CHAPTER 10: LESSEE ACCOUNTING
IFRS 16 defines a lease as:
A contract, or part of a contract,
that conveys the right to use the
underlying asset for a period of time in
exchange for consideration.
One essential feature of a lease is
that there is an IDENTIFIED ASSET.
2. Right to direct the use of the
identified asset.
 A customer has the right to direct
the use of an identified asset during
the period of use only if either:
a. The customer has the right to
direct how and for what
purpose the asset is used during
the period of use; or
b. The relevant decisions about
how and for what purpose the
asset
is
used
are
predetermined.
 Identified asset should be explicitly
specified in a contract or implicitly
specified when made available to
the customer.
A portion of an asset could be
considered identified as long as it is
physically distinct, for example is single
floor of a building.
In addition, to be a lease, a contract
must convey the right to control the use of
an identified asset.
An operating lease is a contract that
allows for the use of an asset but does not
convey ownership rights of the asset.
A contract conveys the right to control the
use of an asset if throughout the period of
use, the customer has the right to:
1. Obtain substantially all of the
economic benefits from the use of
the identified asset.
 To control the use of an identified
asset, a customer or the lessee is
required to have the right to obtain
substantially all of the economic
benefits from the use of an asset
during the period of use. The most
obvious way for that is having
exclusive use of the asset during the
period of its use.
A finance lease also called as capital
lease is a contract entitling a renter to the
temporary use of an asset and has the
economic characteristics of asset
ownership for accounting purposes.
FINANCE LEASE MODEL FOR LESSEE


Finance
lease
transfers
substantially all of the risks and
rewards incidental to ownership
of an underlying asset.
All leases shall be accounted for
by the lessee as finance lease.


At the commencement date, a
lessee shall recognize a right of
use asset and a lease liability.
Lessee is required to initially
recognize a right of use asset for
the right to use the underlying
asset over the lease term and a
lease liability for the obligation to
make payments.
OPERATING LEASE MODEL FOR LESSEE
According to IFRS 16, par.5, Lessee
is permitted to make an accounting policy
election to apply the operating lease
accounting and not recognize an asset and
lease liability in two optional exemptions:
1. Short-term lease
 It is a lease that has a term of 12
months
or
less
at
the
commencement date of the lease.
 A lease that contains a purchase
option is not a short-term lease.
2. Low value lease
 The new lease standard does not
provide
for
a
quantitative
threshold for low value asset. It is a
matter
of
professional
judgement.
 Appendix BE states that a lesee
shall assess the value of an
underlying asset based on the
value of the asset when it is new
regardless of the age of the asset
being leased.
 For example, a lease of car would
not qualify as low value lease
because a new car would typically
not be of low value.
 Typically low value underlying
assets
includes
personal
computers, office furniture and
equipment.
 IFRS 16, par.8, provides that the
election for low value lease is made
on a lease by lease basis.
Stated differently, a lessee may or
may not apply the operating lease
accounting if the lease is short-term or if
the underlying asset is of low value.
Paragraph 6 provides that if lessee
elects to apply the operating lease
accounting under the two exemptions, the
lessee shall recognize the lease payments
as an expense in either a straight line
basis over the lease term or another
systematic basis.
Lessee shall apply another
systematic Basis if this is more
representative of the pattern of the
lessee's benefit.
The operating lease model, the
periodic rental is simply recognized as
rent expense on the part of the lessee.
IFRS 16, par.23, provides that the
lessee shall measure the right of use asset
at cost at commencement date.
The ‘right of use asset’ at cost includes the
following:
 Present Value of lease payment or
the initial measurement of the lease
liability.
 Any payments made to the lessor
at, or before, the commencement
date of the lease, less any lease
incentives received.
 Any initial direct costs incurred by
the lessee.
 An estimate of any costs to be
incurred by the lessee in
dismantling and removing the
underlying asset, or restoring the
site on which it is located.
Paragraph 47 provides that the
lessee shall present the right of use asset
as a separate line item in the statement of
financial position.
As an alternative, the lessee may
include the right of use of asset in the
appropriate line item within which the
corresponding underlying asset world be
presented if owned.
IFRS 16, par.29, provides that a
lease shall measure the right of use asset
applying the Cost Model.
To apply the cost model, the lessee
shall measure the right of use asset at cost
less any accumulated depreciation and
impairment loss.
Moreover, the carrying amount of
the right of use asset is adjusted for any
remeasurement of the lease liability.
IFRS 16, par.32, provides that the
lessee shall depreciate for the right of use
asset over the useful life of the underlying
asset under the following conditions:
 The lease transfers ownership of
the underlying asset to the lessee
at the end of the lease term.
 The lessee reasonably certain to
exercise a purchase option.
Paragraph 34 provides that if a
lessee applies that fair value model in
measuring investment property, the
lessee shall also apply the fair value
model to the right of use asset that meets
the definition of investment property.
Paragraph 35 further provides that
if the right of use asset related to a class
property, paint and equipment to which
the lessee applies the revaluation model,
a lessee may elect to apply the revaluation
model to all of the right of use assets that
relates to that class of property, plant and
equipment.
If there is no transfer of
ownership to the lessee or if the purchase
option is not reasonably certain to be
exercised, the lessee shall depreciate the
right of use asset over the shorter
between the useful life of the asset and
the lease term.
IFRS 16, par.26, provides that at
the commencement date, the lessee shall
measure the lease liability at the present
value of lease payments.
The lease payments shall be
discounted using the interest rate
implicit in the lease.
If the implicit rate cannot be readily
determined, the incremental borrowing
rate of the lessee is used.
 Interest rate implicit in the lease the interest rate that causes the
present value of the lease payment
and the unguaranteed residual value
to equal the fair value of the
underlying asset and initial direct cost
of the lessor.
 Incremental borrowing rate - the
rate of interest that the order would
have to pay to borrow funds necessary
to obtain similar asset over a similar
term and similar security.
COMPONENTS OF LEASE LIABILITY
The lease payments comprise the
following payments for the right to use the
underlying asset during the lease term:
1. Fixed lease payments
2. Variable lease payments
3. Exercise price of a purchase option
if the lessee is reasonably certain
to exercise the option.
4. Amount expected to be payable by
the lessee under a residual value
guarantee.
5. Termination penalties if the lease
term reflects the exercise of a
termination option.
This is a payment made by the
lessee to the lessor for the right to use of
an underlying asset during the lease
term.
Appendix B42 provides the
following examples of lease payment that
are variable in legal form but should be
treated as fixed in substance:
1. Payments that must be made only if
an asset is proven to be capable of
operating during the lease.
2. Payments that mut be made only if
an event occurs with no genuine
possibility of not occuring.
3. Payments that are initially variable
but for which the variability will be
resolved at some point and
payments become in substance
fixed when resolved.
4. When there is more than one step
of payments, only the realistic set of
payments should be considered.
A payments made by the lessee for
the right to use the underlying asset
during the circumstances occurring
after the commencement date other
than passage of time.
The lease liability is remeasured
when the index or interest rate changes
and the lease payments are revised.
Payments that are based if time or
future usage of the underlying asset are
NOT INCLUDED in lease payment.