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INSTRUCTOR INFORMATION

LECTURE Full name: DANG THI THUY HANG, MB, Ph.D.

Address: Room 1114, 11th Floor, Building A1, NEU
Phone number: +84 915 166 150
LEASES
Email: [email protected]
Faculty/Institute: School of Accounting and Auditing
Department: Financial Accounting

Hà Nội, 2023
Copyright © 2019 - Trường Đại học Kinh tế Quốc dân 1 2

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LEARNING OBJECTIVES MAIN TOPICS

Fundamentals of Accounting for Leases

 Describe the nature, economic roles and benefits of leasing
transactions.
 Explain the accounting for leases by lessees. Lessee Accounting

 Explain the accounting for leases by lessors.

 Discuss the accounting and reporting for special features of lease Lessor Accounting
arrangements.
 Presentation and disclosure about leases.
Financial Statement Presentation

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IFRS 16 – Leases

Fundamentals of Accounting for  A lease is a contractual agreement

between a lessor and a lessee, that gives the
Leases lessee the right to use specific property,
which is owned by the lessor, for a specified
period of time; and the lessee makes rental
payments over the lease term to the lessor.

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LEASING TRANSACTION CHARACTERISTCS OF A LEASING TRANSACTION

Underlying assets
(Property, Plants and Equipment) 1. A leasing transaction must be expressed in the form of a contract (or part of a

contract), which clearly specifies the rights and obligations of related parties to
rental payments over the lease term LESSEE the transaction, including a lessor and a lessee.
LESSOR

2. The contract must specify the transfer of one (or several) underlying
At the end of the lease term, the lessee
returns or purchases the leased asset assets and the right to use such assets from the lessor to the lessee during the
lease term.

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CHARACTERISTCS OF A LEASING TRANSACTION CHARACTERISTCS OF A LEASING TRANSACTION

3. Lease term: A non-cancellation period during which the lessee has the - 4. Stipulate the amount of lease payment the lessee must pay to the lessor
right to use the asset, including the period under the option to extend or according to the timeline specified in the contract (usually at the beginning or
terminate the lease contract specified in the contract if the lessee firmly end of the period).
exercises the right.
- 5. Other conditions: Depending on the agreements specified in the contract, a

leasing transaction may also include the repurchase option, the redemption
The lessee is required to re-evaluate the option when there are significant
price, extend the lease term, etc.
conditions or changes that are within the lessee control. The lessor may not
reassess the lease term.
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THE RIGHTS AND BENEFITS OF EACH PARTY THE RIGHTS AND BENEFITS OF EACH PARTY

LESSEES
LESSEES
100% financing at fixed rates
Receive one (or several) underlying assets from the lessor (right
of use asset)
Protection against obsolescence
Have the right to collect the majority of the benefits as well as
bear the risk of using the leased assets during the lease term
Flexibility
Transfer lease payments to the lessor during the lease term

Exercise of the rights and obligations at the end of the lease Less costly financing
term as agreed upon

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THE RIGHTS AND BENEFITS OF EACH PARTY THE RIGHTS AND BENEFITS OF EACH PARTY

LESSORS LESSORS
Often provides profitable interest margins
Transfer one (or several) underlying assets to lessee

Transfer most of the benefits as well as bear the risk of using the Stimulate sales of a lessor’s product
leased assets during the lease term

Tax benefits
Receive lease payments from the lessee during the lease term

Exercise of the rights and obligations at the end of the lease term as High residual value to the lessor
agreed upon

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CLASSIFICATION OF LEASE AGREEMENT

Lease Agreement

Lessee Lessor
Lessee Accounting
High- Low- Capital
Value Value Leases
and and
Long- Short- Operating
term term Direct Leases)
Sales and
Leases Leases Financial
Leases Back
Leases
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CLASSIFICATION and RECOGNITION

Long-term leases
Classification Recognition

Long-term leases IASB requires lessees must capitalize the value of leased
assets in Right-of-use asset account, and record Lease At commencement of the lease:
liability at the same time.
Recognize interest expense on the lease liability over the life
of the lease using the effective-interest method Determine the right-of-use asset
Record depreciation expense on the right-of-use asset. Determine the lease liability

Short-term leases Lease payment is recorded as an expense.

(less than one year)

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Long-term leases Long-term leases

Determine the right-of-use asset Determine the right-of-use asset

PV of lease payments  PV of lease payments
Lease prepayments
 1. Fixed payments. These are the rental payments that are specified in the lease
agreement and fixed over the lease term.
The Initial direct costs made prior to or at the commencement date
right-of-  2. Variable payments : based on an index or a rate at the commencement date.
use asset PV of the estimated costs for disposal of leased assets or recovery the
initial situation at the end of lease term (for lessee)

Less lease incentives.

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Long-term leases Long-term leases

Determine the lease liability
Determine the lease liability  Amounts guaranteed by a lessee under a residual value guarantee
Variable payments are based on an index or a rate at the commencement  Residual value is the expected value of the leased asset at the end of the lease
date gia tri con lai cua tai san ma lessee phai dam bao khi tra lai
term.
Amounts guaranteed by a lessee under a residual value guarantee. cho lessor
 Guaranteed residual value, the lessee has an obligation to not only return the
Lease leased asset at the end of the lease term but also to guarantee that the residual
The purchase option (Bargain Purchase Option), the extend or
liability termination option, etc. if the lessee firmly exercises the right.
value will be a certain amount.
 Guaranteed residual value is included in the lease payments only to the extent
PV of fixed payments less lease incentives. that the guaranteed amount exceeds the expected residual value of the
underlying asset at the end of the lease.

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Long-term leases
Long-term leases
Determine the lease liability
Payments related to the options: Discount Rate
 1. The purchase option: If the lessee is reasonably certain to exercise the  * To determine the lease liability, a lessee should compute the present value of
option, the PV of that option price should be considered part of the lease the lease payments using the implicit interest rate.
payments
 * The implicit interest rate: is defined as the discount rate that, at
 2. The extend option: If the lessee is reasonably certain to exercise the option, commencement of the lease, causes the aggregate (a) present value of the lease
the lease payments during the extended period should be included in the lease payments and (b) unguaranteed residual value to be equal to (i) the fair value of
liability. the leased asset and (ii) the initial direct costs for the lessor.
 3. The termination option : If the lessee is reasonably certain to exercise the
option, all fines and refunds to the lessor must be included in the lease liability.

quyen cham dut hop dong truoc thoi han: khi cham dut trc thoi han
thi khoan tien phat cho vao lease liability 23 24

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Long-term leases ILLUSTRATION

Discount Rate
 * In the event that it is impracticable to determine the implicit rate of the lessor, On 1/1/2022, BeeB Co. leases a machine to AnnA Co. for 5 years.
the lessee uses its incremental borrowing rate. AnnA has to pay $20,000 at the commencement of the lease. The
requiring equal rental payments of $55,000 at the end of each year
 * The incremental borrowing rate is the rate of interest the lessee would have
to pay on a similar lease or the rate that, at commencement of the lease, the (31/12), the implicit interest rate is 10%.
lessee would incur to borrow over a similar term the funds necessary to
purchase the asset. Compute and record the Right-of-use asset and Lease liability of this
lease agreement.
lai suat cua mot khoan vay tuong tu: lai suat ma lessee phai tra cho 1
khoan lease tuong tu
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ILLUSTRATION ILLUSTRATION

Compute Lease liability

Record at AnnA on 1/1/2022:

Lease payment $55,000 Lease liability: $

Right-of-use asset: $
Present value factor (i=10%, n=5)
PV of lease payment $208,493
Right-of-use asset 228,493
Lease liability 208,493
Lease liability: $208,493 Cash 20,000
Right-of-use asset: $20k + $208,493 = $228,493

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Long-term leases
Long-term leases
Amortization of leased asset
 * Amortization of the right-of-use asset is accounted for similar to other non-
financial assets (PPE)
Subsequent Lessee Accounting:
 * The lessee should amortize the right-of-use asset using an approach that
reflects the consumption of the economic benefits of the leased asset. Generally,
Amortization of leased asset companies use the straight-line method.
Determine Interest expense  * If the lease agreement transfers ownership of the asset to the lessee, it
depreciates the asset consistent with its normal depreciation policy for the same
type of assets using by lessee.
 * If the lease does not transfer ownership, then the lessee depreciates leased
asset over the term of the lease.

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Long-term leases Long-term leases

At commencement of the lease :
Determine Interest expense
Receive leased asset
• * For lease liability generates lease payment and interest expense.
• * In the lease term, the lessee uses the implicit interest rate of the lessor (if Right-of-use asset
lessee know this) or the incremental borrowing rate, to allocate each lease Lease liability
payment between principal and interest.
 * This method produces a periodic interest expense equal to a constant Direct costs
percentage of the carrying value of the lease obligation.
Right-of-use asset
Cash, Payables,…

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Long-term leases ILLUSTRATION

T Financial Services Co. and H Corporation sign a lease agreement dated January 1, 2019, that
Subsequent Lessee Accounting : calls for T to lease a construction machine to H. The terms and provisions of the lease
Record Interest expense: agreement, and other pertinent data, are as follows.
• The term of the lease is five years, beginning January 1, 2019. The lease agreement is non-
Interest expense cancelable, requiring equal rental payments of VND100 millions at the beginning of each year
Lease liability (on 5/1).
• The construction machine has fair value VND500 millions, useful life 5 years.
Record Lease payment: • The lease contains no renewal options. The machine reverts to T at the termination of the
lease.
Lease liability
• H’s incremental borrowing rate is 12 percent per year.
Cash • H depreciates, on a straight-line basis, similar equipment that it owns.
Record Amortization expense: Required:
1. Compute PV of lease payments.
Amortization expense 2. Record at lessee, H Co.
Right-of-use asset 3. Record at lessee, H Co. when rental payments paid at the end of each year.

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ILLUSTRATION ILLUSTRATION

PV of lease payments Annual lease Interest on Reduction of lease

Date Lease liability
payment liability liability
Lease payment (beginning) VND100,000,000 1/1/2019 403,735,000
Present value factor (i=12%, n=5) 5/1/2019 100,000,000 0 100,000,000 303,735,000
PV of lease payment VND403,735,000 5/1/2020 100,000,000 36,448,200 63,551,800 240,183,200
5/1/2021 100,000,000 28,821,984 71,178,016 169,005,184
Lease liability: VND 403,735,000 5/1/2022 100,000,000 20,280,622 79,719,378 89,285,806
Right-of-use asset: VND 403,735,000 5/1/2023 100,000,000 10,714,194 89,285,806 0
500,000,000 96,265,000 403,735,000
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ILLUSTRATION ILLUSTRATION

PV of lease payments Annual lease Interest on Reduction of lease

Date Lease liability
payment liability liability
Lease payment (ending) VND100,000,000
1/1/2019 360,477,620
Present value factor (i=12%, n=5)
5/1/2020 100,000,000 43,257,314 56,742,686 303,734,935
PV of lease payment
VND360,477,620 5/1/2021 100,000,000 36,448,192 63,551,808 240,183,127
5/1/2022 100,000,000 28,821,975 71,178,025 169,005,102
Lease liability: VND360,477,620 5/1/2023 100,000,000 20,280,612 79,719,388 89,285,714
Right-of-use asset : VND360,477,620
5/1/2024 100,000,000 10,714,286 89,285,714 0
500,000,000 96,265,065 360,477,620
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ACOUNTING FOR LEASES AT LESSEE ILLUSTRATION

RENTAL PAYMENTS PAID AT THE END OF EACH YEAR RENTAL PAYMENTS PAID AT THE BEGINNING OF EACH YEAR
On 1/1/2019 1. Guaranteed Residual Value: VND5,000,000.
Right-of-use asset 360,477,620 Right-of-use asset 403,735,000
Lease liability Lease liability
PV of Guaranteed Residual Value:
Pay the first rental payment on 5/1/2019 VND5,000,000/(1+12%)^4 = VND3,177,590
Lease liability 100,000,000
NO ENTRY
Cash 100,000,000 Lease liability: 403,735,000 + 3,177,590 = VND406,912,590
Record interest expense on 31/12/2019
Interest expense 43,257,314 Interest expense 36,448,200
Lease liability Lease liability
Record amortization expense on 31/12/2019 2. Unguaranteed Residual Value.
Amortization expense 72,095,524 Amortization expense 80,747,000=403,735,000/5
Right-of-use asset Right-of-use asset
Pay the second rental payment on 5/1/2020
Lease liability 100,000,000 Lease liability 100,000,000
Cash 100,000,000 Cash 100,000,000
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ILLUSTRATION ACOUNTING FOR LEASES AT LESSEE

GUARANTEED RESIDUAL VALUE UNGUARANTEED RESIDUAL VALUE

On 1/1/2019
Annual lease Interest on Reduction of lease
Date Lease liability Right-of-use asset 406,912,590 Right-of-use asset 403,735,000
payment liability liability Lease liability Lease liability
Pay the first rental payment on 5/1/2019
1/1/2019 406,912,590
Lease liability 100,000,000 Lease liability 100,000,000
5/1/2019 100,000,000 0 100,000,000 306,912,590 Cash 100,000,000 Cash 100,000,000
Record interest expense on 31/12/2019
5/1/2020 100,000,000 36,829,511 63,170,489 243,742,101
Interest expense 36,829,511 Interest expense 36,448,200
5/1/2021 100,000,000 29,249,052 70,750,948 172,991,153 Lease liability Lease liability
Record amortization expense on 31/12/2019
5/1/2022 100,000,000 20,758,938 79,241,062 93,750,092
Amortization expense 81,382,518 Amortization expense 80,747,000
5/1/2023 100,000,000 11,249,908 88,750,092 5,000,000 Right-of-use asset Right-of-use asset
Pay the second rental payment on 5/1/2020
500,000,000 98,087,409 401,912,591 Lease liability 100,000,000 Lease liability 100,000,000
Cash 100,000,000 Cash 100,000,000
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ILLUSTRATION
Short-term leases
Record the last payment including Guaranteed Residual Value
on 5/1/2023:  For low-value leases (of underlying assets with values of $5,000 or less) and short-
term lease (at the commencement date, has a lease term of 12 months or less), a
lessee may elect to expense the lease payments as incurred.
Lease liability 105M
 Lease expense
Cash 105M
 Cash, Payables,…
 One-year lease with a renewal option that the lessee is reasonably certain to
exercise is not a short-term lease.

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THẢO LUẬN

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