LEASES PFRS 16

Lease – is a contract that Right to control the use of Identified Asset Lease Term
conveys the right to use an the asset – when these are - Explicitly/implicitly - Non-cancellable period
asset to another party in met: stated to use the asset
exchange for a Portion of asset – if - Includes the option to
consideration. 1. Right to obtain physically distinct extend if reasonably
substantially all of the certain to exercise and
Lessor and Lessee. economic benefits, only Substantive substitution option to terminate if
Lessor must transfer the if with exclusive use rights –this must not reasonably certain not
ROUA to the Lessee 2. Right to direct the use of exist because this is to be exercised
Lessee pays an asset, how and for not an identified asset
fee/consideration what purpose

ACCOUNTING FOR LEASE - LESSEE

Types of Leases LEASE LIABILITY ROUA
Operating Lease Finance Lease/Capital Initial Initial – at cost
If: Lease PV of lease payments Initial Lease Liab xx
Fixed Lease Payments xx Lease payments made before
In form: Lease Variable Lease Pymts xx commencement date,
1. ST 12 mos/less, but if
Substance: Purchase of asset Guaranteed RV xx net of lease incentives xx
with a purchase option
it’s not operating lease in installment Purchase option xx Initial Direct Cost xx
Penalties, if certain xx PV of est dismantling,
2. Low value lease, based
ROUA xx Lease Liability xx if obliged xx
on judgment of CPA or
entity on its brand new Lease liability xx Cost of ROUA xx
Subsequently
value
GR: if lessee is a finance lease Amortized Cost
XP Subsequently
Cost Model, except if reval
@PV using implicit rate, or model, or FV model
incremental borrowing rate
Fixed Lease payment is net of Depreciated using
lease incentives UL – if may transfer of ownership,
or if may purchase option
reasonably certain to exercise

Shorter between UL & LT, esp if

UL is shorter than UL

Lease Term – if reverts back to

lessor
All these start at commencement
date
Other Accounting Issue
1. Separating the 2. Variable lease Initial Subseq 3. Guaranteed RV by the
components of the payments ROUA = CA Asset reverts back to lessor
rd
contract Included in LL = AC -lessee or 3 party related to lessee
Allocate the contract  Based on index – ROUA and Adjust for -lessor basta unrelated sa kanya
price to: depende sa LL changes 4.Lease Modifications
 Lease Component galaw ng market Separate lease, do not affect the
(use the relative index original ROUA & LL
standalone price) Not included, Exp as
and  Based on but exp incurred
 Non-lease sales/usage outright
component 5.Presentation
(aggregate stand Included in ROUA = CA ROUA = NCA; BS (separate or
along price)  In-substance Fixed ROUA and LL = AC combined/aggregated to another asset
Payments LL as fixed No changes LL = CL and NCL; separate or
payment combined/aggregated to another asset
 ACCOUNTING FOR LEASE - LESSOR
GR: Operating Lease XP: Finance Lease
If any of these are met:

1. Transfer of ownership to lessee at the end of term

2. Lessee has purchase option whose P<FV
3. Lease term represents major portion of the asset’s economic life = 75% of the life
4. PV ot minimum lease payments substantially all FV of asset = 90% of FV
a. Specialized asset that only lessee can use without major modification
b. If lessee cancels, losses will be borne by him, as well as FV fluctuations
c. Lessee can continue lease for a secondary period at lesser rent

A. Direct Finance Lease Sales Type Lease

Lessor is engaged in financing operation, Lessor is manufacturer or dealer, leases to
between financing entity and lessee sale product

Income: Income:
Interest Income Interest Income and Gross Profit
Gross Investment
Gross rentals Lease Payments xx Lease Payments xx
RV guaranteed/not as long as RV guaranteed/not as long as
Reverts back to lessor xx Reverts back to lessor xx
Gross Investment xx Gross Investment xx

Net Investment
Amount lessor Cost of Asset xx PV of lease payments xx
receivable presented in Initial Direct Cost by lessor xx PV of RV G/U as long as revert back xx
SFP Net Investment xx Net Investment xx

Unearned Int Income =gross inv – net investment =gross inv – net investment
Sales ❌ = LOWER of NET IV or FV
Cost of Sales ❌ = Cost of Asset + IDC
Gross Profit ❌ = Sales - COS
OPERATING LEASE
Does not transfer risk
and reward Lessor Lessee
Rental Payments Income on straight line basis, kahit uneven Expense on SL basis
average it
Initial Direct Cost Added to CA of the asset ❌
Includes Expensed over the lease term same basis as
commissions/legal income nan aka SL basis
fees/internal cots
Depreciation ✔ ❌
Lease Bonus Unearned Rent Income amortized over lease Prepaid Rent, paid by lessee as an incentive
term amortized over lease term
Security Deposit Liability of lessor depends if CL/NCL Receivable, Asset of the lessee
 SALE and LEASEBACK
Arrangement wherein and TRANSFER IS A SALE TRANSFER IS NOT A
entity sales a property and PFRS 15 PFRS 16 Purchase of Asset SALE
immediately leases it from Seller- lessee = Finance
the buyer Lease PFRS 9
Recognize ROUA & LL Lessor = FA
Seller becomes the lessee ROUA = proportional to the Lessee = FL
Buyer becomes the lessor rights retained by the seller
GAIN/LOSS = proportional
to the right transferred

LL = the same as the

Finance Lease in general

ROUA

SP = FV SP > FV SP < FV
Excess Additional financing Excess Prepaid rent
= CA x (LL/FV of asset) = CA x (LL less excess/FV of asset) = CA x (LL add excess/FV of asset)
alternative
Initial LL = Rental @ PV
Interest Retained = LL Interest Retained = LL - excess Interest Retained = LL + excess
ROUA = (Int Retained/FV of asset) x CA