FUNDAMENTALS OF IFRS
CHAPTER
19
Leases
(Exposure Draft)
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LEASES (EXPOSURE DRAFT)
FUNDAMENTALS OF IFRS
19.1
LEASES (EXPOSURE DRAFT)
19.2
19.2 CHAPTER NINETEEN
Leases (Exposure Draft)
19
Introduction
A lease is a contract in which the right to use a specified asset (the underlying asset) is conveyed,
for a period of time, in exchange for consideration.

Contract
An agreement between 2 or more parties that create enforceable rights and obligations.

Underlying asset
The asset for which a right of use is conveyed in a lease.

Lessee
An entity that enters into a contract to provide another entity with consideration in
return for the right to use an asset for a period of time.

Lessor
An entity that enters into a contract to provide another entity with the right to use an
asset for a period of time in return for consideration.
At the date of inception of a contract, an entity shall determine whether the contract is, or
contains, a lease on the basis of the substance of the contract, by assessing whether the :

Fulfilment of the contract depends on providing a specified asset(s); and
In assessing whether fulfilment of the contract depends on providing a specified asset(s)
to the lessee, it may be necessary to consider whether the asset(s) are implicitly or explicitly
identified.
Example 1
To be the subject of a lease, a physically distinct portion of a larger asset (eg, wheels of a truck) could be a specified asset, whereas
a non-physically distinguishable portion of an asset (eg, 50% of the capacity of a fuel tank) would not qualify, as a specified asset.
An asset is implicitly specified if it is –

infeasible or impractical for a lessor to provide alternative assets in place of the
underlying asset during the lease term; or

if a lessor can substitute another asset for the underlying asset but rarely does so in
practice.
Example 2
In a lease of an aircraft, it may not be practical to substitute another aircraft if the lessee has made extensive changes to the underlying
asset (the aircraft) to suit the lessee’s image, brand and requirements.
A contract that permits an entity to substitute a similar asset for the specified asset after the
commencement of the lease does not contain a lease because the underlying asset is not specified,
even if the contract explicitly identifies a specified asset.
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19.3
FUNDAMENTALS OF IFRS 19.3
If a supplier of a specified quantity of goods or services has the right and current ability to provide those goods or services using assets
not specified in the arrangement, the underlying assets are not specified and the contract does not contain a lease. However, a contract
that permits or requires the supplier to substitute other assets only when the specified asset is not operating properly may be a lease.
In addition, a contractual provision (contingent or otherwise) that permits or requires a supplier to substitute other assets for any reason
on or after a specified date does not preclude lease treatment before the date of substitution.

Contract conveys the right to control the use of a specified asset for an agreed period of
time.
A contract conveys the right to use an asset if it conveys to an entity the right to control
the use of the underlying asset during the lease term. The right to control the use of the
underlying asset is conveyed if any one of the following conditions is met :


The entity has the ability or right to –

operate the asset or direct others to operate the asset in a manner that it
determines while obtaining or controlling more than an insignificant amount
of the output or other utility of the asset; or

control physical access to the underlying asset while obtaining or controlling
more than an insignificant amount of the output or other utility of the asset.
The entity will obtain all but an insignificant amount of the output or other utility of the
asset during the term of the lease, and the price that the entity will pay for the output is
neither contractually fixed per unit of output nor equal to the current market price per
unit of output as of the time of delivery of the output. If the price that the entity will pay
is contractually fixed per unit of output or at the current market price as of the time of
delivery of the output, then the entity is paying for a product or service rather than
paying for the right to use the underlying asset.
Example 4
A production company (the purchaser) enters into an arrangement with a third party (the supplier) to supply a minimum quantity of gas
needed in its production process for a specified period of time. The supplier designs and builds a facility adjacent to the purchaser’s
plant to produce the needed gas and maintains ownership and control over all significant aspects of operating the facility. The
agreement provides for the following –

The facility is explicitly identified in the arrangement, and the supplier has the contractual right to supply gas from other sources.
However, supplying gas from other sources is not economically feasible or practicable.

The supplier has the right to provide gas to other customers and to remove and replace the facility’s equipment and modify or
expand the facility to enable the supplier to do so. However, at inception of the arrangement, the supplier has no plans to modify
or expand the facility. The facility is designed to meet only the purchaser’s needs.

The supplier is responsible for repairs, maintenance and capital expenditures.

The supplier must stand ready to deliver a minimum quantity of gas each month.

Each month, the purchaser will pay a fixed capacity charge and a variable charge based on actual production taken. The
purchaser must pay the fixed capacity charge irrespective of whether it takes any of the facility’s production. The variable charge
includes the facility’s actual energy costs, which amount to about 90% of the facility’s total variable costs. The supplier is subject
to increased costs resulting from the facility’s inefficient operations.

If the facility does not produce the stated minimum quantity, the supplier must return all or a portion of the fixed capacity charge.
The arrangement contains a lease. An asset (the facility) is explicitly identified in the arrangement and fulfillment of the arrangement is
dependent on the facility. Although the supplier has the right to supply gas from other sources, its ability to do so is not substantive.
The purchaser has obtained the right to use the facility because, on the facts presented – in particular, that the facility is designed to meet
only the purchaser’s needs and the supplier has no plans to expand or modify the facility — it is remote that one or more parties other
than the purchaser will take more than an insignificant amount of the facility’s output and the price the purchaser will pay is neither
contractually fixed per unit of output nor equal to the current market price per unit of output as of the time of delivery of the output.
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LEASES (EXPOSURE DRAFT)
Example 3
LEASES (EXPOSURE DRAFT)
19.4
19.4
CHAPTER NINETEEN
Example 5
A manufacturing company (the purchaser) enters into an arrangement with a third party (the supplier) to supply a specific component
part of its manufactured product for a specified period of time. The supplier designs and constructs a plant adjacent to the purchaser’s
factory to produce the component part. The designed capacity of the plant exceeds the purchaser’s current needs, and the supplier
maintains ownership and control over all significant aspects of operating the plant. The arrangement provides for the following –

The supplier’s plant is explicitly identified in the arrangement, but the supplier has the right to fulfil the arrangement by shipping the
component parts from another plant owned by the supplier. However, to do so for any extended period of time would be
uneconomic.

The supplier is responsible for repairs, maintenance, and capital expenditures of the plant.

The supplier must stand ready to deliver a minimum quantity. The purchaser is required to pay a fixed price per unit for the actual
quantity taken. Even if the purchaser’s needs are such that they do not need the stated minimum quantity, they still pay only for
the actually quantity taken.

The supplier has the right to sell the component part to other customers and has a history of doing so (by selling in the replacement
parts market), so it is expected that parties other than the purchaser will take more than an insignificant amount of the component
parts produced at the supplier’s plant.
The arrangement does not contain a lease. An asset (the plant) is explicitly identified in the arrangement and fulfillment of the
arrangement is dependent on the facility. Although the supplier has the right to supply component parts from other sources,
the supplier would not have the ability to do so because it would be uneconomic. However, the purchaser has not obtained the
right to use the plant because the purchaser does not have the ability or right to operate or direct others to operate the plant
or control physical access to the plant, and the likelihood that parties other than the purchaser will take more than an insignificant
amount of the component parts produced at the plant is more than remote, on the basis of the facts presented. In addition, the
price that the purchaser pays is fixed per unit of output taken.
Separation of lease and service components
An entity shall apply this Exposure Draft to a contract that contains service components and
lease components, except as follows –

A lessee (lessor) shall apply Revenue from Contracts with Customers to a service
component of a contract that contains service components and lease components if the
service component is distinct and the lessee (lessor) is able to do so.

When a lessor applies the derecognition approach (discussed later), it shall apply Revenue
from Contracts with Customers to a service component of a contract that contains service
components and lease components, even if that service component is not distinct.
An entity shall apply Revenue from Contracts with Customers to identify separate performance
obligations within a contract that contains both service components and lease components. An
entity shall determine whether a service component is distinct at the date of inception of the
lease considering all concurrently negotiated contracts with another party. A service component
is distinct if either the :

entity, or another entity, sells an identical or similar service separately; or

entity could sell the service separately because the service has a distinct –

function, ie, it has a utility either (1) on its own; or (2) together with other nonleasing goods and services that the lessee has acquired from the lessor or is provided
separately by the lessor or by another entity;

profit margin, ie, it is subject to distinct risks and the lessor can separately identify
the resources needed to provide the service.
If the payments required by a contract that contains both lease and service components change
after the commencement of the lease, an entity shall determine the change attributable to the
lease and service components. If the amount of the change attributable to each component
cannot be determined, the entity shall allocate the change to the service components and lease
components in the same proportion as determined at the date of commencement of the contract.
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19.5
FUNDAMENTALS OF IFRS 19.5

If the service component is distinct, the entity allocates the payments required by the
contract between the service components and lease components using the principles
of Revenue from Contracts with Customers. However, if a lessee or a lessor that applies
the performance obligation approach is unable to allocate the payments, the lessee or
lessor applies this Exposure Draft to the whole contract.

If the service component is not distinct, a lessee and a lessor that applies the performance
obligation approach shall account for the whole contract as a lease.

If a service component is not distinct and a lessor applies the derecognition approach,
the lessor shall allocate the payments between service components and lease
components on a reasonable basis, eg, based on the stand-alone selling price of the
service. The lessor recognises a receivable for the lease component only and recognises
the service component in accordance with the principles of Revenue from Contracts
with Customers.
Example 6
An entity goes into a 3-year lease of equipment. The contract entails the entity to make fixed monthly payment of 360 to cover the 3
components of the contact, ie, lease, maintenance and training.
Scenario 1
The entity ascertains the stand-alone selling price for each of the components and calculates the amount allocated to each component
as follows –
Component
Lease
Stand-alone
selling price
Allocation
Monthly
allocation
320
80% (320  400  100)
Maintenance
60
15% (60  400  100)
54 (360  15%)
Training
20
5% (20  400  100)
18 (360  5%)
400
100%
288 (360  80%)
360
The entity would allocate 288 of the monthly payments to the equipment lease, and would recognise and measure the right-of-use
asset and the liability to make lease payments using this Exposure Draft. The payments allocated to the maintenance (54) and training
(18) would be accounted for as per Revenue from Contracts with Customers.
Scenario 2
Except for the maintenance, stand-alone selling prices exist for the other 2 components, which are same as Scenario 1. The lessor
offers the lease of the equipment with a maintenance plan and charges a fixed monthly payment of 360. Without the maintenance
service, the charge is 340 per month. No other vendor offers a maintenance plan separately.
The entity would allocate 320 to the lease, 20 to training and the balance 20 (360 – 340) to maintenance.
Scenario 3
The stand-alone selling price for the maintenance services exists which is 60 per month. But for lease and training, stand-alone selling
prices are not available.
In this case, the training component would be accounted for together with the lease, which is 300 (360 – 60) per month. The 60 per
month maintenance services will be accounted for as per Revenue from Contracts with Customers.
Scenario 4
The stand-alone selling price of any of the components does not exist. In such a case, the entire payment of 360 per month will be
accounted for using this Exposure Draft.
Distinguishing between a lease and a purchase or sale
An entity shall not apply this Exposure Draft to contracts that meet the criteria for classification
as a purchase or sale of an underlying asset. A contract represents a purchase or sale of an
underlying asset if, at the end of the contract, an entity transfers to another entity control of
the entire underlying asset and all but a trivial amount of the risks and benefits associated
with the entire underlying asset. That determination is made at inception and is not
subsequently reassessed.
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LEASES (EXPOSURE DRAFT)
An entity shall account for each component as follows –
LEASES (EXPOSURE DRAFT)
19.6
CHAPTER NINETEEN
19.6
An entity shall consider all relevant facts and circumstances when determining whether control
of the underlying asset is transferred at the end of the contract. A contract normally transfers
control of an underlying asset when the contract –

automatically transfers title to the underlying asset to the transferee at the end of the
contract term; or

includes a bargain purchase option, which is an option to purchase the asset at a price
that is expected to be significantly lower than the fair value of the asset at the date that
the option becomes exercisable. If the exercise price is significantly lower than fair
value, it would be reasonably certain at the inception of the lease that such options will
be exercised. An entity that has a bargain purchase option is in an economically similar
portion to an entity that will automatically obtain title to the underlying asset at the end
of the lease term. By exercising its bargain purchase option, the transferee would be
able to direct the use of, and receive the benefits from, the whole of the underlying
asset for the whole of its life.
Determining the lease term
The lease term is the longest possible term that is more likely than not to occur. An entity
determines the lease term considering all explicit and implicit options included in the contract
and given effect by the operation of statutory law.
Example 7
An entity may have a lease that has a non-cancellable 10-year term, an option to renew for 5 years at the end of 10 years, and an
option to renew for an additional 5 years at the end of 15 years. Assume that the entity determines the probability for each term as
follows :
Probability
Term (years)
40%
10
30%
15
30%
20
The term will be at least 10 years, there is a 60% change that the term will be 15 years or longer, but only a 30% change that the term
will be 20 years. Therefore, there is a 60% chance that the term will be 15 years, which is the longest possible term more likely than
not to occur. Therefore, the lease term is 15 years.
An entity considers the following factors in assessing the probability of each possible term –

contractual factors, which are the explicit contractual terms that could affect whether
the lessee extends or terminates the lease.
Example 8
Examples of contractual factors are the level of lease payments in any secondary period (bargain, discounted, market or fixed rate),
the existence and amount of any contingent rentals or other contingent payments such as payments under term option penalties and
residual value guarantees, the existence and terms of any renewal options and costs associated with returning the underlying asset
in a contractually specified condition or to a contractually specified location.

non-contractual factors, such as statutory law or the financial consequences of a decision
to extend or terminate the lease that the contract does not state explicity.
Example 9
Examples of non-contractual features are local regulations that affect the lease term, the existence of significant leasehold improvements
that would be foregone if the lease were terminated or not extended, non-contractual relocation costs, costs of lost production, tax
consequences and costs associated with sourcing an alternative item.
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19.7
FUNDAMENTALS OF IFRS 19.7
business factors, such as whether the underlying asset is crucial to the lessee’s
operations, or whether the underlying asset is a specialised asset or the location of the
asset.

other lessee-specific factors, such as lessee’s intentions and past practice.
Leases sometimes include options and residual value guarantees, ie, a guarantee made by the
lessee that the fair value of the underlying asset that the lessee will return to the lessor will be at
least a specified amount. If the fair value is less than that amount, the lessee is obliged to pay the
difference to the lessor.
Example 10
A lease contract includes a guarantee by the lessee that the lessor will realise 10 from selling the asset at the expiration of the lease.
At the commencement of the lease, the lessee estimates that the underlying asset will have a fair value of 5 at the expiration of the
lease. Therefore, the lessee expects to pay the lessor the gross guaranteed amount minus the expected value of the underlying asset,
ie, 5 (10 – 5) under the residual value guarantee.
Example 11
A lease may have a term of 10 years. At the end of 10-year period, the contract permits the lessee to return the underlying asset to
the lessor or to extend the lease for an additional 5 years. If the lessee returns the leased asset to the lessor, the contract may specify
that the lessee will pay the lessor the difference between the expected residual value of the leased asset at the end of 10 years and
the actual residual value at the end of 10 years (a residual value guarantee). At the date of inception of the lease, a lessee or lessor
shall determine whether exercising the option to extend its more likely than not to occur. At the date of commencement of the lease,
the lessee recognises a liability to make lease payments and the lessor recognises a right to receive lease payments that is consistent
with that outcome. Thus :


if the lessee or lessor determines that returning the asset at the end of the 10-year period is more likely than not to occur, the lease
term for the lessee or lessor is 10 years. In that case –

the lessee would recognise a liability to make lease payments equal to the present value of 10 years of lease payments
plus an estimate of the amount payable under the residual value guarantee.

if the lessor retains exposure to significant risks or benefits associated with the underlying asset, the lessor would
recognise a receivable and a liability equal to the present value of 10 years of lease payments plus an estimate of
the amount receivable under the residual value guarantee. The lessor would continue to recognise the underlying
asset.

if the lessor does not retain exposure to significant risks or benefits associated with the underlying asset, the lessor would
recognise a receivable equal to the present value of 10 years of lease payments plus an estimate of the amount receivable
under the residual value guarantee and would derecognise a portion of the underlying asset.
if the lessee or lessor determines that renewal is more likely than not to occur, the lease term for the lessee or lessor is 15 years.
In that case –

the lessee would recognise a liability to make lease payments equal to the present value of 15 years of lease payments.

if the lessor retains exposure to significant risks or benefits associated with the underlying asset, the lessor would
recognise a receivable and a liability equal to the present value of 15 years of lease payments. The lessor would
continue to recognise the underlying asset.

if the lessor does not retain exposure to significant risks or benefits associated with the underlying asset, the lessor would
recognise a receivable equal to the present value of 15 years of lease payments and would derecognise a portion of the
underlying asset.
At each reporting date, the lessee or lessor reassesses which outcome it considers to be most likely to occur on the basis of any new
facts or circumstances that indicate that there would be a significant change in the recognised right to receive lease payments or liability
to make lease payments since the previous reporting period. The lessee and lessor may have different information regarding the
likelihood of an option being exercised; therefore, they may reach different decisions about what is the most likely outcome.
Example 12
An entity enters in a lease for an equipment that includes a non-cancellable term of 4 years and 2 additional 4-year renewal options.
If the entity finds no significant economic incentive to exercise the renewal options, the lease term would be 4 years.
Now assume the lessee installed a significant amount of leasehold improvements at the commencement of the lease, which have a
useful life of 10 years. The entity determines that a significant economic incentive exists through 10 years, which would otherwise be
foregone if the lease were not extended. Therefore, the lease term would be for 10 years.
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LEASES (EXPOSURE DRAFT)

LEASES (EXPOSURE DRAFT)
19.8
19.8 CHAPTER NINETEEN
Example 13
An entity enters into a 3-year lease for an equipment, which has a 5-year useful life and the expected fair value of the equipment at
the end of 3 years is 10. The lease contract includes a purchase option under which the entity can purchase the equipment for 5 at the
end of the contract. Since the entity can obtain the equipment at a price that is significantly lower than the expected fair value at the
time of exercise of the option, the entity has a significant economic incentive to exercise the purchase option. Therefore, the lease term
would be for 5 years.
Lessee
Recognition
At the date of commencement of a lease, a lessee shall recognise in the Statement of Financial
Position a right-of-use asset and a liability to make lease payments.

Date of commencement of the lease
The date on which the lessor makes the underlying asset available for use by the lessee.

Right-of-use asset
An asset that represents the lessee’s right to use, or control the use of, a specified asset
for the lease term.

Lease payments
Payments arising under a lease including fixed rentals and rentals subject to uncertainty,
including, but not limited to, contingent rentals and amounts payable by the lessee
under residual value guarantees and term option penalties.

Contingent rentals
Lease payments that arise under the contractual terms of a lease because of changes in
facts or circumstances occurring after the date of inception of the lease, other than the
passage of time.

Date of inception of the lease
The earlier of the date of the lease agreement and the date of commitment by the
parties to the lease agreement.
A lessee shall recognise the following items in the Statement of Comprehensive Income, except to the
extent that another IFRS requires or permits its inclusion in the cost of an asset –

Interest expense on the liability to make lease payments

Amortisation of the right-of-use asset
If a lessee measures the right-of-use asset at amortised cost, it shall amortise the asset
on a systematic basis from the date of commencement of the lease to the end of the
lease term or over the useful life of the underlying asset if shorter. The lessee shall
select the amortisation method and review the amortisation period and amortisation
method in accordance with IAS 38.

Revaluation gains and losses of a right-of-use asset
A lessee may measure a right-of-use asset at its fair value at the date of revaluation less
any amortisation and impairment losses arising after the date of revaluation if it revalues
all owned assets in that class of property, plant and equipment, in accordance with IAS
16. For the purposes of this revaluation, fair value need not be determined by reference
to an active market. If a lessee measures a right-of-use asset at a revalued amount, it
shall revalue all right-of-use assets relating to the class of property, plant and equipment
to which the underlying asset belongs.
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19.9
FUNDAMENTALS OF IFRS 19.9
If the lessee revalues a right-of-use asset in accordance with the above, it shall recognise
gains and losses on revaluation in the Statement of Comprehensive Income in accordance
with IAS 38.

Any changes in the liability to make lease payments resulting from reassessment of the
expected amount of contingent rentals or expected payments under term option penalties
and residual value guarantees relating to current or prior periods.

Any impairment losses on a right-of-use asset
A lessee shall apply IAS 36 at each reporting date to determine whether the right-of-use
asset is impaired and shall recognise any impairment loss in accordance with IAS 36.
Initial measurement
At the end of inception of the lease, a lessee shall measure :

the liability to make lease payments at the present value of the lease payments,
discounted using the lessee’s incremental borrowing rate or, if it can be readily
determined, the rate the lessor charges the lessee.

Lessee’s incremental borrowing rate
The rate of interest that, at the date of inception of the lease, the lessee would have
to pay to borrow over a similar term, and with a similar security, the funds necessary
to purchase a similar underlying asset.

Rate the lessor charges the lessee
A discount rate that takes into account the nature of the transaction as well as the
specific terms of the lease such as lease payments, lease term and contingent rentals.
The discount rate used to determine the present value of lease payments for lessees is the lessee’s
incremental borrowing rate or the rate the lessor charges the lessee if that rate can be reliably
determined. The lessee’s incremental borrowing rate may be the same as the rate the lessor
charges the lessee.
Both the lessee’s incremental borrowing rate and the rate the lessor charges the lessee would
reflect the nature of the transaction and the specific terms of the lease, such as lease payments,
lease term, expected contingent rentals, expected payments under term option penalties and
residual value guarantees, the expected value of the underlying asset at the end of the lease term
and security attached to the underlying asset during and at the end of the lease term.
Present value of lease payments
A lessee shall determine the present value of lease payments payable during the lease term on
the basis of expected outcome, determined using all relevant information. The expected outcome
is the present value of the probability-weighted average of the cash flows for a reasonable number
of outcomes. Estimating expected outcome involves –

identifying each reasonably possible outcome. An entity need not assess every possible
outcome to identify the reasonably possible outcomes included in the expected present
value of the cash flows.

estimating the amount and timing of the cash flows for each reasonably possible outcome.

determining the present value of those cash flows.

estimating the probability of each outcome.
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LEASES (EXPOSURE DRAFT)
If the lessee revalues a right-of-use asset in accordance with the above, it shall perform
revaluations with such regularity that at the end of the reporting period the carrying
amount of the asset does not differ materially from its fair value.
LEASES (EXPOSURE DRAFT)
19.10
19.10 CHAPTER NINETEEN
In determining the present value of lease payments payable, a lessee shall include an
estimate of –

contingent rentals payable. If the contingent rentals depend on an index or a rate,
the lessee shall determine the expected lease payments using readily available
forward rates or indices. If forward rates or indices are not readily available, the
lessee shall use the prevailing rates or indices.

amounts payable to the lessor under residual value guarantees. Residual value
guarantees that are provided by an unrelated third party are not lease payments.

expected payments to the lessor under term option penalties.
The exercise price of a purchase option included in a lease is not a lease payment and the
purchase option is not included in determining the present value of lease payments payable.

the right-of-use asset at the amount of the liability to make lease payments, plus any
initial direct costs incurred by the lessee.

Initial direct costs
Recoverable costs that are directly attributable to negotiating and arranging a
lease that would not have been incurred had the lease transaction not been
made. They may include –

commissions;

legal fees;

evaluation of the prospective lessee’s financial condition;

evaluating and recording guarantees, collateral and other security
arrangements;

negotiating lease terms;

preparing and processing lease documents;

closing the transactions;

other costs that are incremental and directly attributable to negotiating and
arranging the lease.
The following items are not initial direct costs –

general overheads, such as rent, depreciation, occupancy and equipment
costs, unsuccessful origination efforts and idle time;

costs related to activities performed by the lessor for advertising, soliciting
potential leases, servicing existing leases, or other ancillary activities.
Subsequent measurement
After the date of commencement of the lease, a lessee shall measure the :

liability to make lease payments at amortised cost using the effective interest method.

Effective interest method
It is a method of calculating the amortised cost of a financial asset or a financial
liability (or group of financial assets or financial liabilities) and of allocating the
interest income or interest exposure over the relevant period.
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19.11
FUNDAMENTALS OF IFRS 19.11
After the commencement of the lease, the lessee shall reassess the carrying amount of
the liability to make lease payments arising from each lease if facts or circumstances
indicate that there would be a significant change in the liability since the previous
reporting period. When such indications exist, a lessee shall reassess the –

length of the lease term and adjust the right-of-use asset to reflect any resulting
change to the liability to make lease payments arising from changes to the lease
term.

expected amount of any contingent rentals and expected payments under term
option penalties and residual value guarantees. A lessee shall recognise any
resulting changes to the liability to make lease payments in accordance with the
following paragraph.
A lessee shall distinguish changes in contingent rentals and expected payments
under term option penalties and residual value guarantees that relate to current or
prior periods from those that relate to future periods. A lessee shall recognise changes
in the expected amount of such payments –

in profit or loss, to the extent that those changes relate to current or prior periods.

as an adjustment to the right-of-use asset to the extent that those changes
relate to future periods.
Example 14
When lease payments depend on the amount of the lessee’s sales, changes relating to sales in the current or prior periods are
recognised in profit or loss, whereas changes relating to expectations of future sales are recognised as an adjustment to the right-ofuse asset.
A lessee shall not change the rate used to discount the lease payments except to reflect
changes in reference interest rates when contingent rentals are based on those reference
interest rates. When contingent rentals are based on reference interest rates, a lessee shall
recognise any changes to the liability to make lease payments arising from changes in the
discount rate in profit or loss.

right-of-use asset at amortised cost, except for revaluation and impairment.
Example 15
An entity enters into a 3-year lease of a machine. Annual lease payments are 1,000 in arrears. The lessee’s incremental borrowing
rate is 10%. The present value of the lease payments using 10% discount rate is :
Year-end
Cash outflow
Discount rate @ 10%
1
1,000
0.909
2
1,000
0.826
826
3
1,000
0.751
751
Present value of lease payments
Present value
909
2,486
At the commencement of the lease, the lessee recognises the leased asset and corresponding liability at the present value of lease
payments :
Right-of-use asset
2,486
Liability to make lease payments
2,486
 At the end of year 1, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
248 (2,486  10%)
Liability to make lease payments

248
lease payment :
Liability to make lease payments
Cash
1,000
1,000
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continued ...
LEASES (EXPOSURE DRAFT)
Reassessment of the liability to make lease payments
LEASES (EXPOSURE DRAFT)
19.12
19.12 CHAPTER NINETEEN
... continued
and,
amortisation of the right-of-use asset.
Amortisation
Accumulated amortisation
 At the end of year 2, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
Liability to make lease payments

lease payment :
Liability to make lease payments
Cash
and,

amortisation of the right-of-use asset.
Amortisation
Accumulated amortisation
 At the end of year 3, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
Liability to make lease payments

lease payment :
Liability to make lease payments
Cash
and,

amortisation of the right-of-use asset.
Amortisation
Accumulated amortisation
* under SLM

829 (2,486  3)*
829
173 [(2,486 + 248 – 1,000) x 10%]
173
1,000
1,000
829 (2,486  3)
829
93 (1,000 – 907)
93
1,000
1,000
828
828
Example 16
An entity enters into a 3-year lease of a machine. Annual lease payments are 1,000 in arrears. The lessee’s incremental borrowing
rate is 10%. The residual value guarantee at the end of 3 years is 500.
The lease term can be renewed for an additional period of 2 years, when annual lease payments are 1,200 in arrears. The residual
value guarantee at the end of 5 years is 300.
At the commencement of the lease, it is more likely than not to occur that the lease term is 3 years.
At the end of the 2nd year, the lessee determines to renew the lease for further 2 years.
The lessee amortises the right-of-use asset on a straight-line basis.
The present value of lease payments using 10% discount rate is :
Year-end
Cash outflow
Discount rate @ 10%
Present value
1
1,000
0.909
909
2
1,000
0.826
826
3
1,500*
0.751
1,127
Present value of lease payments
2,862
* including residual value guarantee.
At the commencement of the lease, the lessee recognises the leased asset and corresponding liability at the present value of lease
payments :
Right-of-use asset
2,862
Liability to make lease payments
2,862
 At the end of year 1, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
286 (2,862 x 10%)
Liability to make lease payments
286
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continued ...
19.13
FUNDAMENTALS OF IFRS 19.13

lease payment :
Liability to make lease payments
1,000
Cash
1,000
and,
amortisation of the right-of-use asset.
Amortisation
954 (2,862  3)
Accumulated amortisation
954
Following these events, the carrying amount of the liability to make lease payments is 2,148 (2,862 + 286 – 1,000) and the
carrying amount of right-of-use asset is 1,908 (2,862 – 954).
 At the end of year 2, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
215 (2,148 x 10%)
Liability to make lease payments
215

lease payment :
Liability to make lease payments
1,000
Cash
1,000
and,

amortisation of the right-of-use asset.
Amortisation
954 (2,862  3)
Accumulated amortisation
954
Following these events, the carrying amount of the liability to make lease payments is 1,363 (2,148 + 215 – 1,000) and the
carrying amount of right-of-use asset is 954 (2,862  3).
When the lessee determines to renew the lease, the present value of lease payments at the end of 2nd year is :

Year-end
Cash outflow
Discount rate @ 10%
Present value
3
1,000
0.909
909
4
1,200
0.826
991
5
1,500*
0.751
1,127
Present value of lease payments
3,027
* including residual value guarantee
The lessee is to adjust the right-of-use asset to reflect the resulting change to the liability to make lease payments arising from
changes to the lease term and residual value guarantee :
Right-of-use asset
1,664
Liability to make lease payments
1,664 (3,027 – 1,363)
Following these events, the carrying amount of the liability to make lease payments is 3,027 and the carrying amount of rightof-use asset is 2,618 (954 + 1,664).
 At the end of year 3, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
303 (3,027 x 10%)
Liability to make lease payments
303

lease payment :
Liability to make lease payments
1,000
Cash
1,000
and,

amortisation of the right-of-use asset.
Amortisation
873 (2,618  3)
Accumulated amortisation
873
Following these events, the carrying amount of the liability to make lease payments is 2,330 (3,027 + 303 – 1,000) and the
carrying amount of right-of-use asset is 1,745 (2,618 – 873).
 At the end of year 4, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
233 (2,330 x 10%)
Liability to make lease payments
233
continued ...
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LEASES (EXPOSURE DRAFT)
... continued
LEASES (EXPOSURE DRAFT)
19.14
19.14 CHAPTER NINETEEN
... continued
lease payment :
Liability to make lease payments
Cash

1,200
1,200
and,
amortisation of the right-of-use asset.
Amortisation
873 (2,618  3)
Accumulated amortisation
873
Following these events, the carrying amount of the liability to make lease payments is 1,363 (2,330 + 233 – 1,200) and the
carrying amount of right-of-use asset is 872 (2,618  3).
 At the end of year 5, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
137 (1,363 x 10%)
Liability to make lease payments
137

lease payment :
Liability to make lease payments
1,500 (1,363 + 137)
Cash
1,500
and,

amortisation of the right-of-use asset.
Amortisation
872
Accumulated amortisation
872

Example 17
An entity enters into a lease of a machine that has a 3-year non-cancellable initial lease term with an additional 3-year renewal option.
The lessee is required to pay 2,000 at the date of the commencement of the lease on 1 January 20x1 and annual lease payments of
1,000 at the beginning of each subsequent year.
In case the renewal option is not exercised, the lessee is required to pay the lessor 1,500 as term option penalty, when the lessee
returns the machine to the lessor at the end of 3 years.
If the contract is renewed, the lessee is required to pay the lessor a residual value guarantee of 500 at the end of 5 years, when the
lessee returns the machine to the lessor. The annual lease payments are increased by 200.
The lessee’s incremental borrowing rate is 8%. The lessee amortises the right-of-use asset on a straight-line basis.
At the commencement of the lease, it is more likely than not to occur that the lease term is 3 years.
At the beginning of the 3rd year, the lessee installs significant leasehold improvements costing 1,000 that have a useful life of 4 years.
As a result, the lessee determines that there is significant economic incentive to exercise the 3-year renewal option.
The present value of lease payments using 8% discount rate is :
Date
Cash outflow
Discount rate @ 8%
Present value
1 January 20x1
2,000
1.000
2,000
1 January 20x2
1,000
0.926
926
1 January 20x3
1,000
0.857
857
31 December 20x3
1,500
0.794
1,191
Present value of lease payments
4,974
 20x1
At the commencement of the lease, the lessee recognises –

the leased asset and corresponding liability at the present value of lease payments :
Right-of-use asset
4,974
Liability to make lease payments
4,974
and,

lease payment.
Liability to make lease payments
Cash
2,000
2,000
continued ...
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19.15
FUNDAMENTALS OF IFRS 19.15
At the end of the year, the lessee recognises –
interest on the liability to make lease payments :

Interest expense
238 (2,974 x 8%)
Liability to make lease payments
238
and,
amortisation of the right-of-use asset.
Amortisation
1,658 (4,974  3)
Accumulated amortisation
1,658
Following these events, the carrying amount of the liability to make lease payments is 3,212 (4,974 – 2,000 + 238) and the
carrying amount of right-of-use asset is 3,316 (4,974 – 1,658).

 20x2
At the beginning of the year, the lessee recognises –

lease payment.
Liability to make lease payments
1,000
Cash
1,000
At the end of the year, the lessee recognises –
interest on the liability to make lease payments :

Interest expense
177 [(3,212 – 1,000) x 8%]
Liability to make lease payments
177
and,
amortisation of the right-of-use asset.
Amortisation
1,658 (4,974  3)
Accumulated amortisation
1,658
Following these events, the carrying amount of the liability to make lease payments is 2,389 (3,212 – 1,000 + 177) and the
carrying amount of right-of-use asset is 1,658.

 20x3
At the beginning of the year, the lessee recognises –

lease payment :
Liability to make lease payments
1,000
Cash
1,000
and,

leasehold improvements.
Right-of-use asset
1,000
Cash
1,000
At the end of the year, the lessee recognises –

the balance of the liability to make lease payments to adjust against right-of-use asset 1,191 [1,658 – (3,783 –
3,316)] and the remaining balance to profit or loss 198 (1,389 – 1,191).
Liability to make lease payments
Right-of-use asset
Profit or loss
1,389
1,191
198
and,
amortisation of the right-of-use asset.
Amortisation
717 [(3,783 – 3,316) + (1,000  4)]
Accumulated amortisation
717
Following these events, the carrying amount of the liability to make lease payments is Nil and the carrying amount of right-of-use
asset is 750 (1,000 – 250).
continued ...

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LEASES (EXPOSURE DRAFT)
... continued
LEASES (EXPOSURE DRAFT)
19.16
19.16 CHAPTER NINETEEN
... continued
 20x4
After renewal, the present value of lease payments using 8% discount rate is :
Date
Cash outflow
Discount rate @ 8%
Present value
1 January 20x4
1,200
1.000
1,200
1 January 20x5
1,200
0.926
1,111
1 January 20x6
1,200
0.857
1,028
500
0.794
31 December 20x6
Present value of lease payments
397
3,736
At the beginning of the year, the lessee recognises –

the leased asset and corresponding liability at the present value of lease payments :
Right-of-use asset
3,736
Liability to make lease payments
3,736
and,

lease payment.
Liability to make lease payments
1,200
Cash
1,200
At the end of the year, the lessee recognises –
interest on the liability to make lease payments :

Interest expense
201 (2,536 x 8%)
Liability to make lease payments
201
and,
amortisation of the right-of-use asset.
Amortisation
1,495 [(1,000  4) + (3,736  3)]
Accumulated amortisation
1,495
Following these events, the carrying amount of the liability to make lease payments is 2,737 (3,736 – 1,200 + 201) and the
carrying amount of right-of-use asset is 2,991 (750 + 3,736 – 1,495).

 20x5
At the beginning of the year, the lessee recognises –

lease payment.
Liability to make lease payments
1,200
Cash
1,200
At the end of the year, the lessee recognises –
interest on the liability to make lease payments :

Interest expense
123 [(2,737 – 1,200) x 8%]
Liability to make lease payments
123
and,
amortisation of the right-of-use asset.
Amortisation
1,495 [(1,000  4) + (3,736  3)]
Accumulated amortisation
1,495
Following these events, the carrying amount of the liability to make lease payments is 1,660 (2,737 – 1,200 + 123) and the
carrying amount of right-of-use asset is 1,496 (2,991 – 1,495).

 20x6
At the beginning of the year, the lessee recognises –

lease payment.
Liability to make lease payments
Cash
1,200
1,200
continued ...
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19.17
FUNDAMENTALS OF IFRS 19.17
At the end of the year, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
40 [500 – (1,660 – 1,200)]
Liability to make lease payments

40
lease payment :
Liability to make lease payments
500
Cash
500
and,

amortisation of the right-of-use asset.
Amortisation
Accumulated amortisation
1,496
1,496
Presentation
A lessee shall present the following items in the Statement of Financial Position –

liabilities to make lease payments, separately from other financial liabilities.

right-of-use assets as if they were tangible assets within property, plant and equipment
or investment property as appropriate, separately from assets that the lessee does not
lease.
A lessee shall present amortisation of the right-of-use asset and interest expense on the
liability to make lease payments separately from other amortisation and interest expense,
either in profit or loss or in the notes.
A lessee shall classify cash payments for leases as financing activities in the Statement of Cash
Flows and present them separately from other financial cash flows.
Lessor
At the date of inception of the lease, a lessor shall assess whether a lease is accounted for in
accordance with the –

performance obligation approach
If a lessor retains exposure to significant risks or benefits associated with an underlying
asset, the lessor shall apply the performance obligation approach to the lease.
or,

derecognition approach
If a lessor does not retain exposure to significant risks or benefits associated with an
underlying asset, the lessor shall apply the derecognition approach to the lease.
On the basis of whether the lessor retains exposure to significant risks or benefits associated
with the underlying asset either –

during the expected term of the lease; or

after the expected term of the lease by having the expectation or ability to generate
significant returns by re-leasing or selling the underlying asset.
A lessor shall not change the lessor accounting approach after the date of inception of the
lease.
A lessor shall consider the following factors in assessing whether it retains exposure to
significant risks or benefits associated with the underlying asset during the expected term of
the current lease –
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LEASES (EXPOSURE DRAFT)
... continued
LEASES (EXPOSURE DRAFT)
19.18
19.18 CHAPTER NINETEEN

significant contingent rentals during the lease term that are based on the use or
performance of the underlying asset;

options to extend or terminate the lease;

material non-distinct services provided under the current lease.
Example 18
The existence of material non-distinct services may expose the lessor to a significant risk that the lessee will terminate the lease early
because of the non-provision of those services. When the risk that the lessee will terminate the lease early is significant, the lessor
is likely to be exposed to significant risks or benefits associated with the underlying asset during the term of the lease.
A lessor shall consider the following facts when determining whether it retains exposure to
significant risks or benefits associated with the underlying asset after the expected term of the
current lease :

whether the duration of the lease term is not significant in relation to the remaining
useful life of the underlying asset.

whether a significant change in the value of the underlying asset at the end of the lease
term is expected. In making that assessment, the lessor shall consider the –

present value of the underlying asset at the end of the lease term, and

effect that any residual value guarantees (including those provided by an unrelated
third party) may have on the lessor’s exposure to risks or benefits.
Example 19
In general, a residual value guarantee will reduce a lessor’s exposure to downside risk but may give the lessor the potential to benefit
from increases in the expected value of the underlying asset at the end of the lease.
The existence of one or more indicators is not conclusive in determining whether the lessor
retains exposure to significant risks or benefits associated with the underlying asset.
A lessor shall not consider the risks associated with the counterparty credit risk of the lessee
when determining whether it retains exposure to significant risks or benefits associated with the
underlying leased asset during the expected term of the current lease.
Performance obligation approach
Recognition
At the date of commencement of a lease, a lessor shall recognise in the Statement of Financial
Position a right to receive lease payments and a lease liability. The lessor shall not derecognise
the underlying asset.

Lease liability
The lessor’s obligation to permit the lessee to use the underlying asset over the lease
term.
A lessor shall recognise the following items in profit or loss –

Interest income on the right to receive lease payments.

Lease income as the lease liability is satisfied.

Any changes in the lease liability resulting from reassessment of the expected amount of
contingent rentals and expected payments under term option penalties and residual value
guarantees when the lessor satisfies that liability.
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19.19
FUNDAMENTALS OF IFRS 19.19

length of the lease term and adjust the lease liability to reflect any change to the right
to receive lease payments arising from changes to the lease term.

expected amount of any contingent rentals and any expected payments under residual
value guarantees that the lessor can measure reliably and any expected payments under
term option penalties. A lessor shall recognise any resulting changes to the right to receive
lease payments –

in profit or loss to the extent that the lessor has satisfied the related lease liability.

as an adjustment to the lease liability to the extent that the lessor has not satisfied,
the related lease liability. However, the lessor shall recognise any changes that
would reduce that liability below zero in profit or loss.
A lessor shall not change the rate used to discount the lease payments except to reflect
changes in reference interest rates when contingent rentals are based on those reference
interest rates. When contingent rentals are based on reference interest rates, a lessor shall
recognise any changes to the right to receive lease payments arising from changes in the
discount rate in profit or loss.

Any impairment losses on the right to receive lease payments
A lessor shall apply IAS 39 at each reporting date to determine whether the right to
receive lease payments is impaired and shall recognise any impairment loss in profit or
loss.
Initial measurement
At the date of inception of the lease, a lessor shall measure the :

right to receive lease payments at the sum of the present value of the lease payments,
discounted using the rate the lessor charges the lessee, and any initial direct costs incurred
by the lessor.
Present value of lease payments
A lessor shall determine the present value of the lease payments receivable during the
lease term on the basis of expected outcome, determined using all relevant information.
The expected outcome is the present value of the probability-weighted average of the
cash flows for a reasonable number of outcomes. In determining the present value of
lease payments receivable, a lessor shall include an estimate of –

contingent rentals receivable that the lessor can measure reliably. If the contingent
rentals depend on an index or a rate, the lessor shall determine the expected lease
payments using readily available forward rates or indices. If forward rates or indices
are not available, the lessor shall use the prevailing rates or indices.

amounts receivable from the lessee under residual value guarantees that the lessor
can measure reliably, residual value guarantees that are provided by an unrelated third
party are not lease payments.

expected payments from the lessee under term option penalties.
The exercise price of a purchase option included in a lease is not a lease payment and the
purchase option is not included in determining the present value of lease payments receivable.
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LEASES (EXPOSURE DRAFT)
After the date of commencement of the lease, the lessor shall reassess the carrying amount of
the right to receive lease payment arising from each lease if the facts or circumstances indicate
that there would be a significant change in the right to receive lease payments since the previous
reporting period. When such indications exist, a lessor shall reassess the :
LEASES (EXPOSURE DRAFT)
19.20
19.20 CHAPTER NINETEEN
The discount rate used to determine the present value of lease payments for lessor is the rate
that the lessor charges the lessee. The rate the lessor charges the lessee could be, eg, the
lessee’s incremental borrowing rate, the rate implicit in the lease (ie, the rate that causes the
sum of the present value of cash flows and the present value of the residual value of the
underlying asset at the end of the lease to equal the fair value of the underlying asset) or, for
property leases, the yield on the property.

lease liability at the amount of the right to receive lease payments.
Subsequent measurement
After the date of commencement of the lease, a lessor shall measure the :

right to receive lease payments at amortised cost using the effective interest method.

remaining lease liability determined on the basis of the pattern of use of the underlying
asset by the lessee. If the lessor cannot determine reliably the remaining lease liability
in a systematic and rational manner on the basis of the pattern of use of the underlying
asset by the lessee, it shall use the straight-line method.
Systematic and rational methods of determining the lessor’s remaining liability, other
than straight-line method, include –

output methods in which the pattern of use of the underlying asset is based on the
number of units produced by the lessee (eg, units delivered, contract milestones,
or estimates of goods or services transferred to date relative to the total goods or
services to be transferred).

input methods in which the pattern of use of the underlying asset is based on the
efforts expended to date by the lessee (eg, machine hours used), relating to total
efforts expected to be expended over the lease term.
Example 20
An entity enters into a lease of a machine (carrying amount 5,000; useful life 5 years). The lessor amortises the lease liability and
depreciates the machine on a straight-line basis. The present value of lease payments is :
Year
Cash inflow
Discount rate @ 10%
Present value
1
1,000
0.909
909
2
1,000
0.826
826
3
1,000
0.751
751
Present value of lease payments
2,486
At the commencement of the lease, the lessor recognises a lease receivable and a lease liability at the present value of lease
payments :
Lease receivable
2,486
Lease liability
2,486
 At the end of year 1, the lessor recognises –



interest on the lease receivable :
Lease receivable
Interest income
receipt of the lease payment :
Cash
Lease receivable
lease income from satisfaction of the lease liability :
Lease liability
Lease income
248 (2,486 x 10%)
248
1,000
1,000
829 (2,486  3)
829
and,

depreciation of the underlying asset.
Depreciation
Accumulated depreciation
1,000 (5,000  5)
1,000
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continued ...
19.21
FUNDAMENTALS OF IFRS 19.21
LEASES (EXPOSURE DRAFT)
... continued
Following these events, the carrying amount of the lease receivable is 1,734 (2,486 + 248 – 1,000),
 At the end of year 2, the lessor recognises –

interest on the lease receivable :
Lease receivable
173 (1,734  10%)
Interest income
173

receipt of the lease payment :
Cash
1,000
Lease receivable
1,000

lease income from satisfaction of the lease liability :
Lease liability
829 (2,486  3)
Lease income
829
and,

depreciation of the underlying asset.
Depreciation
1,000 (5,000  5)
Accumulated depreciation
1,000
Following these events, the carrying amount of the lease receivable is 907 (1,734 + 173 – 1,000),
 At the end of year 3, the lessor recognises –

interest on the lease receivable :
Lease receivable
93 (1,000 – 907)
Interest income
93

receipt of the lease payment :
Cash
1,000
Lease receivable
1,000

lease income from satisfaction of the lease liability :
Lease liability
828
Lease income
828
and,

depreciation of the underlying asset.
Depreciation
1,000 (5,000  5)
Accumulated depreciation
1,000
Example 21
An entity (lessor) enters into a lease of a machine (carrying amount 5,000, useful life 5 years) with another entity (lessee). Annual
lease payments are 1,000 in arrear. The lessee’s incremental borrowing rate is 8%, whereas the rate the lessor charges the lessee
is 9%. The lessee amortises the right-of-use asset on a straight-line basis. The lessor amortises the lease liability and depreciates the
machine also on a straight-line basis. The lease contract includes a guarantee by the lessee that the lessor will realise 500 from selling
the asset at the expiration of the lease. At the commencement of the lease, the lessee estimates that the underlying asset will have
a fair value of 300 at the expiration of the lease.
Lessee
Year-end
Cash outflow
Discount rate @ 8%
1
1,000
0.926
Present value
926
2
1,000
0.857
857
3
1,200
0.794
953
Present value of lease payments
2,736
At the commencement of the lease, the lessee recognises the leased asset and corresponding liability at the present value of lease
payments :
Right-of-use asset
2,736
Liability to make lease payments
2,736
 At the end of year 1, the lessee recognises –

interest on the liability to make lease payments :
Interest expense
Liability to make lease payments
219 (2,736 x 8%)
219
continued ...
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19.22 CHAPTER NINETEEN
LEASES (EXPOSURE DRAFT)
19.22
... continued

lease payment :
Liability to make lease payments
Cash
1,000
1,000
and,
amortisation of the right-of-use asset.
Amortisation
912 (2,736  3)
Accumulated amortisation
912
Following these events, the carrying amount of the liability to make lease payments is 1,955 (2,736 + 219 – 1,000).

 At the end of year 2, the lessee recognises –


interest on the liability to make lease payments :
Interest expense
Liability to make lease payments
lease payment :
Liability to make lease payments
Cash
156 (1,955 x 8%)
156
1,000
1,000
and,
amortisation of the right-of-use asset.
Amortisation
912 (2,736  3)
Accumulated amortisation
912
Following these events, the carrying amount of the liability to make lease payments is 1,111 (1,955 + 156 – 1,000).

 At the end of year 3, the lessee recognises –


interest on the liability to make lease payments :
Interest expense
Liability to make lease payments
lease payment :
Liability to make lease payments
Cash
89 (1,200 – 1,111)
89
1,200
1,200
and,

amortisation of the right-of-use asset.
Amortisation
Accumulated amortisation
912 (2,736  3)
912
Lessor
Year-end
Cash inflow
Discount rate @ 9%
1
1,000
0.917
Present value
917
2
1,000
0.842
842
3
1,500
0.772
1,158
Present value of lease payments
2,917
At the commencement of the lease, the lessor recognises a lease receivable and a lease liability at the present value of lease
payments :
Lease receivable
2,917
Lease liability
2,917
 At the end of year 1, the lessor recognises –



interest on the lease receivable :
Lease receivable
Interest income
receipt of the lease payment :
Cash
Lease receivable
lease income from satisfaction of the lease liability :
Lease liability
Lease income
263 (2,917 x 9%)
263
1,000
1,000
972 (2,917  3)
972
continued ...
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19.23
FUNDAMENTALS OF IFRS 19.23
LEASES (EXPOSURE DRAFT)
... continued
and,
depreciation of the underlying asset.
Depreciation
1,000 (5,000  5)
Accumulated depreciation
1,000
Following these events, the carrying amount of the lease receivable is 2,180 (2,917 + 263 – 1,000).

 At the end of year 2, the lessor recognises –



interest on the lease receivable :
Lease receivable
Interest income
receipt of the lease payment :
Cash
Lease receivable
lease income from satisfaction of the lease liability :
Lease liability
Lease income
196 (2,180 x 9%)
196
1,000
1,000
972 (2,917  3)
972
and,
depreciation of the underlying asset.
Depreciation
1,000 (5,000  5)
Accumulated depreciation
1,000
Following these events, the carrying amount of the lease receivable is 1,376 (2,180 + 196 – 1,000).

 At the end of year 3, the lessor recognises –





interest on the lease receivable :
Lease receivable
Interest income
receipt of the lease payment :
Cash
Lease receivable
lease income from satisfaction of the lease liability :
Lease liability
Lease income
depreciation of the underlying asset :
Depreciation
Accumulated depreciation
and,
changes to the right to receive lease payments.
Profit or loss
Lease receivable
124 (1,500 – 1,376)
124
1,200
1,200
973
973
1,000 (5,000  5)
1,000
300
300
Example 22
An entity enters into a 5-year lease of a machine with an expected useful life of 15 years. The lease includes an option to terminate
after 3 years. Annual lease payments are 1,000 in arrears. The rate the lessor charges in the lease is 8%. The carrying amount of
the machine at the commencement of the lease is 15,000. The lessor initially estimates that it retains exposure to significant risks or
benefits associated with the underlying asset after the expected lease term and accounts for the lease using the performance obligation
approach.
The present value of 5 years of lease payments is 3,993. The lessor amortises the lease liability on a straight-line basis.
At the end of year 1, the lessor reassesses the lease term and determines that the option will be exercised and the lease will terminate
at the end of 3 years. The present value of remaining 2 years of lease payment is 1,783.
At the commencement of the lease, the lessor recognises a right to receive lease payments (lease receivable) and a lease liability
:
Lease receivable
3,993
Lease liability
3,993
continued ...
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LEASES (EXPOSURE DRAFT)
19.24
19.24 CHAPTER NINETEEN
... continued
 At the end of year 1, the lessor recognises –
receipt of the lease payment :
Cash
Lease receivable
interest on the lease receivable :
Lease receivable
Interest income
lease income from satisfaction of the lease liability :
Lease liability
Lease income



1,000
1,000
319 (3,993  8%)
319
799 (3,993  5)
799
and,
depreciation of the underlying asset.
Depreciation
1,000 (15,000  15)
Accumulated depreciation
1,000
Following these events, the carrying amount of the lease receivable is 3,312 (3,993 – 1,000 + 319), the carrying amount of lease
liability is 3,194 (3,993 – 799) and the net amount recognised in profit or loss is income of 118 (799 + 319 – 1,000).
At the end of year 1, the lessor reassess the lease term and decreases its lease receivable to reflect the new expected payments (2
years remaining). The lessor makes a corresponding decrease in the lease liability to reflect the shorter term of the lease :
Lease liability
1,529
Lease receivable
1,529 (3,312 – 1,783)
After making this adjustment the carrying amount of the lease receivable is 1,783 representing the present value of the 2 remaining
1,000 lease payments and the carrying amount of the lease liability is 1,665 representing the lease liability of 3,194 adjusted for the
decrease in the lease receivable of 1,529.
 At the end of year 2, the lessor recognises –

receipt of the lease payment :
Cash
1,000
Lease receivable
1,000

interest on the lease receivable :
Lease receivable
143 (1,783  8%)
Interest income
143

lease income from satisfaction of the lease liability :
Lease liability
832 (1,665  2)
Lease income
832
and,

depreciation of the underlying asset.
Depreciation
1,000 (15,000  15)
Accumulated depreciation
1,000
Following these events, the carrying amount of the lease receivable is 926 (1,783 – 1,000 + 143), the carrying amount of the lease
liability is 833 (1,665 – 832) and the net amount recognised in profit or loss is a loss of 25 (832 + 143 – 1,000).

Example 23
The facts are the same as in the previous example except that the lessor initially estimates that the lease term is 3 years. The lessor
further determines that it retains exposure to significant risks or benefits associated with the underlying asset after expected lease term
and accounts for the lease using the performance obligation approach.
The present value of 3 years of lease payments is 2,577.
At the end of year 1, the lessor reassesses the lease term and determines that the lease term is 5 years. The present value of 4 years
of lease payments is 3,312.
At the date of commencement of the lease, the lessor recognises a right to receive lease payments (lease receivable) and a lease
liability :
Lease receivable
Lease liability
2,577
2,577
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19.25
FUNDAMENTALS OF IFRS 19.25
 At the end of year 1, the lessor recognises –

receipt of the lease payment :
Cash
1,000
Lease receivable

1,000
interest on the lease receivable :
Lease receivable
206 (2,557  8%)
Interest income

206
lease income from satisfaction of the lease liability :
Lease liability
859 (2,557  3)
Lease income
859
and,

depreciation of the underlying asset.
Depreciation
1,000 (15,000  15)
Accumulated depreciation
1,000
Following these events, the carrying amount of the lease receivable is 1,783 (2,577 – 1,000 + 206), the carrying amount of the lease
liability is 1,718 (2,577 – 859) and the net amount recognised in profit or loss is income of 65 (859 + 206 – 1,000).
At the end of year 1, the lessor reassesses the lease term and increases the lease receivable to the newly expected payments
(remaining 4 years) with a corresponding increase in the lease liability to reflect the longer term of the lease :
Lease receivable
1,529 (3,312 – 1,783)
Lease liability
1,529
After making this adjustment the carrying amount of the lease receivable is 3,312 representing the present value of the 4
remaining ,1,000 lease payments and the carrying amount of the lease liability is 3,247 representing the lease liability of 1,718
adjusted for the increase in the lease receivable of 1,529.
 At the end of year 2, the lessor recognises –

receipt of the lease payment :
Cash
1,000
Lease receivable

interest on the lease receivable :
Lease receivable
265 (3,312  8%)
Interest income

1,000
265
lease income from satisfaction of the lease liability :
Lease liability
812 (3,247  4)
Lease income
812
and,

depreciation of the underlying asset.
Depreciation
1,000 (15,000  15)
Accumulated depreciation
1,000
Following these events, the carrying amount of the lease receivable is 2,577 (3,312 – 1,000 + 265), the carrying amount of the lease
liability is 2,435 (3,247 – 812) and the net amount recognised in profit or loss is income of 77 (812 + 265 – 1,000).
Presentation
A lessor shall present the following items together in the Statement of Financial Position –
(a) underlying assets;
(b) rights to receive lease payments;
(c) lease liabilities;
(d) the total of (a) – (c) as a net lease asset or a net lease liability.
An intermediate lessor shall present the liability to make lease payments under a head lease
separately from other assets and liabilities arising from the sublease and shall present the following
items together in the Statement of Financial Position –
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LEASES (EXPOSURE DRAFT)
... continued
LEASES (EXPOSURE DRAFT)
19.26
19.26 CHAPTER NINETEEN
(a) right-of-use assets (which are the underlying assets in subleases);
(b) rights to receive lease payments under subleases;
(c) lease liabilities
(d) the total of (a) – (c) as a net lease asset or a net lease liability.
Example 24
Presentation of information from a sublease
Property, patent and equipment
X
Cash
X
Right-of-use asset
X
Lease receivables
X
Lease liability
(X)
Net sublease asset
X
Total assets
X
Trade and other payables
X
Liability to make lease payments
Total liabilities
X
(X)
A lessor shall present in profit or loss interest income on a right to receive lease payments,
lease income resulting from satisfaction of a lease liability and depreciation expense on an
underlying asset separately from other interest income, income and depreciation expense.
A lessor shall classify the cash receipts from lease payments as operating activities in the
Statement of Cash Flows. If the lessor applies the –

direct method, it shall present those cash receipts separately from other cash flows
from operating activities.

indirect method, it shall present changes in the right to receive lease payments separately
from the changes in other operating receivables.
Derecognition approach
Recognition
At the commencement of a lease, a lessor shall –

recognise a right to receive lease payments in the Statement of Financial Position.

derecognise from the Statement of Financial Position the portion of the carrying amount
of the underlying asset that represents the lessee’s right-to-use the underlying asset
during the term of the lease.

reclassify as a residual asset the remaining portion of the carrying amount of the underlying
asset that represents the rights in the underlying asset that the lessor retains.

Residual asset
An asset representing the rights to the underlying asset retained by the lessor under
the derecognition approach for lessor accounting.
A lessor shall determine the amount derecognised and the initial carrying amount of the
residual asset by allocating the carrying amount of the underlying asset at the date of inception
of the lease in proportion to the fair value of the rights that have been transferred and the fair
value of the rights that have been retained by the lessor. Therefore, the amount of the
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19.27
FUNDAMENTALS OF IFRS 19.27
A lessor shall recognise the following items in profit or loss –

Lease income representing the present value of the lease payments and lease expense
representing the cost of the portion of the underlying asset that is derecognised at the
date of commencement of the lease.
A lessor shall determine the present value of lease payments receivable during the
lease term on the basis of expected outcome, determined using all relevant information.
The expected outcome is the present value of the probability-weighted average of the
cash flows for a reasonable number of outcomes. In determining the present value of
lease payments receivable, a lessor shall include an estimate of –

contingent rentals receivable that the lessor can measure reliably. If the contingent
rentals depend on an index or a rate, the lessor shall determine the expected lease
payments using readily available forward rates or indices. If forward rates or indices are
not readily available, the lessor shall use the prevailing rates or indices.

the amounts receivable from the lessee under residual value guarantees that the lessor
can measure reliably. Residual value guarantees that are provided by an unrelated third
party are not lease payments.

expected payments from the lessee under term option penalties.
The exercise price of a purchase option included in a lease is not a lease payment, and the
purchase option is not included in determining the present value of lease payments receivable.

Interest income on the right to receive lease payments

Lease income and lease expense upon any reassessment of the lease term.

Any changes in the right to receive lease payments resulting from reassessment of the
expected amount of contingent rentals and expected payments under term option
penalties and residual value guarantees
After the date of commencement of the lease, the lessor shall reassess the carrying
amount of the right to receive lease payments arising from each lease if facts or
circumstances indicate that there would be a significant change in the right to receive
lease payments since the previous reporting period. When such indications exist, a
lessor shall reassess the –

length of the lease term. When that reassessment results in a change to the residual
asset, the lessor shall allocate those changes to the rights derecognised and the
residual asset and adjust the carrying amount of the residual asset accordingly.

expected amount of any contingent rentals and any expected payments under
residual value guarantees that the lessor can measure reliably and any expected
payments under term option penalties. A lessor shall recognise any resulting changes
in the expected amount of the right to receive lease payments in profit or loss.
A lessor shall not change the rate used to discount lease payments except to reflect changes
in reference interest rates when contingent rentals depend on those reference interest rates.
When contingent rentals are based on reference interest rates, a lessor shall recognise any
changes to the right to receive lease payments arising from changes in the discount rate in
profit or loss.
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LEASES (EXPOSURE DRAFT)
underlying asset multiplied by the fair value of the right to receive lease payments divided by
the fair value of the underlying asset (all determined at the date of inception of the lease).
LEASES (EXPOSURE DRAFT)
19.28
19.28 CHAPTER NINETEEN

Any impairment losses on the right to receive lease payments or the residual value
At each reporting date, lessor shall apply –

IAS 39 to determine whether the right to receive lease payments is impaired. A
lessor shall recognise any impairment loss in profit or loss.

IAS 36 to determine whether the residual asset is impaired. A lessor shall recognise
any impairment loss in profit or loss.
Initial measurement
At the date of inception of the lease, a lessor shall measure the –

right to receive lease payments at the sum of the present value of the lease payments,
discounted using the rate the lessor charges the lessee, and any initial direct costs incurred
by the lessor.

residual asset at an allocated amount of the carrying amount of the underlying asset.
Subsequent measurement
After the date of commencement of the lease, a lessor shall measure the right to receive
lease payments at amortised cost using the effective interest method, unless the reassessment
or impairment applies.
A lessor shall not measure the residual asset unless reassessment or impairment applies.
Example 25
An entity enters into a lease of a machine (carrying amount 2,500; fair value 3,000). The present value of lease payments is :
Year-end
Cash inflow
Discount rate @ 8%
Present value
1
1,000
0.909
909
2
1,000
0.826
826
3
1,000
0.751
751
Present value of lease payments
2,486
At the commencement of the lease, the lessor derecognises the portion of the asset transferred to the lessee, recognises lease
receivable, revenue and cost of sales :
Lease receivable
2,486
Cost of sales
2,070
Machinery
2,070 (2,500 x 2,486  3,000)
Revenue
2,486
In effect, the lessor recognises a profit from the lease of 416 (2,486 – 2,070).
 At the end of year 1, the lessor recognises –
interest on the lease receivable :
Lease receivable
248 (2,486 x 10%)
Interest income
248
and,

receipt of the lease payment.
Cash
1,000
Lease receivable
1,000
Following these events, the carrying amount of the residual asset is 430 (2,500 – 2,070) and the carrying amount of the lease
receivable is 1,734 (2,486 + 248 – 1,000).

 At the end of year 2, the lessor recognises –

interest on the lease receivable :
Lease receivable
Interest income
173 (1,734 x 10%)
173
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19.29
FUNDAMENTALS OF IFRS 19.29
LEASES (EXPOSURE DRAFT)
... continued
and,
receipt of the lease payment :
Cash
1,000
Lease receivable
1,000
Following these events, the carrying amount of the lease receivable is 907 (1,734 + 173 – 1,000).

 At the end of year 3, the lessor recognises –


interest on the lease receivable :
Lease receivable
Interest income
and,
receipt of the lease payment.
Cash
Lease receivable
93 (1,000 – 907)
93
1,000
1,000
Example 26
An entity (lessor) enters into a 4-year lease of a machine (carrying amount 4,000; fair value 5,000; useful life 5 years) with another
entity (lessee). The lessor determines that it does not retain exposure to significant risks or benefits associated with the underlying
asset during or after the expected lease term and accounts for the lease using the derecognition approach. The rate the lessor charges
the lessee is 9%, whereas the lessee’s incremental borrowing rate is 8%. The lessee amortises the right-of-use asset on a straightline basis. Annual lease payments are 1,200 in arrears and a residual value guarantee of 800.
Lessee
Year-end
Cash outflow
Discount rate @ 8%
Present value
1
1,200
0.926
1,111
2
1,200
0.875
1,050
3
1,200
0.794
953
4
2,000
0.735
1,470
Present value of lease payments
4,584
At the commencement of the lease, the lessee recognises the leased asset and corresponding liability at the present value of lease
payments :
Right-of-use asset
4,584
Liability to make lease payments
4,584
 At the end of year 1, the lessee recognises –


interest on the liability to make lease payments :
Interest expense
Liability to make lease payments
lease payment :
Liability to make lease payments
Cash
367 (4,584 x 8%)
367
1,200
1,200
and,
amortisation of the right-of-use asset.
Amortisation
1,146 (4,584  4)
Accumulated amortisation
1,146
Following these events, the carrying amount of the liability to make lease payments is 3,751 (4,584 + 367 – 1,200).

 At the end of year 2, the lessee recognises –


interest on the liability to make lease payments :
Interest expense
Liability to make lease payments
lease payment :
Liability to make lease payments
Cash
300 (3,751 x 8%)
300
1,200
1,200
continued ...
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LEASES (EXPOSURE DRAFT)
19.30
19.30 CHAPTER NINETEEN
... continued
amortisation of the right-of-use asset.
Amortisation
1,146 (4,584  4)
Accumulated amortisation
1,146
Following these events, the carrying amount of the liability to make lease payments is 2,851 (3,751 + 300 – 1,200).

 At the end of year 3, the lessee recognises –


interest on the liability to make lease payments :
Interest expense
Liability to make lease payments
lease payment :
Liability to make lease payments
Cash
228 (2,851 x 8%)
228
1,200
1,200
and,
amortisation of the right-of-use asset.
Amortisation
1,146 (4,584  4)
Accumulated amortisation
1,146
Following these events, the carrying amount of the liability to make lease payments is 1,879 (2,851 + 228 – 1,200).

 At the end of year 4, the lessee recognises –


interest on the liability to make lease payments :
Interest expense
Liability to make lease payments
lease payment :
Liability to make lease payments
Cash
121 (2,000 – 1,879)
121
2,000
2,000
and,

amortisation of the right-of-use asset.
Amortisation
Accumulated amortisation
1,146 (4,584  4)
1,146
Lessor
Year-end
Cash inflow
Discount rate @ 9%
Present value
1
1,200
0.917
1,100
2
1,200
0.842
1,010
3
1,200
0.772
926
4
2,000
0.708
1,416
Present value of lease payments
4,452
At the commencement of the lease, the lessor derecognises the portion of the asset transferred to the lessee, recognises lease
receivable, revenue and cost of sales :
Lease receivable
4,452
Cost of sales
3,562 (4,000 x 4,452  5,000)
Machinery
3,562
Revenue
4,452
In effect, the lessor recognises a profit from the lease of 890 (4,452 – 3,562).
 At the end of year 1, the lessor recognises –
interest on the lease receivable :
Lease receivable
401 (4,452 x 9%)
Interest income
401
and

receipt of the lease payment.
Cash
1,200
Lease receivable
1,200
Following these events, the carrying amount of the residual asset is 438 (4,000 – 3,562) and the carrying amount of the
lease receivable is 3,653 (4,452 + 401 – 1,200).

continued ...
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19.31
FUNDAMENTALS OF IFRS 19.31
LEASES (EXPOSURE DRAFT)
... continued
 At the end of year 2, the lessor recognises –
interest on the lease receivable :
Lease receivable
329 (3,653 x 9%)
Interest income
329
and

receipt of the lease payment.
Cash
1,200
Lease receivable
1,200
Following these events, the carrying amount of the lease receivable is 2,782 (3,653 + 329 – 1,200).

 At the end of year 3, the lessor recognises –
interest on the lease receivable :
Lease receivable
250 (2,782 x 9%)
Interest income
250
and,

receipt of the lease payment.
Cash
1,200
Lease receivable
1,200
Following these events, the carrying amount of the lease receivable is 1,832 (2,782 + 250 – 1,200).

 At the end of year 4, the lessor recognises –


interest on the lease receivable :
Lease receivable
Interest income
and,
receipt of the lease payment.
Cash
Lease receivable
168 (2,000 – 1,832)
168
2,000
2,000
Example 27
An entity enters into a 10-year lease of a machine. The lease includes an option to terminate after 8 years. Annual lease payments
are 1,000 in arrears. The rate the lessor charges in the lease is 8%. The fair value of the machine at the commencement of the lease
is 7,000 and its carrying amount is 5,000. The useful life of the machine is 10 years. The lessor initially estimates the lease term is
10 years. The lessor further determines that it does not retain exposure to significant risks or benefits associated with the underlying
asset either during or after the expected lease term and accounts for the lease using the derecognition approach.
The present value of 10 years of lease payments is 6,710.
At the end of year 1, the lessor reassesses the lease term and determines that the option will be exercised and the lease will terminate
at the end of 8 years. The fair value of the machine at the end of year 1 is 6,250. The present value of 7 years of lease payments is
5,206.
At the date of commencement of the lease, the lessor derecognises the portion of the asset transferred to the lessee, recognises lease
receivable, revenue and cost of sales :
Lease receivable
6,710
Cost of sales
4,793
Asset
4,793 (5,000  6,710  7,000)
Revenue
6,710
At the date of commencement of the lease, the lessor recognises a profit from the lease of 1,917 (6,710 – 4,793).
At the end of year 1, the lessor recognises –

receipt of the lease payment :
Cash
1,000
Lease receivable
1,000
and,
continued ...
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19.32
19.32 CHAPTER NINETEEN
... continued

interest on the lease receivable.
Lease receivable
537 (6,710  8%)
Interest income
537
Following these events, the carrying amount of the residual asset is 207 (5,000 – 4,793) and the carrying amount of the lease
receivable is 6,247 (6,710 – 1,000 + 537).
At the end of year 1, the lessor reassesses the lease term and reinstates a portion of the asset, recognises an adjustment to
lease receivable, revenue and cost of sales :
Revenue
Residual asset
Cost of sales
Lease receivable
1,041
34 (207  1,041  6,250)
34
1,041 (6,247 – 5,206)
The net result of the reassessment of the lease term is a loss of 1,007 (34 – 1,041).
After making this adjustment the carrying amount of the lease receivable is 5,206 representing the present value of the 7
remaining 1,000 lease payments and the carrying amount of the residual asset is 241 (207 + 34).
At the end of year 1, the net amount recognised in profit or loss is income of 1,447 (1,917 + 537 – 1,007).
Example 28
The facts are the same as in the previous example except that the lessor initially estimates that the lease term is 8 years. The lessor
determines that it does not retain exposure to significant risks or benefits associated with the underlying asset either during or after the
expected lease term and accounts for the lease using the derecognition approach.
The present value of 8 years of lease payments is 5,747.
At the end of year 1, the lessor reassesses the lease term and determines that the lease term is 10 years. The present value of 9 years
of lease payments is 6,247.
At the date of commencement of the lease, the lessor derecognises the portion of the asset transferred to the lessee, recognises lease
receivable, revenue and cost of sales :
Lease receivable
5,747
Cost of sales
4,105
Asset
4,105 (5,000  5,747  7,000)
Revenue
5,747
At the date of commencement of the lease, the lessor recognises profit from the lease of 1,642 (5,747 – 4,105).
At the end of year 1, the lessor recognises –

receipt of the lease payment :
Cash
1,000
Lease receivable
1,000
and,

interest on the lease receivable.
Lease receivable
460 (5,747  8%)
Interest income
460
Following these events, the carrying amount of the residual asset is 895 (5,000 – 4,105) and the carrying amount of the receivable
is 5,207 (5,747 – 1,000 + 460).
Upon reassessing the lease term, the lessor derecognises an additional portion of the asset transferred to the lessee, recognises
additional lease receivable, revenue and cost of sales :
Lease receivable
1,040 (6,247 – 5,207)
Cost of sales
149
Residual asset
149 (895  1,040  6,250)
Revenue
1,040
In profit or loss, the net result of the reassessment of the lease term is income of 891 (1,040 – 149).
After making this adjustment the carrying amount of the lease receivable is 6,247 representing the present value of the 9 remaining
1,000 lease payments, and the carrying amount of the residual asset is 746 (895 – 149).
At the end of year 1, the net amount recognised in profit or loss is income of 2,993 (1,642 + 460 + 891).
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19.33
FUNDAMENTALS OF IFRS 19.33
A lessor shall present the following items in the Statement of Financial Position –

rights to receive lease payments, separately from other financial assets, distinguishing
those that arise under a sublease.

residual assets, separately within property, plant and equipment, distinguishing those
that arise under a sublease.
A lessor shall present lease income and lease expense in profit or loss either in separate line
items or net in a single line item so that the lessor provides information that reflects the
lessor’s business model.
Example 29
If a lessor’s business model uses leases –

as an alternative means of realising value from the goods it would otherwise sell, the lessor shall present lease income and lease
expense in separate line items. Many manufacturers and dealers regard the lease of an asset as equivalent to selling the asset.
Those lessor would present revenue and cost of sales so that income and expenses from sold and leased items are presented
consistently.

for the purposes of providing finance, the lessor would present lease income and lease expense net in a single line item.
A lessor shall present in profit or loss interest income from rights to receive lease payments
separately from other interest income.
A lessor shall classify cash receipts from lease payments as operating activities in the Statement
of Cash Flows. If a lessor applies the —

direct method, it shall present the cash receipts from lease payments separately from
other cash flows from operating activities.

indirect method, it shall present the changes in the right to receive lease payments
separately from changes in other operating receivables.
Short-term leases
A short-term lease is a lease that, at the date of commencement of the lease, has a maximum
possible lease term including options to renew or extend, of 12 months or less.
At the date of inception of a lease, a :


lessee that has a short-term lease may elect on a lease-by-lease basis to measure, both
at initial measurement and subsequently, –

the liability to make lease payments at the undiscounted amount of the lease
payments; and

the right-of-use asset at the undiscounted amount of lease payments plus initial
direct costs. Such leases shall recognise lease payments in profit or loss over the
lease term.
lessor that has a short-term lease may elect on a lease-by-lease basis not to recognise
assets or liabilities arising from a short-term lease in the Statement of Financial Position,
nor derecognise any portion of the underlying asset. Such lessor shall continue to
recognise the underlying asset in accordance with other IFRSs and shall recognise lease
payments in profit or loss over the lease term.
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Presentation
LEASES (EXPOSURE DRAFT)
19.34
19.34 CHAPTER NINETEEN
Sale and leaseback transactions
If the transferor transfers an asset to another party and leases that asset back from that other
party, both the transferor and the transferee shall account for the transfer contract and the lease
contract if the contracts are –

entered into at or near the same time;

negotiated as a package with a single commercial objective; or

performed either concurrently or consecutively.
The transferor shall account for transactions as follows –

If the transfer meets the condition for a sale, the transferor shall account for the sale in
accordance with applicable IFRSs and for the lease in accordance with this Exposure Draft
(ie, as a lessee).

If the transfer does not meet the conditions for a sale, the transferor shall account for
the contract as a financing. The transferor shall not derecognise the transferred asset
and shall recognise any amounts received as a financial liability.
The transferee shall account for transactions as follows :

If the transfer meets the condition for a purchase, the transferee shall account for the
purchase in accordance with applicable IFRSs and for the lease using the performance
obligation approach.

If the transfer does not meet the conditions for a purchase, the transferee shall not
recognise the transferred asset. The transferee shall recognise the amount paid as a
receivable in accordance with applicable of IFRSs.
If the consideration for a purchase or sale or the lease payments specified by the leaseback
are not at fair value :
a transferor shall adjust the –


measurement of the right-of-use asset to reflect current market rates for lease
payments for that asset.

gain or loss on the disposal of the underlying asset by any difference between the
present value of lease payments based on the terms specified in the lease and the
present value of the lease payments based on current market rates.
a transferee shall adjust the carrying amount of the underlying asset and the lease
liability it recognises under the performance obligation approach to reflect current
market rates for the lease payments for that lease.

An entity considers the effect of the transfer contract and the lease contract together to
assess whether the transferred asset has been purchased or sold. Additionally, such sale and
leaseback contracts may have conditions that generally do not arise in other transactions and
may result in the transfer not meeting the conditions for a purchase or sale.
Example 30
The following conditions normally preclude the seller / lessee from transferring more than a trivial amount of the risks and benefits
associated with the transferred asset at the end of the contract and do not result in a purchase or sale –

The seller / lessee has an obligation or an option to repurchase the asset at an amount that is not fair value at the time of
purchase, or the buyer / lessor can compel the seller / lessee to repurchase the asset.

The seller / lessee guarantees the buyer / lessor’s investment or a return on that investment.

The seller / lessee provides the buyer / lessor with a residual value guarantee.
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continued ...
19.35
FUNDAMENTALS OF IFRS 19.35

The seller / lessee provides non-recourse financing to the buyer / lessor.

The seller / lessee retains an obligation to service any existing debt related to the asset.

The seller / lessee provides collateral on behalf of the buyer / seller (other than the transferred asset) or guarantees the buyer
/ lessor’s debt.

The seller / lessee’s rental payment is contingent on some predetermined or determinable level of future operations of the
buyer / lessor.

The seller / lessee enters into a sale and leaseback transaction involving asset enhancements without leasing the transferred
asset from the buyer / lessor,.

The buyer / lessor is obliged to share a significant portion of the appreciation of the asset with the seller / lessee.

Any other provisions or circumstances exist that allow the seller / lessee to participate in any future profits of the buyer /
lessor or the appreciation of the transferred asset, eg, a situation in which the seller / lessee owns or has an option to acquire
a significant interest in the buyer / lessor.
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