PFRS 16:
Leases
Presenters:
 Francis Lloyd Galuza
 Iris Claire Clemente
Learning Objectives:
1. Identify a lease.
2. Describe the general
recognition and
recognition exemption
relating to the accounting
for leases by a lessee.
3. State the lease
classifications by a lessor.
4. State the indicators of a
finance lease.
5. Describe the accounting
for finance leases and
operating leases by a
lessor.
IDENTIFY
LESSEE
LESSOR
ACCOUNTING FOR LEASES BY LESSEE
Recognition:
A lessee recognizes a lease liability and right-of-use asset at
the commencement date.
IDENTIFY
LESSEE
LESSOR
LEASE LIABILITY
Initially measured at present value
Fixed payments
Variable lease payments that depend on index
Amounts expected to be payable by the lessee
under residual value guarantees
The exercise price of a purchase option if the lessee is
reasonably certain to exercise that option
discounted using
the interest rate
implicit in the
lease, if not readily
determinable, the
lessee’s
incremental
borrowing rate is
used
Payments of penalties for terminating the lease
Subsequently measured similar to an amortized cost financial liability
IDENTIFY
LESSEE
LESSOR
LEASE PAYMENTS includes the following:
a. Fixed payments
b. Variable lease payments that depend on index
c. Amounts expected to be payable by the lessee under
residual value guarantees
d. The exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
e. Payments of penalties for terminating the lease
IDENTIFY
LESSEE
LESSOR
The present value is discounted using the interest rate
implicit in the lease, if not readily determinable, the
lessee’s incremental borrowing rate is used.
“the rate of interest that a lessee would have to pay to
borrow over a similar term, and with a similar security,
the funds necessary to obtain an asset of a similar
value to the right-of-use asset in a similar economic
environment”
IDENTIFY
LESSEE
LESSOR
Subsequently measured similar to an amortized cost
financial liability (but remeasured to reflect any
reassessments or lease modifications). Accordingly:
• Interest on the lease liability is computed using the
effective interest method and recognized in profit or loss,
unless it forms part of the carrying amount of another
asset. Interest in each period reflects a constant periodic
rate of interest on the remaining balance of the lease
liability
• Lease payments are apportioned between the interest
and reduction to the lease liability
IDENTIFY
LESSEE
LESSOR
RECOGNITION EXEMPTIONS
A lessee may elect not to apply the recognition requirements
(recognition of lease liability and right-of-use asset) for:
 Short term leases – lease term of 12 months or less. A
lease that contains a purchase option is not a short-term
lease
 Leases for which the underlying asset is of low value –
assessment of value is based on the value of the asset
when it is new, thus the assessment is on absolute basis
and is not affected by materiality or the lessee’s size.
IDENTIFY
LESSEE
LESSOR
ACCOUNTING FOR SHORT TERM LEASE AND LOW
VALUE ASSET
The lessee may elect to recognize the lease payments as an
expense on a straight line basis over the lease term, unless
there’s a more systematic basis.
IDENTIFY
LESSEE
LESSOR
RIGHT-OF-USE ASSET
Initially measured at cost
Amount of initial measurement of lease liability
Any lease payments made at or before the commencement date, less
any lease incentives received
Any initial direct costs incurred by the lessee
The present value of any decommissioning and restoration costs for which the
entity has incurred to produce inventories
Subsequently measured similar to a purchased asset
IDENTIFY
LESSEE
LESSOR
RIGHT-OF-USE ASSET
 Initially measured at cost
the COST is comprises of the following:
a. Amount of initial measurement of lease liability
b. Any lease payments made at or before the commencement
date, less any lease incentives received
c. Any initial direct costs incurred by the lessee, and
d. The present value of any decommissioning and restoration
costs for which the entity has incurred to produce
inventories
IDENTIFY
LESSEE
LESSOR
COST MODEL (right-of-use asset)
a. Less any accumulated depreciation and any accumulated
impairment losses, and
b. Adjusted for any remeasurement of the lease liability.
The lessee depreciates the underlying asset over its useful life if:
a. The contract provide for the transfer of ownership to the
lessee by the end of the lease term, or
b. There is a reasonable certainty that the lessee will exercise
the purchase option
IF NOT the lessee depreciates the underlying asset over the
shorter of the asset’s useful life and the lease term.
IDENTIFY
LESSEE
LESSOR
 Subsequently measured similar to a purchase
asset. Accordingly, the asset is subsequently
measured under the cost model, except when:
a. It relates to a class of PPE that is measured under the
revaluation model, in which case, the asset may be
measured under the revaluation model
b. It meets the definition of investment property and the
entity uses the fair value model, in which case, the asset
is measured under the fair value model
IDENTIFY
LESSEE
LESSOR
Illustration: General Recognition
On January 1, 20x1, Entity X enters into a 3-year lease of
equipment for an annual rent of 100,000 payable at the end of
each year. The equipment has a remaining useful life of 10
years. The interest rate implicit in the lease is 10%, while the
lessee’s incremental borrowing rate is 12%. Entity X uses the
straight-line method of depreciation. The present value factors
are as follows:
PV of ordinary annuity of 1 @ 10%, n=3: 2.48685
PV of ordinary annuity of 1 @ 12%, n=3: 2.40183
IDENTIFY
LESSEE
LESSOR
IDENTIFY
LESSEE
LESSOR
IDENTIFY
LESSEE
LESSOR
In case of contracts with a non-lease
component, separation from its lease part shall be
done on the basis of the relative stand-alone price of
the lease component and the aggregate stand-alone
price of the non-lease components.
NON-LEASE ELEMENTS is considered as separate
element if it transfers goods or services to the lessee.
IDENTIFY
LESSEE
LESSOR
LEASE OF MULTIPLE ASSET
 Considered as separate lease component if BOTH of the
following criteria are met:
a. The lessee can benefit from the use of the asset either
on its own or together with other resources that are
readily available to the lessee; and
b. The underlying asset is neither highly dependent on, nor
highly interrelated with, the other underlying assets in
the contract.
If NOT MET, the right to use multiple asset is considered a single
lease component
IDENTIFY
LESSEE
LESSOR
IDENTIFY
LESSEE
LESSOR
IDENTIFY
LESSEE
LESSOR
IDENTIFY
LESSEE
LESSOR
PRACTICAL EXPEDIENT
PFRS 16 allows an entity to elect by class of underlying
asset, not to separate the lease and non-lease components
of a contract and instead account for them as a single
lease component.
Applying the practical expedient simplifies accounting but it
would increase the amounts recognized for the lease
liability and right-of-use asset and this could have
implications for impairment.
IDENTIFY
LESSEE
LESSOR
PRESENTATION
Statement of Financial Position
Right-of-use asset (Lease Liability) presented as either:
a. Separately from other assets (liabilities)
b. Together with other assets (liabilities) as if they were owned, with
disclosure of line items that include the right-of-use assets (lease
liability)
Right-of-use assets that meet the definition of investment property
are presented as investment property
Statement of Profit or Loss and other Comprehensive Income
• Depreciation and interest expense are presented separately.
IDENTIFY
LESSEE
LESSOR
DISCLOSURE
• Depreciation charge on right-of-use asset
• Interest expense in the lease liability
• Expense relating to low-value and short-term leases (other
than leases of 1 month of less)
• Expense relating to variable lease payments not included in
lease liabilities
• Income from subleasing
• Total cash out flows for leases
• Addition to right-of-use assets
• Carrying amount of right-of-use assets by class or underlying
asset
IDENTIFY
LESSEE
LESSOR
DISCLOSURE
• Additional information on right-of-use assets that are
investment property or are revalued under PAS 16
• Maturity analysis of lease liabilities using the following time
bands under PFRS 7 financial instruments: disclosures
a. Not later than 1 month
b. Later than 1 month and not later than 3 months
c. Later than 3 months and not later than 1 year
d. Later than 1 year and not later than 5 years
IDENTIFY
LESSEE
LESSOR
ACCOUNTING FOR LEASES BY LESSOR
Classification:
1. Finance Lease (Capital Lease) is a lease that transfers
substantially all the risks and rewards incidental to ownership of an
underlying asset.
2. Operating Lease is a lease that does not transfer substantially all
the risks and rewards incidental to ownership of an underlying asset.
Include the possibilities of losses
Include the possibilities of profits and gains
IDENTIFY
LESSEE
LESSOR
INDICATORS OF A FINANCE LEASE:
1. Transfer of ownership
2. Bargain Purchase Option (BPO)
Price that is sufficiently lower than the FV when the option becomes
available.
3. Lease term is at least 75% of the useful life of the leased
asset
This constitutes a major part of the economic life of
the asset as per SFAS No. 13 of US GAAP.
4. Present value of lease payments is at least 90% of the fair
value of the leased asset at the inception date
Constitutes at least substantially all of the FV of the leased asset as per
SFAS No. 13 of US GAAP.
5. Leased asset is of specialized nature
IDENTIFY
LESSEE
LESSOR
OTHER INDICATORS OF FINANCE LEASE:
1. If the lessee can cancel the lease, the lessor’s losses
associated with the cancellation are borne by the lessee
(transfer of risk).
2. Gains or losses from the fluctuation in the fair value of the
residual accrue to the lessee (transfer of risks and rewards).
3. The lessee has the ability to continue the lease for a
secondary period at a rent that is substantially lower than
market rent (transfer of reward).
Note: The above indicators are not always conclusive.
IDENTIFY
LESSEE
LESSOR
INCEPTION DATE is the earlier of:
a. The date of the lease agreement
b. The date of commitment by the parties to the principal
provisions of the lease.
COMMENCEMENT DATE
 The date on which a lessor makes an underlying asset
available for use by a lessee.
 The date on which a lessee is entitled to exercise its right to
use the lease asset.
IDENTIFY
LESSEE
LESSOR
FINANCE LEASE
Initial Measurement
 The lessor recognizes a finance lease receivable measured at an
amount equal to the net investment in the lease.
 The lessor derecognizes the leased asset.
Gross Investment
Less: Net Investment
Unearned Finance Income
The sum of:
1. Lease payment
receivable
2. Unguaranteed
residual value
Present value of
“gross investment”
IDENTIFY
LESSEE
LESSOR
Lease Payments
a. Fixed payments, including in-substance fixed payments, less
any lease incentives payable;
b. Variable lease payments that depend on an index or a rate,
initially measured using the index or rate as at the
commencement date;
c. Guaranteed residual value;
d. The exercise price of a purchase option if the lessee is
reasonably certain to exercise that option; and
e. Payments of penalties for terminating the lease, if the lease
term reflects the lessee exercising an option to terminate
the lease.
IDENTIFY
LESSEE
LESSOR
FINANCE LEASE
Subsequent Measurement
The net investment in the lease (net lease receivable) is subsequently
measured similar to an amortized cost financial asset.
IDENTIFY
LESSEE
LESSOR
OPERATING LEASE
Initial Measurement
 None
Subsequent Measurement
 The lessor recognizes the lease payments as income on a straightline basis over the lease term, unless another systematic basis is
more representative of the pattern in which benefit from the use of
the underlying asset is diminished (Annual Lease Income).
IDENTIFY
LESSEE
LESSOR
SUBLEASES
Sublease is “a transaction for which an underlying asset is re-leased
by a lessee (intermediate lessor) to a third party, and the lease (head
lease) between the head lessor and lessee remains in effect.”
Head Lessor
Intermediate Lessor
Third Party
IDENTIFY
LESSEE
LESSOR
SUBLEASES
An intermediate lessor classifies a sublease as a finance lease or an
operating lease as follows:
a. If the head lease is a short-term lease, the sublease is classified
as an operating lease.
b. Otherwise, the sublease is classified by reference to the right-ofuse asset arising from the head lease, rather than by reference to
the underlying asset.
Note: If the leased asset is subleased, the head lease does not
qualify as a lease of a low-value asset.
IDENTIFY
LESSEE
LESSOR
DISCLOSURE
Finance Leases
• Selling profit or loss
• Finance income on the net investment in the lease
• Income relating to variable lease payments not included in the
measurement of the net investment in the lease
• Qualitative and quantitative explanation of significant changes in
net investment in the lease
• Maturity analysis of lease receivable
IDENTIFY
LESSEE
LESSOR
DISCLOSURE
Operating Leases
• Lease income, separately disclosing income for variable lease
payments that do not depend on an index or rate
• As applicable for underlying asset, relevant disclosures in:
 PAS 16 for leases of PPE, disaggregated by class
 PAS 36 Impairment of Assets
 PAS 38 Intangible Assets
 PAS 40 Investment Property
 PAS 41 Agriculture
• Maturity analysis of lease payments
Miscellaneous Topics
LAND AND BUILDING
 accounted separately
 If impracticable to account separately, accounted as a one lease
item.
Miscellaneous Topics
SALE AND LEASEBACK TRANSACTIONS
- It occurs when a party sells an asset and immediately leases it
back from the buyer.
Miscellaneous Topics
Transfer of Asset is a Sale
If the transfer qualifies as a sale under PFRS 15:
SELLER/LESSEE
I.
II.
Measure the right-of-use asset arising I.
from the leaseback at the proportion
of the previous carrying amount of the
asset that relates to the right of use
retained by the seller-lessee; and
Recognize only the amount of any gain
or loss that relates to the rights
transferred to the buyer-lessor.
BUYER-LESSOR
The buyer-lessor shall account for the
purchase of the asset applying
applicable Standards.
Miscellaneous Topics
Transfer of Asset is a Sale
Adjustments
If sale price
FV of the asset or lease payments
not at market
rates, the ff. adjustments shall be made to measure the sale
proceeds at fair value:
a. Below-Market Terms – Prepayment of lease payments
b. Above-Market Terms – Additional financing provided by the
buyer-lessor to the seller-lessee
Miscellaneous Topics
Transfer of Asset is NOT a Sale
If a transfer does not qualify as a sale, the parties shall account for
it as a financing transaction. Accordingly,
SELLER/LESSEE
 Continues to recognize the
asset and accounts for the
amounts received as a
financial liability under
PFRS 9.
BUYER/LESSOR
 Does not recognize the
transferred asset and
accounts for the amounts
paid as a financial asset
under PFRS 9.
Thank You!