CHAPTER 28.

LEASE
AGCAOILI | RAMOS
 Learning Objectives:
1.Identify and explain lease
2.Differentiate operating and finance lease
3.Account for operating lease in the books of the
lessee and lessor.
4.Account for finance lease in the books of lessee and
lessor.
5.Differentiate lease accounting under full PFRS and
PFRS for SME
 Lease
 Is a contract, or part of a contract , that
conveys the right to use an asset (the
underlying asset) for a period of time in
exchange for consideration.
 Identifying a Lease
a. The right to obtain substantially all of the
economic benefits from use of the identified
asset;
b. The right to direct the use of the identified
asset.
 Identified Asset
An asset is typically identified by being explicitly
specified in a contract. However, an asset can
also be identified by being implicitly specified at
the time the asset is made available for use by
the customer.
 Type of Lease
1. Operating lease –is a lease that does not transfers
substantially all the risk and rewards incidental to
ownership of an asset.
2. Finance lease –is a lease that transfers substantially
all the risk and rewards incidental to ownership of an
asset.
Under PFRS 16, leases will be accounted for in the lessor’s and
lessee’s perspective as follows:

A. LESSEE’S POINT OF VIEW

 a lessee is required to account for all leases as finance lease,
except when the contract of lease is a
a. Short-term Lease. A lease contract with a lease term of twelve
(12) months.
b. Low value Lease. A lease for which the underlying asset is of low
value regardless of the lease term

B. LESSOR’S POINT OF VIEW

 A lessor may classify a lease as either finance or operating lease.
 DATES RELEVANT TO A CONTRACT OF
LEASE
Inception Date Commencement Date

The earlier between the date of The date when the lessee is
agreement or commitment by entitled to exercise its right to
the parties on the terms of the the lease asset.
lease contract.
Amount to be recognized at the Initial recognition of the assets,
commencement date are liabilities, income and expenses
determined. related to the lease.
Classification of the lease, as to
whether finance or operating
lease is determined.
 INITIAL MEASUREMENT: RIGHT-OF-USE ASSET
At the commencement date, a lessee shall recognize the
right-of-use asset at cost which shall comprise:
a. The amount of the initial measure of the lease liability.
b. Any lease payment made at or before the
commencement date, less any lease incentives received.
c. Any initial direct cost incurred by the lessee;
d. An estimate of cost to be incurred by the lessee in
dismantling and removing the underlying asset
 INITIAL MEASUREMENT: LEASE LIABILITY

At the commencement date, a lessee shall

measure the lease liability at the present value
of the lease payment that are not paid at that
date. The lease payment shall be discounted
using the:
a. Interest rate implicit in the lease.
b. Lessee’s incremental borrowing rate.
 SUBSEQUENT MEASUREMENT: ROU
a. For right-of-use asset that is considered as property, plant and
equipment, the lessee shall use either the:
i. Cost model –cost less accumulated depreciation and any accumulated
impairment losses adjusted for any remeasurement of the lease liability.
ii. Revaluation model –revalued amount being the FV at the date of
revaluation less any subsequent accumulated depreciation and
accumulated impairment loss.

b. The right-of-use asset that is considered as an investment property, the

lessee shall use either:
• Cost model
• Fair value model
DEPRECIATION OF RIGHT OF USE ASSET
If there is transfer of ownership If there is no transfer of
or purchase option ownership or purchase option

Life to be used:

Based on leased asset’s useful Based on asset’s useful life or

life lease term, whichever is
shorter

Residual Value:

Estimated amount expected to Gross amount of guaranteed

be realized upon disposal of residual value, if applicable
the asset at the end of its (asset reverts back to the
SUBSEQUENT MEASUREMENT: LEASE LIABILITY
After the commencement date, a lessee shall measure the
lease liability by:
a. Increasing the carrying amount to reflect interest on the
lease liability;
b. Reducing carrying amount to reflect the lease payments
made; and
c. Remeasuring the carrying amount to reflect any
reassessment or lease modification or to reflect revised
in-substance fixed lease payments.
 LEASE MODIFICATIONS
a. Accounted for as a separate lease
b. Not accounted for as a separate lease
 ACCOUNTED FOR AS A SEPARATE LEASE
A lessee shall account for a lease modification as a separate
lease if both:
a. The modification increases the scope of the lease by
adding the right to use one or more underlying assets; and
b. The consideration for the lease increases by an amount
commensurate with the stand-alone price for the increase
in scope and any appropriate adjustments to that stand-
alone price to reflect the circumstances of the particular
contract
 NOT ACCOUNTED FOR AS A SEPARATE LEASE

Not accounted for as a separate lease may either be:

a. Decrease in the scope of lease term
b. Other lease modifications

Accounting procedures:
c. Allocate the consideration in the modified contract;
d. Determine the lease term of the modified lease; and
e. Remeasure the lease liability by discounting the
revised lease payments using a revised discount rate.
Decrease in the scope of lease term
 The lessee shall account for the remeasurement of the
lease liability by decreasing the carrying amount of the
ROU asset to reflect the partial or full termination of the
lease for lease modifications that decrease the scope of
the lease.

Other lease modifications

 The lessee shall account for it by making a
corresponding adjustment to the ROU asset for all other
lease modifications.
 FINANCIAL STATEMENT PRESENTATION: LESSEE

A lessee shall either present in the statement of financial

position, or disclose in the notes:
1. right-of-use assets separately from other assets.
a. include ROU asset within the same line item as that within
which the corresponding underlying assets would be
presented if they were owned; and
b. disclose which line items in the balance sheet include
those ROU assets.

2. Lease liability separately from other liabilities.

In the statement of profit or loss and other
comprehensive income, a lessee shall present
interest expense on the lease liability separately from
the depreciation charge of ROU asset.
In the statement of cash flows, a lessee shall classify:
a. Cash payments for the principal portion of the lease
liability within financing activities;
b. Cash payments for the interest portion of the lease
liability;
 ACCOUNTING FOR OPERATING LEASE
Payments made by Lease
• Periodic Rental Rental Income
• Unequal rental payments Total collections will be
recognized as rental income
over lease term
• Lease bonus Recognized as a liability (une
arned rent income) and to be
amortized over the lease
term.
• Contingent rent Added to rent income in the
period which they arise
• Refundable security deposit Recognized as a liability
(non-current) and may be
Other Cost Incurred

If paid by the Lessee If paid by the Lessor

Initial direct costs(e.g., Ignore Capitalized as part of t
professional fees and he cost of leased asset
commission) and to be recognized
as expense over the
lease term on the
same basis as the
lease income.
Executory cost Recognize as income Expense
(e.g., property taxes, equal to the amount
insurance and paid by the lessee. At
maintenance costs) the same time, the
lessor shall recognize
expense for
Other items related to an operating lease
Leased Assets Continued to be recognized i
n the books and will be
depreciated using method as
required by the lessor’s
policy.
Leasehold Improvements Ignore
 ACCOUNTING FOR FINANCE LEASE: BOOK OF THE
LESSOR
Types: Direct Financing Lease Sales Type Lease
Definition Does not involve a manufact Involves the recognition of a
urer’s or dealer’s profit. manufacturer’s or dealer’s
profit or loss on the transfer
of the asset to the lessee.
Initial Direct Cost Included in the initial Expensed immediately (or
measurement of the net added to the cost of sales
lease receivable or net account.)
investment.
Effect if there is initial cost New implicit rate will be -
computed using
interpolation.(Note that the
PV is higher thus the new
implicit rate is lower than
the old implicit rate.)
 Sales-Type Lease
Formulas:
Lessor: Direct Financing and Sales-Type Lease
Lease Payments Receivable/ Gross Lease Payments (LPs):
Investment: Total Periodic Lease Payments
Periodic payment x lease term xx
Add: Guaranteed residual xx
Or bargain purchase option xx
Add: Unguaranteed residual value xx
Total Lease Receivable xx

Net Investment or PV of Gross Investment PV of LP:

PV of Lease Payments (Periodic Payment
x PV of Ordinary Annuity or Annuity
Date) xx
PV of GRV ( GRV x PV of 1)
xx
PV of BPO (BPO x PV of 1)
xx
Add: PV or URV (URV x PV of 1)
Unearned Net Income Total Lease Receivable or Gross
Receivable xx
Less: Net Investment
xx
Unearned Interest Income
xx
Gross Profit or Manufacturer’s Profit (only Sales (=PV of LP or Sales Price)
for sales-type lease) xx
Less: Cost of Sales
xx
Less: Initial Direct Costs ( if any)
xx
Gross Profit or Manufacturer’s Profit
xx
 Sales-Type Lease
Guaranteed Residual Unguaranteed Residual
Value Value
Gross Amount Included in Yes Yes
the Lease Receivable?

Present Value amount Yes No

included in the Sales?

Present Value amount No Yes

deducted in the Cost of
Sales?
 SUBLEASES
Account for the lease either Operating or Finance Lease
Owner/Head
Intermediate lessor’s POV
Lessor
Account the Head Lease as:

HEAD LEASE Right-of-use- asset xx

Lease Liability xx
Head Lease/ Assuming the Sublease is treated as Finance Lease
Intermediate Lease Receivable xx
Lessor or
Sublessor Loss on Subleasing xx
Unearned Interest Income xx
SUBLEASE Right-of-use asset xx
Gain on Subleasing xx
Sub-lessee’s POV
SUBLESSEE
Account the sublease as:
Right-of-use- asset xx
Lease Liability xx
 Sales and Leaseback
Transfer of the asset is sale
a. The seller-lessee shall measure the ROU asset arising from the leaseback at
the proportion of the previous carrying amount of the asset that relates to
the ROU retained by the seller-lessee.
b. The buyer-lessor shall account for the purchase of the asset applying
applicable standards, and for the lease applying the lessor accounting
requirements in this standard.

Selling Price xx
Less: FV xx
Additional financing xx

Fair value xx
Less: CA xx
Total gain(loss) on sale and leaseback xx
 Transfer of the asset is not a sale
a. The seller-lessee shall continue to recognize the transferred asset
and shall recognize a financial liability equal to the transfer
proceeds.
Cash xx
Financial liability xx
b. The buyer-lessor shall not recognize the transferred asset and shall
recognize a financial asset equal to the transfer proceeds. The journal
entry is:
Financial asset (receivable) xx
Cash xx
THANK YOU!!