It provides guidance on measurement of these amounts at inception and over the lease term.

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Pamela Malacora
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48 views

Module 2. Lease Accounting Finance Lease Lessee

The document defines key terms related to lease accounting under IFRS 16. It states that a lease is a contract that conveys the right to use an asset for a period of time in exchange for consideration. For a lessee, all leases will be accounted for as finance leases, requiring recognition of a right-of-use asset and lease liability. It provides guidance on measurement of these amounts at inception and over the lease term.

Uploaded by

Pamela Malacora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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FINANCE LEASE

LESSEE ACCOUNTING

10 - 2
DEFINITION OF LEASE
IFRS 16 is the new lease standard

A lease is defined as a contract or part of


a contract that conveys the right to use the
underlying asset for a period of time in
exchange for consideration.
DEFINITION OF LEASE
Underlying asset – is the subject of a lease for
which the right to use that asset has been
provided buy the lessor to the lessee.

Lessee – is the entity that obtains the right to


use an underlying asset.

Lessor – is the entity that provides the right to


use an underlying asset.
FINANCE LEASE MODEL FOR LESSEE
• At the commencement date, a lessee
shall recognize a right of use asset and
a lease liability.

• All lease shall be accounted for by the


lessee as a finance lease under the
new lease standard
Operating lease model for lessee
Two optional exemptions:
a. Short-term lease
b. Low value lease

- Lease payments = rent expense


(in either a straight line basis or another
systematic basis.)
a. Short-term lease
- Term of 12 months or less
- w/ purchase option is not a short-term
lease.
b. Low value lease
- The new lease standard does not
provide for a quantitative threshold for
low value asset.
- Professional judgment
Finance lease - Lessee
A finance lease is defined as a lease that
transfer substantially all of the risk and
rewards incidental to ownership of an
underlying asset.
Initial measurement of right of use asset
A right of use asset is defined as an asset
that represents the right of a lessee to use
an underlying asset over the lease term in
a finance lease.

Measured at cost at commencement date.


Subsequent measurement of right of use asset

• IFRS 16, par 29, provides that a lessee


shall measure the right of use asset
applying the cost model.
• Cost less any accumulated depreciation
and impairment loss
• Moreover, the CA of the right of use
asset is adjusted for any
remeasurement of the lease liability
Presentation of right of use asset
• Separate line item in the statement of
financial position.
• As an alternative, for example, the right
of use asset related to equipment may
be included within PPE.
• However, disclosure is required that the
PPE include right of use asset.
Other measurement models
• If the lessee applies the FV model in
measuring investment property, the
lessee shall apply the FV model to the
right of use asset that meets the
definition of investment property.
Other measurement models
• If the right of use assets relates to a
class of PPE to which the lessee applies
the revaluation model, a lessee may
elect to apply the revaluation model to
all of the right of use assets that relate to
that class of PPE.
Depreciation of right of use asset
• useful life of the underlying asset under
the following conditions.
a. The lease transfer ownership of the
underlying asset to the lessee at the end
of the lease term.
b. The lessee is reasonably certain to
exercise a purchase option.
Depreciation of right of use asset
• Otherwise, the lessee shall depreciate the
right of use asset over the shorter between
the useful life of the asset and the lease
term.
Measurement of Lease Liability
• At the commencement date, the lessee
shall measure the lease liability at the
present value of lease payments.
• Discounted using the interest rate implicit in
the lease.
• If cannot be readily determine, the
incremental borrowing rate of the lessee is
used.
Components of lease payments
a. Fixed lease payments less any lease
incentives
b. Variable lease payments
c. Exercise price of a purchase option if the
lessee is reasonably certain to exercise
the option.
d. Amount expected to be payable by the
lessee under a residual value guarantee.
e. Termination penalties if the lease term
reflects the exercise of a termination plan.
Other definitions
• Residual value guarantee is the
guarantee made to the lessor by a party
unrelated to the lessor that the value of an
underlying asset at the end of the lease
term will be at least a specified amount.
• Unguaranteed residual value is that
portion of the residual value of the
underlying asset, the realization of which by
the lessor is not assured or is guaranteed
solely by a party related to the lessor.
Other definitions
• Executory costs are ownership expenses
such as maintenance, taxes and insurance
for the underlying asset.
• Such executory costs are expensed
immediately when incurred.

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