Other Accounting Issues Related to Lease
1) Extension Option
REMEASUREMENT OF LEASE LIABILITY
-Multiply by PV of an ordinary annuity of 1 using the new implicit interest rate the remaining lease
term
-Multiply by PV of an ordinary annuity of 1 using the new implicit rate the new annual rental then
multiply the result of PV of 1 of new implicit interest rate at remaining period of the lease on the
date of extension
-Add the result of step 1 and step 2 to arrive total PV of liability using the new implicit rate and
deduct the outstanding PV of liability on the date of extension to arrive increase in lease liability.
-Compute for the carrying amount of ROUA on the date of extension (Cost less accumulated
depreciation) and add the computed increase in liability on the date of extension to arrive the
new carrying amount of ROUA
Finance classification
1) Sales type lease – nagbenta; only recognizes interest income and gross profit on sale
2) Direct financing lease – only interest income
Direct financing lease – an arrangement between a financing entity and a lessee.
- The income of the lessor is only in the form of interest
- No dealer profit is recognized because the FV and the cost of the asset
are equal.
Accounting consideration
Gross investment – this is equal to the gross rentals for the entire lease term plus the
absolute amount of the residual value, whether guaranteed or unguaranteed.
Net investment in the lease – This is equal to the cost of the asset plus any initial direct
cost paid by the lessor
Unearned interest income- This is the difference between the gross investment in the
lease.
The initial direct cost would effectively spread the initial direct cost over the lease term
and reduce the amount of interest income.
Additional notes to remember:
o Net investment of the lease or lease receivable = Annual rental x PV of ordinary annuity
of 1
o Initial direct cost is added to the cost of underlying asset to determine the net investment
in the lease
o Residual Value:
-Asset will revert (babalik) to the lessor = the residual value is deducted from the cost of
the asset
-Asset will not revert to the lessor at the end of the lease term = the residual value is
completely ignored.
- If the fair market value of the underlying asset is lower than the residual value under
guaranteed scenario, the lessee will pay for the difference.
-Under unguaranteed scenario, the lessor shall recognized loss for the difference
o FS Presentation
Current portion:
Lease Receivables
Unearned interest income
Carrying amount
500000
(124344)
375656
Non-current portion:
Lease receivables
Unearned interest income
Carrying amount
1000000
(132211)
867789
Sales type lease
-manufacturer or dealer that uses the lease as a means of facilitating the sale of the product
-Sales type lease involves the recognition of a manufacturer or dealers profit on the transfer of
a manufacturer or dealers profit on the transfer of the lessee in addition to the recognition of
interest income
Accounting considerations
Gross investment – this is equal to the gross rentals for the entire lease term plus the absolute
amount of the residual value, whether guaranteed or unguaranteed
Net investment in the lease- this is equal to the present value of the gross rental plus the PV of
residual value whether guaranteed or unguaranteed
Unearned interest income- This is the difference between the gross investment and the net
investment in the lease.
Sales – The amount is equal to the ne investment in the lease (PV of lease payment) or FV of
the asset whichever is lower
COGS – This is equal to the cost of the asset sold minus the PV of unguaranteed residual value
plus initial direct cost paid by the lessor.
Gross profit – sales minus cogs
Initial direct cost – this amounts is expensed immediately in a sales type lease as component
of cogs