LEASES
Leases: Definitions
A lease is a contract, or part of a contract, that conveys the right of use an asset (the underlying asset) for a period of
time in exchange for consideration.
The lessor is the entity that provides the right to use an underlying asset in exchange for consideration.
The lessee is the entity that obtains the right to use an underlying asset in exchange for consideration.
A right-of-use asset represents the lessee’s rights to use an underlying asset for the lease term.
Inception date vs. Commencement date
Inception date (Classification of leases)
1. The date of the lease agreement.
2. The date of commitment by the parties to the principal
terms and conditions of the lease.
1.
Commencement date (Recognition of leases)
The date on which a lessor makes an underlying asset
available for use by a lessee.
Classifications of leases are to be made at the inception
of the lease. The inception of a lease is the earlier of the
agreement date and the date of the commitment by the parties
to the principal provisions of the lease. If the lease terms are
subsequently altered to such a degree that the lease would have
had a different classification at it inception, a new lease is
deemed to have been entered into. Changes in estimates such as
the residual value of an asset are not deemed to be a change in
classification.
Lease Contract
A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in
exchange for consideration. An asset that is subject of a lease, for which the right to use that asset has been provided by a
lessor to a lessee. For example, if the lessee entered into a contract of lease with a lessor to use the latter’s building. The
lessee shall recognize a right to use asset for building. The building is the underlying asset.
Identifying a lease
To assess whether a contract conveys the right to
control the use of an identified asset for a period of
time, an entity shall assess whether, throughout the
period of use, the customer has both of the
following:
(a) the right to obtain substantially all of the
economic benefits from use of the identified asset
and
(b) the right to direct the use of the identified
asset.
You should carefully look at:



Can the asset be identified? E.g. is it physically distinct?
Can the customer decide about the asset’s use?
Can the customer get the economic benefit
from the use of that asset?
If the answer to these questions is YES, then it’s
probable that your contract contains a lease.
Under IFRS 16, you need to separate lease and nonlease components in the contract.
For example, if you rent a warehouse and rental
payments include the fees for cleaning services, then
you should separate these payments between the
lease payments and service payments and account
these elements separately.
for
However, lessee can optionally choose not to
separate these elements, but account for the whole
contract as a lease (this applies for the whole class of assets).
Identifying a lease
A contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in
Page 1 of 80
exchange for consideration. [IFRS 16:9]
Control is conveyed where the customer has both the right to direct the identified asset’s use and to obtain substantially
all the economic benefits from that use. [IFRS 16:B9]
An asset is typically identified by being explicitly specified in a contract, but an asset can also be identified by being
implicitly specified at the time it is made available for use by the customer.
However, where a supplier has a substantive right of substitution throughout the period of use, a customer does not
have a right to use an identified asset. A supplier’s right of substitution is only considered substantive if the supplier has
both the practical ability to substitute alternative assets throughout the period of use and they would economically
benefit from substitution. [IFRS 16:B13-14]
A capacity portion of an asset is still an identified asset if it is physically distinct (e.g. a floor of a building). A capacity or
other portion of an asset that is not physically distinct (e.g. a capacity portion of a fibred optic cable) is not an identified
asset, unless it represents substantially all the capacity such that the customer obtains substantially all the economic
benefits from using the asset. [IFRS 16:B20]
Separating components of a contract
For a contract that contains a lease component and additional lease and non-lease components, such as the lease of an asset
and the provision of a maintenance service, lessees shall allocate the consideration payable on the basis of the relative standalone prices, which shall be estimated if observable prices are not readily available.
As a practical expedient, a lessee may elect, by class of underlying asset, not to separate non-lease components from lease
components and instead account for all components as a lease. [IFRS 16:13-15]
Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts with Customers.
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Is there an identified asset?
An identified asset is an asset that is
either:

explicitly
identified
in
the
contract, or

is implicitly specified by being
identified at the time that the
asset is made available for use
by the customer.
Even if an asset is explicitly specified, a
customer does not have the right to use
an identified asset if the supplier has a
substantive substitution right throughout
the period of use.
What is a substantive substitution
right?
A substantive substitution right exists
if the supplier has the practical ability to
substitute alternative assets throughout
the period of use and the economic
benefits of substituting the asset would exceed the cost (or in other words, the supplier would benefit economically from substituting
the asset). When the asset is located at the customer’s premises, the costs associated with substituting the asset are likely to be
higher, making it less likely that the supplier would economically benefit from making a substitution.
The assessment of whether a supplier’s substitution right is substantive is based on facts and circumstances present at inception of
the contract. This means that the customer ignores events that are not likely to occur in future such as:

an agreement by a future customer to pay an above-market rate for use of the asset

the introduction of new technology that is not substantially developed at inception of the contract

a substantial difference between the performance or customer’s use of an asset, and the use or performance considered
likely at inception of the contract, and

a substantial difference between the actual market price of the asset during the period of use, and the market price
considered likely at inception of the contract.
If the supplier has the right or obligation to substitute the asset for repair purposes or to provide routine maintenance services (eg,
to allow it to install a technical upgrade that has become available), a customer is not precluded from having the right to use an
identified asset. A customer is also not required to perform an exhaustive search to determine if a supplier has a substantive
substitution right. If a customer cannot readily determine whether a supplier has such a right, it may conclude that a right does not
exist.
Example 1 – Rail cars
In a contract between a customer and a supplier, the supplier needs to transport goods using a particular type of rail car in line with
a specified timetable over a three-year period. The timetable and quantity of goods stipulated are equivalent to the customer having
the use of six rail cars for three years. The supplier makes available the cars, driver and engines as part of the arrangement. The
supplier has a large supply of similar cars and engines that are available to fulfill the obligations of the arrangement. The rail cars
and engines are kept at the supplier’s premises when they are not being used to transport the goods.
Analysis
The contract does not contain a lease of either rail cars or engines.
The rail cars and engines used to transport the customer’s goods are not identified assets. The supplier has a substantive
substitution right to replace the rail cars and engines as a result of:

the supplier having the practical ability to substitute each car and engine throughout the period of use. Alternative cars and
engines are readily available to the supplier and these can be substituted without the customer’s approval, and

the supplier being able to economically benefit from substituting each car and engine. There would be very little cost
associated with substituting these assets as the cars and engines are stored at the supplier’s premises and the supplier has
a large pool of similar cars and engines.
Therefore, the customer does not have the right to obtain substantially all of the economic benefits from the use of an identified rail
car or an engine or directs their use. The supplier chooses which rail cars and engines are used for each delivery and therefore
directs them. It has substantially all of the economic benefits from use of the rail cars and engines.
Can a portion of an asset be an identified asset?
A portion of an asset is an identified asset if it is physically distinct (eg a single floor of an apartment building). Where a portion of an
asset is not physically distinct (eg 20% of the capacity of an oil pipeline), the portion of the asset is not an identified asset unless it
represents substantially all of the capacity of the asset. If neither of these situations exist, the customer is not provided with the
right to obtain substantially all the economic benefits from use of the asset and an identified asset does not exist.
Example 2 – Fibre-optic cable
A customer enters into a 10-year contract with a utilities company (the supplier) for the right to use five individually specified,
physically distinct fibre-optic strands (fibres) within a larger cable running between New York and London. The customer makes all
relevant decisions concerning the use of the individual fibres by connecting them to its own electronic equipment (ie, the customer
‘lights’ the fibres) and deciding what data, and how much data, each strand will carry. If any of the strands are damaged, the
supplier is responsible for effecting any necessary repairs. The supplier owns additional fibres both within the same cable and in
adjacent cables but can only substitute those for the customer’s strands when performing ongoing maintenance or effecting
necessary repairs.
Analysis
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The contract represents a lease of unlit fibre-optic strands (the identified assets).
The fibre optic strands are identified assets because they are explicitly specified in the contract and are physically distinct from other
fibres within the cable. The supplier cannot substitute the fibres for reasons other than repair, maintenance or malfunction.
Conversely, if the customer was entitled only to use an amount of capacity equivalent to five fibres within a cable made up of 15
strands, but not five specific strands, the contract would contain neither an identified asset nor a lease because the capacity
represented by five fibres does not represent substantially all the capacity of the 15-strand cable. In this case, the supplier would
only be providing data capacity (ie, a service).
Does the customer have the right to... ...obtain substantially all of the economic benefits from the use of the identified
asset throughout the period of use?
The second evaluation involves determining whether a customer has the right to obtain substantially all of the economic benefits
from use of the identified asset throughout the period of use. There are many ways that a customer can obtain those economic
benefits such as by using, holding or sub-leasing the asset.
When making this evaluation, a customer considers its rights within the defined scope of the contract. For example, if a contract
specifies that a customer can only print up to a specified number of pages during the period of use of a printer, the customer
considers only the economic benefits arising from use of the printer for those pages, and not beyond.
Variable lease payments based on the customer’s use of the asset (e.g. variable payments based on sales) do not prevent a
customer from obtaining substantially all of the economic benefits from the use of the asset. Although the customer passes on some
of the benefits to the supplier through variable payments, the customer is still the party that receives the economic benefits arising
from use of the asset (in this case, the cash flows arising from the sales). IFRS 16 is explicit on this point to eliminate the possibility
that companies might include variable lease payments solely to avoid the arrangement being classified as a lease and therefore lease
accounting.
...direct the use of the identified asset throughout the period of use?
In evaluating whether the customer has the right to direct the use of an identified asset, a customer must have the right to direct
‘how and for what purpose’ the asset is used throughout the period of use. In making this evaluation, a customer considers the
decisions that most directly impact the economic benefits to be derived from the use of the asset, including:

rights to decide the type of output to be produced by the asset(s)

rights to decide when the output is produced

rights to decide where the output is produced

rights to decide whether the output is produced and the quantity thereof.
In many cases, contracts will include terms and conditions that protect the supplier’s interest in the asset, protect its personnel
and/or ensure the supplier complies with laws and regulations. These rights are considered to be protective and do not, in isolation,
prevent the customer from having the right to direct the use of the asset within the scope of the contract.
Examples of protective rights noted in IFRS 16 include:

specifying the maximum amount of use of an asset (eg an aircraft lease with a maximum usage allowed of 15,000 engine
hours per year)#

limiting where or when the customer can use the asset (eg an automotive lease specifying that the identified vehicle can
only be driven in France)

requiring the customer to follow certain operating practices (eg a lease of retail space where opening hours are limited to
specific times of the day)

requiring the customer to notify the supplier if the customer changes how the asset will be used (eg a warehouse lease
where the customer must notify the supplier if they plan to change the use of the space from storing inventory to a retail
area).
Lastly, IFRS 16 is clear that rights to operate or maintain an asset do not give a customer the right to direct how and for what
purpose the asset is used, except for when the ‘how and for what purpose’ decisions are predetermined. In this case, the customer
will control the asset if the customer has the right to operate the asset throughout the period of use or the customer designed the
asset in a way that predetermines how and for what purpose the asset will be used throughout the period of use.
Example 3 – Ship
A customer enters into a contract with a shipping company (the supplier) to transport cars from Tokyo to Singapore. The contract
specifies the particular ship to be used, the dates of pick-up and delivery, and the cars to be transported (which will occupy the full
capacity of the ship). The supplier operates and maintains the ship and is responsible for the safe passage of the cars. The customer
is not able to make changes (ie to either the destination or the nature of the cargo) once the contract has been signed.
Analysis
The contract does not contain a lease.
After signing the contract, the customer is not able to direct how and for what purpose the ship is used and does not therefore
control the use of the asset. The contract pre-determines how and for what purpose the ship will be used and customer neither
operates nor designed the ship.
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As a simple illustration, let me come up with a small example:
Imagine you want to rent some space in the warehouse for storing your goods. You’d like to enter into a 3year rental contract. The owner of that warehouse offers 2 options to you:
1. You will occupy a certain area of XY cubic meters, but the specific place will be determined by
the owner of the warehouse, based on actual usage of the warehouse and free storage.
2. You will occupy the unit no. 13 of XY cubic meters in the sector A of that warehouse. This place is
assigned to you and no one can change it during the duration of the contract.
Under new IFRS 16, you need to assess whether these contracts contain lease as defined in IFRS 16.
The first thing you would look at is whether an underlying asset can be identified.
Long story short:
1. The first contract does not contain any lease, because no asset can be identified. The reason is that the supplier
(warehouse owner) can exchange one place for another and you lease only certain capacity.
Therefore, you would account for rental payments as for expenses in profit or loss.
2. The second contract does contain a lease, because an underlying asset can be
identified– you are leasing the unit no. 13 of XY cubic meters in the sector A.
Therefore, you need to account for this contract as for the lease and it means recognizing some
asset and a liability in your balance sheet.
This was a very simplified illustration to make you aware of this and it’s by no means
exhaustive – but you get a point.
Do we pay only for a lease, or also for some services?
This is another change we need to watch out under IFRS 16.
When you lease some assets under operating lease (as called by older IAS 17), in most cases, a lessor
provides certain services to you, such as maintenance, repairs, cleaning, etc.
Under new IFRS 16, you need to split the rental or lease payments into lease element and non-lease element, because you
need to:

Account for a lease element as for a lease under IFRS 16 (if it meets the criteria in IFRS 16); and

Account for a service element as before, in most cases as an expense in profit or loss.
From our example above: let’s say you took the option 2 and you pay P10,000 per year. This payment includes the payment for
rental of the unit no. 13 and its cleaning once per week.
Therefore, you need to split the payment of P10,000 into lease element and cleaning element based on their relative
stand-alone selling prices (i.e. for similar contracts when got separately).
You find out that you would be able to rent out similar unit in the warehouse next door for P 9,000 per year without cleaning service,
and you would need to pay P1,500 per year for its cleaning.
Based on this, you need to:

Allocate P8,571 (P9 000/(P9 000+P1 500)) to the lease element and account for that as for the lease; and

Allocate P1,429 (P1,500/(P9 000+P1,500)) to the service element and in this case, probably recognize it in profit
or loss as an expense for cleaning.
Is There A Contract of Lease?
Case A
Supplier L provides Customer M the use of 5 delivery vans of particular type for a term of 5 years. The contract specifies
the vans and Customer M has the decision where the goods will be delivered and the types of goods to be delivered.
Customer M can use the vans for whatever purpose, except for delivery of illegal drugs, explosives, firearms and other items
of similar nature. Supplier L is required to substitute a van that may require repairs and maintenance services.
Yes
Case B
No
Accountantea Company enters into a contract with SuperMalls to use a space for a kiosk (which Accountantea owns) to sell
its milktea products for a three-year period. The contract specifies the amount of the space, which may be located at any
area in the mall, provided that SuperMalls may change the location of Accountantea space with a two-day notice. Minimal
cost is incurred by SuperMalls in changing the space allotted to Accountantea. Accountantea’s kiosk can be moved easily
within the mall and there are several available areas that would meet the space requirement specified in the contract.
Case C
Yes
JetLag Company enters into a 15-year contract with Craftbuilders Company to use three specified jumbo jets that will fly
passengers from Manila to selected cities in Asia Pacific. Jetlag makes the decision about the use of the jumbo jets and the
destination of such flights. Craftbuilders owns a fleet of jumbo jets, such that it can substitute any unit of jet for JetLag
Company for reason of repairs, maintenance or malfunction. In fact, Craftbuilders Company is obliged to substitute those
jets in such cases.
Case D
The contract between Indoplas and FastMover requires the latter to transport a specified quantity of goods by using a
specified type of car in accordance with a stated time table for three years, renewable at the end of the term. FastMover
provides the delivery cars, driver and gasoline. The contract states the nature and quantity of goods to be transported and
the type of car to be sued the suits the nature of the goods. FastMover has a large pool of similar cars that can be used for
this purpose. The cars, when not in use, are parked at the FastMover’s premises.
No
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IFRS 16 - LEASES
Objective
IFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of leases, with the objective of ensuring
that lessees and lessors provide relevant information that faithfully represents those transactions. [IFRS 16:1]
SCOPE

An entity shall apply this Standard to all leases, including leases of right-of-use assets in a sublease, except for:
(a) leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
(b) leases of biological assets within the scope of IAS 41 Agriculture held by a lessee;
(c) service concession arrangements within the scope of IFRIC 12 Service Concession Arrangements;
(d) licences of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from Contracts with Customers; and
(e) rights held by a lessee under licensing agreements within the scope of IAS 38 Intangible Assets for such items as motion picture
films, video recordings, plays, manuscripts, patents and copyrights.

A lessee may, but is not required to, apply this Standard to leases of intangible assets.
LESSEE ACCOUNTING
Lessee Accounting
Basic Principle
At the commencement of the lease, the lessee should recognize a lease liability and a right-of-use asset*
* Except for the exempted short term leases and low value asset leases
RECOGNITION EXCEPTION:
A lessee may elect not to apply the requirements to:
(a) short-term leases; and
(b) leases for which the underlying asset is of low value
SHORT-LIFE AND LOW VALUE ASSETS
If the lease is short-term (less than 12 months at the inception date) and of a low value then a simplified treatment is allowed.
In these cases, the lessee can choose to recognize the lease payments in profit or loss on a straight line basis.
liability or right-of-use asset would therefore be recognized.
No lease
Low value assets – IFRS 16 Leases does not specify a particular monetary amount below which an asset would be
considered low value, although the basis for conclusion indicates a value of $5,000 as a guide.
The standard also gives the following examples of low value assets:
1. Tablets
2. Small personal computers
3. Telephone
4. Small items of furniture
The assessment of whether an asset qualifies as having a “low value” must be made based on its value when new. Therefore,
a car would not qualify as a low value asset, even if it was very old at the commencement of the lease.
The lessee shall recognise the lease payments associated with those leases as an expense on either a straight-line basis over
the lease term or another systematic basis. The lessee shall apply another systematic basis if that basis is more representative
of the pattern of the lessee’s benefit.
__________________________________________________________________________________________________________
Initial measurement
The liability (IFRS 16, para 26)
The lease liability is initially measured at the present value of the lease payments that have not yet been paid.
Lease payments should include the following (IFRS 16, para 27):

Payments (Fixed or Variable)

Amounts expected to be payable under residual guarantees

Options to purchase the asset that are reasonably certain to be exercised

Termination penalties, if the lease term reflects the expectation that these will be incurred
Key definitions -[IFRS 16: Appendix A]
Interest rate implicit in the lease
The interest rate that yields a present value of (a) the lease payments and (b) the unguaranteed residual value equal to the sum of
(i) the fair value of the underlying asset and (ii) any initial direct costs of the lessor.
Lease term
The non-cancellable period for which a lessee has the right to use an underlying asset, plus:
a) periods covered by an extension option if exercise of that option by the lessee is reasonably certain; and
b) periods covered by a termination option if the lessee is reasonably certain not to exercise that option
Page 6 of 80
Lessee’s incremental borrowing rate
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.
Computation of PV of Lease Liability
If there is transfer of ownership or purchase option
Total periodic rental payment (Periodic rental payment x Lease term)
Add: Purchase option at PV (if applicable)
Total PV of lease liability
X
X
X
If there is No transfer of ownership or purchase option
Total periodic rental payment (Periodic rental payment x Lease term)
Add: Guaranteed residual value at PV (if applicable)
Total PV of lease liability
X
X
X
Note:
Present value of periodic rental payment
Add: Present value of guaranteed residual value (GRV of PV of 1) or Present value of purchase option (PO x PV of 1)
PV value of lease liability
X
x
X
Rate used in calculating present value
In calculating the present value of minimum lease payments, the following rate shall be used in order of priority:
1. Interest rate implicit in the lease, if this is practicable to determine. The interest rate implicit in the lease is the
discount rate that causes the aggregate present value of the minimum lease payments and the unguaranteed residual
value equal to the fair value of the leased asset and initial direct costs of the lessor.
2. Lessee’s incremental borrowing rate, the lessee’s incremental borrowing rate is the rate of interest that the lessee
would have to pay on a similar lease, or the rate that the lessee would incur by borrowing funds to purchase the asset
over a similar term and similar security.
What’s excluded from the lease liability?
In practice, lease contracts may contain payments that are excluded from the lease liability, such as:
 non-lease components – e.g. payment for services; and
 variable lease payments that depend on sales or usage of the underlying asset.
Lessees are required to separate lease and non-lease components of a contract, unless they apply the practical expedient in
paragraph 15 allowing them not to separate the two.
Fixed lease payments
Fixed lease payments are payment made by the lessee to the lessor for the right to use an underlying asset during the
lease term.
In-substance fixed payments
The lessee includes in the lease liability fixed lease payments, including in-substance fixed lease payments. ‘In substance
fixed payments’ are payments that are structured as variable lease payments, but which – in substance – are unavoidable.
Examples include:

payments that have to be made only if an event occurs that has no genuine possibility of not occurring;

there is more than one set of payments that a lessee could make, but only one of those sets is realistic; and

there are multiple sets of payments that a lessee could realistically make, but it has to make at least one set of
payments.
Variable lease payments
Variable lease payments are “the portion of payments made by a lessee to a lessor for the right to use an underlying asset
during the lease term that varies because of changes in facts or circumstances occurring after the commencement date,
other than the passage of time.
Variable lease payment linked to future sale is treated as lease (rent expense) and not to be capitalized as right of
use asset.
The accounting for variable lease payments depends on the nature of the variability
Type of variable payment
Initial accounting
Subsequent accounting
a. Based on index or rate
Include in lease liability and right-of- Adjust lease liability and right-of-use
use asset based on the level of index asset when the revised index or rate
or rate at the commencement date.
changes the lease payments (using
original discount rate)
b. Others (e.g., based on sales or Exclude from lease liability and right- Recognized as expense when event or
usage)
of-use asset
condition that triggers payments
occurs.
c. In-substance fixed payments
Treat as fixed lease payments
Treat as fixed lease payments.
Fixed payments include also payments that may, in form, contain variability but that, in substance, are unavoidable. Such
payments are called ‘in-substance fixed lease payments
Note:
Variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability
Page 7 of 80
and are initially measured using the index or rate as at the commencement date. Amounts expected to be payable by the
lessee under residual value guarantees are also included.
Variable lease payments that are not included in the measurement of the lease liability are recognised in profit or loss
in the period in which the event or condition that triggers payment occurs, unless the costs are included in the carrying
amount of another asset under another Standard
Residual value guarantees
A residual value guarantee is a guarantee made to the lessor that the value (or part of the value) of an underlying asset
will be at least a specified amount at the end of the lease. This guarantee is made by a party unrelated to the lessor.
If a lessee provides a residual value guarantee, then it includes in the lease payments the amount that it expects to pay
under the guarantee. If the amount expected to be payable under a residual value guarantee changes, then the lessee
remeasures the lease liability using an unchanged discount rate.
Note:
Computation of Present Value:
Lessee book
Guaranteed Residual Value
As to the lessee, a residual value is guaranteed if it is:
1. Guaranteed by the lessee; or
2. Guaranteed by a party related to the lessee
Lessor book
Guaranteed or Unguaranteed Residual Value
As to the lessor, a residual value is guaranteed it is:
1. Guaranteed by the lessee;
2. Guaranteed by a party related to the lessee; or
3. Guaranteed by a third party unrelated to the
lessor that is financially capable of discharging
the obligations under the guarantee
Unguaranteed Residual Value = Residual Value - Guaranteed Residual Value
Note: Guaranteed or unguaranteed residual value is ignored in the computation of PV of lease payments where there
is transfer of ownership or purchase option since the leased asset will not revert back to the lessor
Guaranteed residual value is the maximum amount that could, in any event, becomes payable at the end of the lease
term.
Residual Value (Guaranteed vs Unguaranteed)
Guaranteed residual value
Lessee’ point of view

Guaranteed by the lessee or by a party related to
the lessee
Lessor’s point of view

Guaranteed by the lessee, party related to the
lessee or any party who is financially capable of
discharging the obligations under guarantee
Unguaranteed residual value

Guaranteed by a party other than the lessee or
party unrelated to the lessee

Realization of residual value is not assured or
guaranteed by a party related to the lessor.
Renewal, termination and purchase options
At the commencement date, a lessee determines whether it is reasonably certain to exercise an option to extend the lease
or to purchase the underlying asset, or not to exercise an option to terminate the lease early. Lessees make this
determination by considering all relevant facts and circumstances that create an economic incentive to exercise an option,
or not to do so.
The lessee determines the lease payments in a manner consistent with this assessment, as follows.
– Renewal options: If the lessee is reasonably certain to exercise a renewal option, then it includes in the lease liability
the relevant lease payments payable in the period covered by the renewal option.
– Termination option: Unless the lessee is reasonably certain not to terminate the lease early, it reflects the early
termination in the lease term and includes the termination penalty in the measurement of the lease liability.
– Purchase option: If the lessee is reasonably certain to exercise an option to purchase the underlying asset, then it
includes the exercise price of the purchase option in the lease payments.
A lessee remeasures the lease liability, using a revised discount rate, if it changes its assessment of whether it is
reasonably certain to exercise a renewal or purchase option, or not to exercise an option to terminate the lease early.
Page 8 of 80
A residual value guarantee is
when the lessor is guaranteed
that the underlying asset at the
end of the lease term will not be
worth less than a specified
amount.
The discount rate should be the
rate of implicit in the lease. If
this cannot be determined, then
the
entity
should
use
its
incremental borrowing rate (the
rate at which it could borrow
funds to purchase a similar
asset).
The right-of-use asset
The right-of-use asset is initially
recognized at cost.
The initial cost of the right-of-use
asset comprises (IFRS 16, para
24):




The amount of the initial
measurement
of
the
lease
liability
(see
above)
Lease payments made at or before the commencement date
Any initial direct costs
The estimated costs of removing or dismantling the underlying asset as per the conditions of the lease.
Initial measurement of lease liability
Add: Prepaid lease payment
Add: Initial direct cost
Add: Dismantling liability
Add: Lease Bonus
Minus: Lease Incentive received
Right-of-Use-Asset
X
X
X
X
X
(x)
x
Initial Direct Cost
Initial direct costs are incremental costs of a lease that would not have been incurred had the lease not been executed.
Costs directly or indirectly attributable to negotiating and arranging the lease (e.g., external legal costs to draft or negotiate a
lease or an allocation of internal legal costs) are not considered initial direct costs.
Examples of costs included and excluded from initial direct costs from the lessee and lessor side.
Included
Excluded
1. Commissions (included payments to employees
1. Employee salaries
acting as selling agents)
2. Internal engineering costs
2. Legal fees resulting from the execution of the lease
3. Legal fees for services rendered
3. Lease document preparation costs incurred after
execution of the lease
the execution of the lease
4. Negotiating lease term and conditions
4. Consideration paid for a guarantee of residual value
5. Advertising
by an unrelated third party
6. Depreciation
7. Costs related to an idle asset
before
the
Initial direct costs should be recorded as an increase in the lessee’s right-of-use asset but should not be recorded as part of the
lease liability.
Note:
Initial direct costs are the costs incurred by the lessor that are directly associated with negotiating and
consummating a completed leasing transaction. There are two types of initial direct costs, incremental direct
costs and internal direct costs. Incremental direct costs are costs incurred in originating a lease arrangement
that are paid to third parties. Internal direct costs are costs directly related to specified activities performed by the
lessor on a given lease.
Initial Direct Costs: Costs incurred by the lessee associated with negotiating, consummating, and processing
the lease.

The initial direct costs are included in the cost of the right of use asset but are not recorded as part of the
lease liablity.
Initial Direct Costs: Costs incurred by the lessor associated with negotiating, consummating, and processing
the lease.

Sales-type leases: Expensed in the period when incurred when the profit on sale is recognized.

Direct financing lease: The costs are first added to the net investment and then amortized over the life of the
lease as a yield adjustment.
Page 9 of 80
Dismantling Costs
Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for
which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period
for purposes other than to produce inventories during that period. The dismantling costs should be added from the cost of
the right of use asset.
Lease Incentive
Lease incentives are payments made by a lessor to a lease associated with a lease, or the reimbursement or assumption
by a lessor of costs of a lessee. For example, as an incentive to the lessee for entering into the lease, the lessor agrees to
reimburse the lessee for the commission paid by the lessee to a broker. The lease incentive should be deducted from the
cost of the right of use asset.
Lease Bonus
Lease bonus is an amount, in addition to periodic rentals, paid by a lessee to the lessor in order to induce granting of
leasehold rights to the lessee. Lease bonus is the opposite of lease incentives. The lease bonus should be added from the
cost of the right of use asset. (Debit RUA Credit Cash)
Leasehold Improvement
Leasehold improvements are separately accounted for as property, plant and equipment and depreciated over the shorter
between the lease term and the life of the improvements. Leasehold improvements are not initial direct costs and not
included in the cost of the right of use asset.
REIMBURSEMENT OF LEASEHOLD IMPROVEMENTS
The reimbursements of leasehold improvements are not lease incentives as they relate to an asset recognised under IAS 16. IASB
stated that it cannot be automatically assumed that all reimbursements of leasehold improvements are not lease incentives.
If such payments economically represent reimbursement for improvements made to the lessor’s asset, then yes – they are not
lease incentives. Factors indicating that leasehold improvements are made to the lessor’s asset include:

leasehold improvements would be necessary to use the leased asset by most entities (e.g. installing walls in a building),

assets constructed in the leasehold improvement process do not result from specialised needs of the lessee, economic
useful life of leasehold improvements exceeds enforceable lease term.
Leasehold improvements are recognised separately under IAS 16. If the reimbursement is not treated as a lease incentive, it is
treated as a reduction of their cost.
On the other hand, if the leasehold improvements are in fact an asset of the lessee, then any reimbursement made by the lessor
should be treated as a lease incentive and accounted for as a reduction of the right-of-use asset recognised under IFRS 16.
The following costs do not affect the lessee measurement of lease liability and right-of-use asset:
1. Security deposit
2. Executory cost
Security deposit
Any security deposit refundable upon the lease expiration is accounted for as an asset by the lessee.
r e f u n d a b l e upon the lease expiration is accounted for as an asset by the lessee.
Security deposit
Security deposit is made by the lessee to the lessor at the inception of the lease, the deposit (which is expected to be refunded
to the lessee at the end of the lease term) shall initially recognized as a receivable by the lessee at its present value. The
appropriate entry is:
Dr. Security Lease Deposit (at present value)
Dr. Prepaid Lease Expense
Cr. Cash
X
X
X
The difference in the initial amount recognized for the deposit and the amount of cash disbursed is treated as prepaid lease
expense that will be subsequently amortized as lease expense on a straight-line basis, while the accretion of interest on the
receivable is based on the effective interest method.
At each reporting date, until the end of the lease term, the following entries will be made:
Dr. Security Lease Deposit (Present Value of Sec. Deposit x implicit rate)
Cr. Interest Revenue
X
Dr. Lease Expense/Rent Expense (Prepaid Lease expense÷ Lease Term)
Cr. Prepaid Lease Expense
X
X
X
Note: Deposit that are to be applied as rental payment at the end of the lease term are not security deposits but rather
advance rent.
Page 10 of 80
Executory Cost
Executory costs represent supplemental costs such as taxes, maintenance fees, or insurance incurred for leased property.
Executory costs are paid by either the lessor or the lessee.
The annual executory cost is not part of the cost of right of use asset but expensed immediately.
The lease terms
To calculate the initial value of the liability and right-of-use asset, the lessee must consider the length of the lease term. The lease
term comprises (IFRS 16, Appendix A):

Non-cancellable periods

Periods covered by an option to extend the lease if reasonably certain to be exercised.

Periods covered by an option to terminate the lease if these are reasonably certain not to be exercised.
Note:
1. LEASE LIABILITY: Discounted at the rate of implicit in the lease or if this is not readily determinable, the
incremental rate of borrowing. The lease liability is the present value of the lease payment which include the
following:
a. Fixed and variable lease payments
b. Purchase option that is reasonably certain to be exercised
c. Residual value guarantee of the lessee
d. Termination penalty if the lease term reflects the exercise of a termination option.
2.
RIGHT OF USE ASSET: The cost of right of use asset comprises:
a. The amount of initial lease liability or the present value of lease payments
b. Payment to the lessor before the commencement date (such as lease bonus) less any lease incentives received
c. Initial direct cost incurred by lessee
d. Estimated cost of dismantling, removing and restoring the underlying asset for which the lessee has a present
obligation
Initial direct cost
Advance Rent
Lease Bonus
General Recognition
Treat as part of the cost of the rightof-use
asset
and
include
in
deprecation
Recognition exemption
Treat as prepaid rent and recognize
as expense under the straight line
basis (or another more appropriate
basis)
Arises when rentals are payable at
the beginning of each period.
Excluded
from
the
initial
measurement of lease liability but
included in the initial measurement
of right-of-use asset
Is an additional payment made by a
lessee to a lessor to induce granting
of leasehold improvement rights to
the lessee. Lease bonus is the
opposite of lease incentives.
Treated
as
prepaid
rent
and
recognized as expense under the
straight line basis (or another
more appropriate basis)
Same accounting as advance rent
above.
Same accounting as advance rent
above.
Subsequent Measureme nt
After lease commencement, a lessee shall measure the right-of-use asset using a cost model, unless: [IFRS 16:29, 34, 35]
i)
the right-of-use asset is an investment property and the lessee fair values its investment property under IAS 40; or
ii) the right-of-use asset relates to a class of PPE to which the lessee applies IAS 16’s revaluation model, in which case all
right-of-use assets relating to that class of PPE can be revalued.
Note:
a.
b.
Cost Model – Cost less any accumulated depreciation and any accumulated impairment losses adjusted for any
remeasurement of the lease liability.
Revaluation Model - revalued amount being the fair value at the date of revaluation less any subsequent accumulated
depreciation and accumulated impairment loss. A lessee may elect to apply the revaluation model to all of the right-ofuse assets that relate to that class of property, plant and equipment.
The liability___________________________________________________________________________________
After the commencement date, a lessee shall measure the lease liability by:
a.
b.
c.
Increasing the carrying amount to reflect interest on the lease liability;
Reducing the carrying amount to reflect the lease payments made; and
Remeasuring the carrying amount to reflect a reassessment or lease modification or to reflect revised in substance fixed leased
payments.
Page 11 of 80
The carrying amount of the lease liability is increased by the interest charge, calculated as the outstanding liability multiplied by the
discount rate of interest. This interest is also recorded in the statement of profit or loss:
Dr. Finance cost (SPL)
Cr. Lease liability (SFP)
The carrying amount of the lease liability is reduced by cash repayments:
Dr. Lease liability
Cr. Cash
To work out the interest and year end liabilities, a lease liability table is often used (see illustration below). The layout of the table
will depend on whether payments are made at the end of the year (in arrears) or at the start of the year (in advance):
Payment in arrears
Year
1
2
Balance b/f
x
x
Interest
x
x
Payment in advance
Year
1
2
Balance b/f
x
x
Payment Subtotal
(x)
x
(x)
x
(NCL)
Payment
(x)
(x)
Balance c/f
x
x
(NCL)
Interest
x
x
Balance c/f
x
x
On the statement of financial position, the total liability at the end of year 1 is split between its non-current and current elements.
For payments made in advance or arrears the non-current liability (NCL) is represented by the balance outstanding immediately after
the payment in year 2. The difference between the total liability at the year-end and the non-current liability will be the current
liability. Note that where payments are made in advance the non-current liability is not the balance outstanding at the end of year
2, as this includes the interest charged for year 2.
Reassessment of Lease Classification
Reassessment of lease classification
Lease classification is reassessed only if there is a lease modification. Changes in estimates or circumstances do not give rise
to a new classification of a lease (IFRS 16.66).




Interest on the lease liability in each period during the lease term shall be the amount that produces a constant periodic rate of
interest on the remaining balance of the lease liability.
The lease liability is subsequently remeasured to reflect changes in:
the lease term
(using a revised discount rate);
the assessment of a purchase option
(using a revised discount rate);
the amounts expected to be payable under residual value guarantees
(using an unchanged discount rate); or
future lease payments resulting from a change in an index or a rate used (using an unchanged discount rate).
to determine those payments
The remeasurements are treated as adjustments to the right-of-use asset.
Lease modifications may also prompt remeasurement of the lease liability unless they are to be treated as separate leases.
Leas e m odific ati ons m ay also pr ompt rem easur ement of the leas e liability unl ess t hey ar e to be tr eated as s epar at e leas es. [IFR S 16: 36(c)]
Covid-19-related rent concessions
A lessee may elect not to assess whether a COVID-19-related rent concession is a lease modification. A lessee that that applies
the exemption accounts for COVID-19-related rent concessions as if they were not lease modifications. [IFRS 16:46A, 46B]
IBOR reform
A lessee accounts for modifications required by the IBOR reform (modifications required as a direct consequence of the IBOR
reform and made on an economically equivalent basis) by updating the effective interest rate. All other modifications are
accounted for using the applicable requirements. [IFRS 16:105-106]
IBOR reform refers to the global reform of interest rate benchmarks, which includes the replacement of some interbank
offered rates (IBOR) with alternative benchmark rates.
The right-of-use asset_____________________________________________________________________________
The right-of-use asset is measured using the cost model
(unless another measurement model is chosen).
This
means that the asset is measured at its initial cost less
accumulated depreciation and impairment losses.
DEPRECIATION:
The lessee shall depreciate the
right of use asset over the useful life of the underlying
asset under the following conditions:
1. The lease transfer ownership of the underlying asset to
the lessee at the end of lease term.
2. The lessee is reasonably certain to exercise a purchase
option.
If not meet either 1 or 2 above, the lessee shall
depreciate the right of use asset over the shorter between
the useful life of the asset and the lease term.
Or Useful
Life
Page 12 of 80


With transfer of title or purchase option
Useful life  Denominator
Residual value: estimated amount expected to be
realized upon disposal of the asset at the end of its
useful life. (Residual value at the end of useful life)




Revert back
Shorter (useful life vs lease term)  Denominator
Residual value: Gross amount of guaranteed
residual value, if applicable (asset reverts back to
the lessor)
If not applicable:
If useful life is shorter (Residual value at the end of
useful life)
If lease term is shorter (Residual value at the end of
lease term)
LEASEHOLD IMPROVEMENT: Leasehold improvements are separately accounted for as property, plant and equipment (not initial
direct cost and not included in the cost of the right of use asset) and depreciated over the shorter between the lease term and the
life of the improvement
Remeasurements of the lease liability
WHEN AND HOW A LEASE LIABILITY IS
REMEASURED?
Remeasurements of the lease liability are treated as
adjustments to the right-of-use asset. If the
carrying amount is reduced to zero, any further
reduction is recognised immediately in P/L (IFRS
16.39).
The lease liability is remeasured when (IFRS
16.40,42):
a. there is a change in the assessment of
a lease term, or
b.
there is a change in the assessment of an option to
purchase the underlying asset, or
c.
there is a change in the amounts expected to be
payable under a residual value guarantee, or
d.
there is a change in future lease payments resulting
from a change in an index or a rate used to determine those payments
The remeasurements made under (a) and (b) should be made using a revised
discount rate, and under (c) and (d) using an unchanged discount rate.
However, remeasurements made under (d) should be made using a revised
discount rate if they are caused by a change in floating interest rates (IFRS
16.41,43).
A or B
C or D
Present Value of New Lease Liability = Revised Lease Payment x Revised Discount Rate
Present Value of New Lease Liability = Revised Lease Payment x Unchanged Discount Rate
To record the increase in lease liability
To record the decrease in lease liability
Dr. RUA
Cr. Lease liability
Dr. Lease liability
Cr. RUA
Cr. Income from remeasurement of lease liability
Remeasurement of Lease Liability
PV of New Lease Liability = Revised Lease Payments x Revised Discount Rate
PV of New Lease Liability = Revised Lease Payments x Unchanged Discount Rate
1. Change in the lease term
2. Change in the assessement of an option to purchase the underlying asset
1. Change in the amounts expected to be payable under a residual value guarantee
2. Change in future lease payments Resulting from a change in index or rate used to determined those payments
Page 13 of 80
Lease Modifications
A lease modification is a change in the scope of
a lease, or the consideration for a lease, that was
not part of the original terms and conditions
of the lease (IFRS 16.Appendix A). Examples of
lease modifications are adding or terminating the
right to use one or more underlying assets or
extending or shortening the contractual lease
term.
When a lease modification occurs, it is accounted
for either as a separate lease or adjustment to
an existing lease.
1. Accounted for as a separate lease
2. Not accounted for as a separate lease
Effective date of lease modification = Date
that both parties agree to the modification (ie:
date the modified contract is signed).
Page 14 of 80
Lease modification as a separate lease (Accounted for as a separate lease)
A lessee (customer) accounts for a lease modification as a separate lease if both the criteria are met (IFRS 16.44):
1. the modification increases the scope of the lease by adding the right to use one or more underlying assets; and
2. the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase
in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular
contract.
When a lease modification is treated as a separate lease, the original right-for-use asset remains unaffected, and the
separate lease is recognised under general recognition principles.
ACCOUNTED FOR AS A SEPARATE LEASE
When a lease modification that increases the scope of a lease, the changes in lease liability have a corresponding
impact on the right-of-use asset without any one-off recognition in P/L (IFRS 16.46(b)). For lease modifications that
change the consideration paid (increase) for a lease, the adjustment to the carrying amount of the right-of-use asset
effectively represents a change in the cost of the right-of-use asset as a result of the modification. For lease modifications
that increase the scope of a lease, the adjustment to the carrying amount of the right-of-use asset effectively represents the
cost of the additional right of use acquired as a result of the modification.
The use of a revised discount rate in remeasuring the lease liability reflects that, in modifying the lease, there is a
change in the interest rate implicit in the lease (IFRS 16.BC203).
Right-of-use Asset
Lease Liability
Note: No gain or loss on lease modification
Debit
Credit
In this case, account for the separate new lease like any other new lease
Lease modification not accounted for as a separate lease (Not accounted for as a separate lease)
The approach to lease modification not accounted for as a separate lease
Page 15 of 80
When a
1.
2.
3.
lease modification is not accounted for as a separate lease, a lessee (customer) (IFRS 16.45):
allocates the consideration in the modified contract as when separating components of a contract,
determines the lease term of the modified lease,
remeasures the lease liability by discounting the revised lease payments using a revised discount rate. The
revised discount rate is determined as the interest rate implicit in the lease for the remainder of the lease term,
if that rate can be clearly determined, or the lessee’s incremental borrowing rate at the effective date of the
modification, if the interest rate implicit in the lease cannot be readily determined.
The above accounting is made at the effective date of the lease modification, which is the date when both parties agree to a
lease modification.
NOT ACCOUNTED FOR AS A SEPARATE LEASE
A. When a lease modification decreases the scope of a lease (IFRS 16.46(a):
1. the right-of-use asset and lease liability are decreased to reflect partial of full termination of the lease
2. any gain or loss resulting from the above-mentioned derecognition is immediately recognised in P/L.
Lease Liability
Loss on Lease Modification
Right-of-use Asset
Gain on Lease Modification
Debit
Debit
Credit
Credit
.
B. For other lease modifications, the lessee shall account for it by making a corresponding adjustment to the right-ofuse asset for all other lease modifications.
Right-of-use Asset
Lease Liability
Note: No gain or loss on lease modification
Debit
Credit
.
Page 16 of 80
Lease Modification
Accounted for as a separate lease
Increase in the scope of the lease
Both
Not accounted for as a separate lease
Consideration increases commensurate to stand-alone price
No gain or loss on lease modification:
Dr. Right of use asset
Cr. Lease liability
Other lease modification
Decrease in the scope of the lease
With possible gain or loss on lease modification
Dr. Lease liability
Dr. Loss on lease modification
Cr. Right of use asset
Cr. Gain on lease modification
SUMMARY
Accounting for leases by lessees
Initial recognition
At lease commencement a lessee accounts for two elements:
1. Right-of-use asset Initially, a right-of-use asset is measured in the amount of the lease liability and initial direct
costs.Then it is adjusted by the lease payments made before or on commencement date, lease incentives received,
and any estimate of dismantling and restoration costs (remember IAS 37).
2. Lease liability The lease liability is in fact all payments not paid at the commencement date discounted to present value
using the interest rate implicit in the lease (or incremental borrowing rate if the previous one cannot be set).These
payments may include fixed payments, variable payments, payments under residual value guarantees, purchase price if
purchase option will be exercised, etc.
Let me outline the journal entries for you:
1. Lessee takes an asset under the lease:
o Debit Right-of-use asset
o Credit Lease liability (in the amount of the lease liability)
2. Lessee pays the legal fees for negotiating the contract:
o Debit Right-of-use asset
o Credit Suppliers (Bank account, Cash, whatever is applicable)
3. The estimated cost of removal, discounted to present value (lessee will need to remove an asset and restore the
site after the end of the lease term):
o Debit Right-of-use asset
o Credit Provision for asset removal (under IAS 37)
Subsequent measurement
After commencement date, lessee needs to take care about both elements recognized initially:
1. Right-of-use asset
Normally, a lessee needs to measure the right-of-use asset using a cost model under IAS 16 Property, Plant and
Equipment.It basically means to depreciate the asset over the lease term:
o Debit Profit or loss – Depreciation charge
o Credit Accumulated depreciation of right-of-use asset
However, the lessee can apply also IAS 40 Investment Property (if the right-of –use asset is an investment property and
fair value model is applied), or using revaluation model under IAS 16 (if right-of-use asset relates to the class of PPE
accounted for by revaluation model).
2. Lease liability
A lessee needs to recognize an interest on the lease liability:
o Debit Profit or loss – Interest expense
o Credit Lease liability
Also, the lease payments are recognized as a reduction of the lease
liability:
o Debit Lease liability
o Credit Bank account (cash)
If there is a change in the lease term, lease payments, discount rate
or anything else, then the lease liability must be re-measured to
reflect all the changes.
Exemptions exist!
You do NOT need to account for all leases like described above. IFRS 16
permits two exemptions (IFRS 16, par. 5 and following):
1. Leases with the lease term of 12 months or less with no
purchase option (applied to the whole class of assets) and
2. Leases where underlying asset has a low value when
new (applied on one-by-one basis). Low value assets – IFRS 16 Leases does not specify a particular monetary
amount below which an asset would be considered low value, although the basis for conclusion indicates a value of
$5,000 as a guide.
So, if you enter into the contract for the lease of PC, or you rent a car for 4 months, then you don’t need to bother with
Page 17 of 80
accounting for the right-of-use asset and the lease liability.
You can simply account for all payments made directly in profit or loss on a straight-line (or other systematic) basis.
Lease Payments at a Glance
Leases under IFRS 16 during COVID -19
The pandemics of coronavirus, or COVID-19 has been here for a while and after the first shock of its quick spread and effect on
people’s health, we are all seeing its economic consequences.
In order to stop the spread, governments in many countries ordered complete lockdown.
Many businesses had to stop their operations and thus their vital force – sales to the customers and resulting cash flow – was
interrupted.
This situation can trigger perhaps the biggest depression we have ever seen.
However, my goal is not to rant about macroeconomics here – there are many other better economic forecasters out there than I
am.
To smooth the economic hammer of the preventive measures, the governments and other parties promised certain reliefs or
concessions.
One of them is providing some relief from payments of rent.
How the lessors provide rent concessions
My three children visit the school that rented its building with all the classes from the local municipality.
Page 18 of 80
However, due to lockdown, all children were forced to stay at home and the school charged much lower fees to the parents for the
scholarship.
But, most of the school’s costs are fixed – salaries of teachers and rent of office represent about 90% of all school’s
expenses.
We don’t have to be mathematical geniuses to see that the school suffered a loss and desperately needed some relief from its
expenses.
The municipality therefore agreed to provide temporary rent concession in two forms:
1. To postpone the rental payment for the 2nd and 3rd quarter of 2020 for 6 months; and at the same time –
2. To decrease the amount of quarterly rental payment for the next two payments.
I am sure that our school is not an exception and lessors provide similar rent reliefs elsewhere to support their customers during
difficult times.
And, frankly speaking, I received a lot of questions from my subscribers:
How to account for rent concessions under IFRS 16?
I gave one and the same answer: lease modification (in most cases).
According to IFRS 16, lease modification is a change in either scope or payments for the lease that was not part of the original
conditions.
It requires recalculation and adjustment of the lease liability – not a pleasant thing to do, especially if many lessees have
adopted IFRS 16 in the previous year and already invested a lot of time, effort and money in all the recalculations.
So, I thought, they could start all over, especially when they received significant rent reliefs from the lessors.
The good news is – this is not true anymore.
New amendment of IFRS 16 to reflect COVID-19
Apparently, my thought process related to this topic was not so insane and far from reality, because IASB reacted to this situation.
In May 2020, IASB issued amendment of IFRS 16 Leases to tackle exactly the rent concessions provided to lessees as a response to
the COVID-19 pandemics.
The main message of this amendment is that you do not have to account for the rent concession as for the lease
modification.
It is a practical expedient and it is voluntary.
However, you need to meet three conditions:
1. Revised consideration must be either the same or less than the consideration before the change;
2. The discount on rentals must not go beyond 30 June 2021. Therefore, if your lease term ends in December 2021 and the
lessor gives you a discount on ALL payments until December 2021, then you CANNOT apply this expedient on ALL the lease.
3. No other significant change in terms and conditions of the lease.
OK, but what does that practically mean?
If the lessor decreased or forgave the lease payments, then you simply treat them as a variable lease payments not included in
the measurement of the lease liability.
In other words – straight in profit or loss, with the corresponding decrease in the lease liability.
If the lessor decreased the payment in one period, but then proportionally increased it in the subsequent period, then you simply
need to continue recognizing the lease liability reduction and the interest as before – at least this is what Basis for conclusion says.
However, I would add that when the timing of the lease payment changes, then there is some remeasurement of the lease
liability involved exactly due to different interest accruing over time.
Example: Rent concession under IFRS 16
Let’s say that ABC rented an office in January 2019 for 3 years. Quarterly payment is CU 10 000. ABC’s annual incremental
borrowing rate is 3% and payments are made at the end of each quarter.
First, we need to see how that lease is initially recognized.
Page 19 of 80
We need to calculate the present value of the lease payments using incremental borrowing rate.
Here’s the trick: we have the annual incremental borrowing rate, but all we need is quarterly rate, because the payments are paid
quarterly.
We can use the following formula to derive quarterly rate from the annual rate:
Thus, quarterly rate = 1,03 to the power of ¼ (as the quarter is ¼ of a year) less one = 0,74%.
Now, you can use PV function in excel to calculate the present value of series of 12 payments, 10 000 each, payable at the end of
each quarter, at the rate of 0,74% per quarter.
It gives us CU 114 409. Hence at the lease commencement, in January 2019, ABC made the following journal entry:
 Debit Right-of-use asset: CU 114 409
 Credit Lease liability: CU 114 409.
Subsequently, ABC recognizes interest expense and the reduction of the lease liability in line with the following table:
OK. Everything went smoothly and then BOOM! Pandemics hit and ABC lost a lot of revenue.
So, ABC’s lessor provided a discount on the next 2 payments, for 2nd and 3rd quarter of 2020, amounting to CU 7 000 per payment.
ABC decided to apply the practical expedient as permitted by the newest IFRS 16 amendment and not account for the discount as for
the lease modification, as it apparently met all three conditions to do so.
Therefore, the lease payment amounting to CU 3 000 for the 2nd quarter will be accounted for as:
 Debit Interest expense in profit or loss: CU 504 (as shown in the table above – see the yellow line)
 Debit Reduction of the lease liability: CU 9 496 (as shown in the table above)
 Credit Cash paid: CU 3 000 (Original payment of 10 000 less discount of 7 000)
 Credit Profit or loss – Rent Concession: CU 7 000
The payment for the third quarter will be recognized accordingly.
Final word…
Many accountants indeed appreciate IASB’s quick action and response to the current situation – their amendment indeed eases the
life of all people dealing with similar reliefs and concessions.
Please remember that this treatment relates solely to the relief provided as a result of COVID-19 pandemics, not to all
concessions.
You can apply this expedient in your financial statements for the period starting on or after 1 June 2020, but even earlier than that
if your financial statements have not been authorized for an issue before 28 May 2020.
Also, one more remark – please make sure you perform the impairment test on your right-of-use asset resulting from the leases.
It is quite probable that there might be some impairment, because the declining revenues as a result of pandemics and the related
measures adopted by the governments are very strong indicator of this situation.
LESSOR ACCOUNTING
Lessors shall classify each lease as an operating lease or a finance lease.
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying
asset. Otherwise a lease is classified as an operating lease.
Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are:
Page 20 of 80





the lease transfers ownership of the asset to the lessee by the end of the lease term
the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the
date the option becomes exercisable at the inception of the lease, it is reasonably certain that the option will be exercised
the lease term is for the major part of the economic life of the asset, even if title is not transferred *
at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of
the fair value of the leased asset **
the leased assets are of a specialised nature such that only the lessee can use them without major modifications being
made
and other finance lease indicators:
Also lists 3 indicators that could also lead to
lease being classified as a finance, but those are
not always conclusive:
1. If the lessee is entitled to cancel the
lease, the lessor’s losses associated
with the cancellation are borne by
the lessee.
2. Gains or losses from fluctuations in
the fair value of the residual fall to
the lessee (for example, by means of
a rebate of lease payments).
3. The lessee has the ability to continue to
lease for a secondary period at a
rent that is substantially lower than market rent.
Note:
*The lease term is for the major part of the economic life of the asset even if the title is not transferred. (Under American
Standard, at least 75% of the economic life of the asset ). Lease term ÷ Economic Life = 75%
**At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair
value of the leased asset. Under American Standard, at least 90% of the fair value of the leased asset). PV of lease payment ÷
fair value of lease asset = 90%
Note:
Initial Direct Costs
Lessee
Included in the cost of asset
Lessor
Operating lease
1.
Included in the CA of the asset
2.
Amortized over the lease term
Finance lease
1. Direct financing – included in net investment
2. Sales-type – included in cost of sales
Operating Lease
A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which
benefit from use of the underlying asset is diminished, another systematic basis.
Direct Finance Lease
Upon lease commencement, a lessor shall recognise assets held under a finance lease as a receivable at an amount equal to the net
investment in the lease.
A lessor recognises finance income over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of
return on the net investment.
Sales type Lease
At the commencement date, a manufacturer or dealer lessor recognises selling profit or loss in accordance with its policy for outright
sales to which IFRS 15 applies.
Sale and Leaseback Transactions (IFRS 16)

The seller-lessee sells the assets to the buyer-lessor, then the seller-lessee leased the asset back.

To determine whether the transfer of an asset is accounted for as a sale an entity applies the requirements of PFRS 15 for
determining when a performance obligation is satisfied. PFRS 15 guidance to determine if the transaction is a sale of the
underlying asset or not.

The cost of right of use asset is equal to the carrying amount of the asset multiplied by a fraction whose numerator is the
initial lease liability and whose denominator is the fair value of the asset.

The gain or loss to be recognized is equal to the gain or loss multiplied by a fraction whose numerator is the right
transferred for the lessor and whose denominator is the fair value of the asset.

The right transferred to the lessor is the fair value of the asset minus the initial lease liability or right retained by the
lessee.
Transfer is a sale:
Page 21 of 80


Seller-lessee:
1. The right of use asset is recorded in proportion to the previous carrying amount of the asset that relates to the right of
use retained.

2. Gains and losses are limited to the amount relating to the rights transferred.

3. If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market
rates, the sales proceeds are adjusted to fair value, either by accounting for prepayments or additional financing.

Buyer-lessor:

1. Account for the purchase of the asset applying the applicable PFRS

2. Account for the lease under the lessor accounting requirements of PFRS 16.
Transfer is not a sale

Seller-lessee:

1. The asset continues to be recognized and a financial liability is recognized equal to the proceeds transferred.

2. The financial liability is accounted for in accordance with PFRS 9.

Buyer-lessor

1. Do not recognize the transferred asset and recognize a financial asset equal to the transfer proceeds.

2. The financial asset is accounted for in accordance with PFRS 9.
SUMMARY
Accounting for leases by lessors
Classification of leases
Unlike lessees, lessors need to classify the lease first, before they start accounting.
There are 2 types of leases defined in IFRS 16:
1. A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying
asset.
2. An operating lease is a lease other than a finance lease.
IFRS 16 (IFRS 16, par. 63) outlines examples of situations that would normally lead to a lease being classified as a
finance lease (and they are almost carbon copy from older IAS 17):
1. The lease transfers ownership of the asset to the lessee by the end of the lease term.
2. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value
at the date of the option exercisability. It is reasonably certain, at the inception of the lease, that the option will be
exercised.
3. The lease term is for the major part of the economic life of the asset even if the title is not transferred.
4. At the inception of the lease the present value of the lease payments amounts to at least substantially all of the fair
value of the leased asset.
5. The leased assets are of such a specialized nature that only the lessee can use them without major modifications.
Accounting for operating lease by lessors
Lessor keeps recognizing the leased asset in his statement of financial position.
Lease income from operating leases shall be recognized as an income on a straight-line basis over the lease term, unless
another systematic basis is more appropriate.
Here you can see that the accounting for operating leases is asymmetrical: both lessees and lessors recognize an asset in their
financial statements (it’s a bit controversial and there were huge debates around).
Accounting for finance lease by lessors
Initial Recognition
At the commencement of the lease term, lessor should recognize lease receivable in his statement of financial position. The
amount of the receivable should be equal to the net investment in the lease.
Net investment in the lease equals to the payments not paid at the commencement date discounted to present value (exactly the
same as described in lessee’s accounting).
The journal entry is as follows:
 Debit Lease receivable (PV)
 Credit PPE (underlying asset)
 Credit Cash (direct cost)
Subsequent Measurement
The lessor should recognize:
1. A finance income on the lease receivable:
o Debit Lease receivable
o Credit Profit or loss – Finance income
2. A reduction of the lease receivable by the cash received:
o Debit Bank account (Cash)
o Credit Lease receivable
Finance income shall be recognized based on a pattern reflecting constant periodic rate of return on the lessor’s net
investment in the lease.
IFRS 16 then also specifies accounting for manufacturer or dealer lessors.
Accounting for manufacturers or dealers by lessors
Manufacturers or dealer lessor should recognize profit or loss from sale in the same period as they would for an outright sale. If
artificially low rates of interest are charged, selling profit should be restricted to that which would apply if a commercial rate of
interest were charged.
Page 22 of 80
Costs incurred by manufacturers or dealer lessor in negotiating and arranging the lease shall be recognized as an expense
when selling profit is recognized.
Sale and Leaseback transactions
A sale and leaseback transaction involves the sale of an asset and the leasing the same asset back.
In this situation, a seller becomes a lessee and a buyer becomes a lessor. This is illustrated in the following scheme:
Accounting treatment of sale and leaseback transactions depends on the whether the transfer of an asset is a saleunder IFRS
15 Revenue from contracts with customers.
1. If a transfer is a sale:
o The seller (lessee) accounts for the right-of-use asset at the proportion of the previous carrying amount
related to the right-of-use retained. Gain or loss is recognized only to the extend related to the rights
transferred. (IFRS 16, par.100)
o The buyer (lessor) accounts for a purchase of an asset under applicable standards and for the lease under IFRS
16.
2. If a transfer is NOT a sale:
o The seller (lessee) keeps recognizing transferred asset and accounts for the cash received as for a financial
liability under IFRS 9 Financial Instruments.
o The buyer recognizes a financial asset under IFRS 9 amounting to the cash paid.
LEASE ON THE VIEWPOINT OF LESSOR AND LESSEE
Lessee (For “short-term” and “low value”)
Rent expense/Rental Rent expense – lessee does not record the leased
receipts
asset; instead, the periodic rental payment is
recognized as rent expense on a straight line
basis*
Free rent/
payments
Uneven
*On a straight-line basis or, if more representative
of the pattern in which benefit from use of the
underlying asset is diminished, another systematic
basis.
Rental expense is still recognized by lessee on a SL
basis and is prorated over full term of lease
Lease bonus
Treated as prepaid rent and amortized as rental
expense over the lease-term on a SL basis
Security deposits
If refundable is treated as a receivable (asset) by
the lessee until the deposit is returned to the lessee
If nonrefundable is recorded as prepaid rent and
amortized as rental expense over the lease term
Leasehold
improvement
Lessor (Operating)
Rental receipts – recognized as rental revenue
of a SL basis*
Rental revenue is still recognized by lessor on a
SL basis and is prorated over full term of lease
Treated as Unearned rent by lessor and
amortized as rental revenue over the lease term
on a SL basis
If refundable is treated as a payable (liability)
by the lessee until the deposit is returned to the
lessee
If nonrefundable is recorded as unearned
revenue and recognized as rental revenue over
the lease term
Leasehold improvement – capitalized by lessee and
amortized over the shorter of the remaining lease
term or the useful life of the improvements
Classified - Property, plant and equipment
Expense
matched
against rent revenue
a. Depreciation of the leased asset – Lessor
depreciates the asset over asset’s economic life
(regardless of the date the lease term begins)
b. Initial direct costs – are recorded as an
asset by the lessor and amortized on a SL basis
to operating expense over the lease term
c. Executory costs – insurance, property tax,
repairs on the leased asset usually paid by lessor
are charged to operating expense as incurred.
Page 23 of 80
Pro-forma entries
Lessee's Books (Short-term and Low value)
Lessor's Books
1. Lease payments
Dr. Rent expense
C r. C ash
Dr. C ash
C r. Rent income
2. C ontigent rental
Dr. Rent expense
C r. C ash
Dr. C ash
C r. Rent income
3. Lease Bonus
Dr. Prepaid rent
C r. C ash
Dr. C ash
C r. Unearned rent income
Amortization
Dr. Rent expense
C r. Prepaid rent
Dr. Unearned rent income
C r. Rent income
Refundable
Dr. Security Rent deposit
Dr. Prepaid lease expense
C r. C ash
Dr. C ash
C r. Liability for rent deposit
C r. Unearned lease income
Amortization
Dr. Security rent deposit (PV x implicit rate)
C r. Interest income
Dr. Interest expense
C r. Liability for rent deposit
Dr. Lease expense/rent expense
C r. Prepaid lease expense (Prepaid Lease expense ÷ Lease term)
Dr. Unearned lease income
C r. Lease income/rent income
Non-refundable
Dr. Prepaid rent
C r. C ash
Dr. C ash
C r. Unearned rent income
Amortization
Dr. Rent expense
C r. Prepaid rent
Dr. Unearned rent income
C r. Rent income
4. Security deposit
5. Leasehold improvement
Dr. Leasehold improvement
C r. C ash
Not Applicable
Depreciation
Dr. Depreciation expense
C r. Accumulated depreciation - LI
Not Applicable
6. Initial direct cost
Dr. Expenses
C r. C ash
Note: If Low value and Short-term
Dr. RUA
C r. C ash
Dr. Initial Direct C ost (PPE)
C r. C ash
Amortization
Dr. Expense
C r. IDC
7. Executory cost and Depreciation
Not Applicable
Dr.
Dr.
C r.
C r.
Repair expenes
Depreciation expense
C ash
Accumulated depreication
Note:
Initial Direct Costs
Lessee
Included in the cost of asset- Under RUA
Charged to expense – Under Low value and Short-term
Lessor
Operating lease
1.
Included in the CA of the asset
2.
Amortized over the lease term
Finance lease
1. Direct financing – included in net investment
2. Sales-type – included in cost of sales
Direct Financing Lease vs Sales Type Lease
Lessor
Direct Financing Lease
A financing company
Sales Type Lease
A manufacturer or a dealer
Cost vs. PV of leased asset
Cost = PV
Cost is not equal to PV
Profit and Loss Statement
N/A (NPV = Cost)
Selling profit/Gross Profit (NPV ≠ Cost)
Interest income
Interest income
Page 24 of 80
Gross investment
(The amount
receivable)
debited
to
lease
Direct Financing Lease
Sales Type Lease
MLP + RV
MLP + RV
Equal to the gross rental for the entire term
plus the absolute amount of the residual value,
whether guaranteed or unguaranteed
Equal to the gross rentals for the entire lease
term plus the absolute amount of the
residual value, whether guaranteed or
unguaranteed.
Note:
Guaranteed or unguaranteed residual value is IGNORED in the computation of minimum
lease payments when there is a transfer of ownership or purchase option since the
leased asset will not revert back to the lessor.
Net investment in the lease
(Whether
Guaranteed
Unguaranteed)
or
PV* of MLP + PV of RV
PV* of MLP + PV of RV
Note: Equal to the cost of the asset plus any
initial direct cost paid by the lessor
Note: Not Equal to the cost of the asset
plus any initial direct cost paid by the lessor
Gross
amount
included in
the
lease
receivable?
PV amount
included in
the sales?
PV amount
deducted in
the cost of
sales?
Initial direct cost
Included in the initial measurement of the net
lease receivable or net investment.
New implicit rate will be computed using
interpolation. (Note that the PV is higher thus
the new implicit rate is lower than the old
implicit rate)
Guaranteed
Residual
value
Yes
Unguaranteed
Residual
value
Yes
(+)Yes
No
No
(-)Yes
Expensed immediately is a sales type lease
as component of cost of sales. (added to
cost of sales)
Note:
If the les sor company paid
initial direct cost:
1. Inclusion of the initial direct cost in the net
investment
2. Initial direct cost would decrease implicit
interest rate in the lease
3. Compute the new implicit rate
Unearned interest income
The total financial revenue of the lessor which
is the difference between the gross investment
and net investment in the lease
The total financial revenue of the lessor
which is the difference between the gross
investment and net investment in the lease.
Note:
* Interest rate implicit in the lease is used in PV calculations
** Initial direct costs are capitalized and allocated over the lease term. Likewise, IDC reduces the implicit interest rate to the lessor.
Legend:
FMV – fair market value
PV – present value
MLP – minimum lease payment
IDC – initial direct cost
URV – unguaranteed residual value
CGS – cost of goods sold
For the Residual Value
Account
Sales Type Lease – (Will revert to the lessor
upon termination of the contract)
Residual Value
Included by the lessor (guaranteed or
unguaranteed)– in the computation of the
unearned interest income and gross profit
If the machinery will revert to the lessor at
the end of the lease term because there is
neither a transfer of title nor a purchase option:
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.
Sales Type Lease – (Will not revert to the lessor
upon termination of the contract)
Not included by the lessor – in the computation of
the unearned interest income and gross profit
If the machinery will n o t r e v e r t t o t h e l e s s o r
at the end of the lease term because the lease
provides for a transfer of title to the lessee. T h e
r e s i d u a l v a l u e i s c o m p l e t e l y i g n o r e d in
the computation of the annual rental and the
unearned interest income.
Sales type lease with purchase option
Treated like Sales type lease with “guaranteed” residual value.
Page 25 of 80
Residual Value (Guaranteed vs Unguaranteed)
Guaranteed residual value
Lessee’ point of view

Guaranteed by the lessee or by a party related to
the lessee
Lessor’s point of view

Guaranteed by the lessee, party related to the lessee
or any party who is financially capable of discharging
the obligations under guarantee
Unguaranteed residual value

Guaranteed by a party other than the lessee or party
unrelated to the lessee

Realization of residual value is not assured or
guaranteed by a party related to the lessor.
Summary of Residual Values

Actual FV ≥ Guaranteed Residual Value  Difference is not accounted

Actual FV < Guaranteed Residual Value  Lessee must pay cash to make up for the deficiency

Actual FV ≥ Unguaranteed Residual Value  Difference is not accounted

Actual FV < Unguaranteed Residual Value  Lessor must recognize a loss
Summary of Journal Entries
Lessee
RUA / Finance Lease
1. Initial direct cost incurred
Dr. RUA
Cr. Cash
2. Inception of the lease
Dr. RUA
Cr. Lease liability
Lessor
Operating lease
x
x
Dr. IDC
Cr. Cash
Lessor
Direct-financing lease
x
x
x
x
Lessor
Sales type lease
Dr. Leased asset
Cr. Cash
x
Dr. Lease receivable
Cr. Unearned interest income
Cr. Lease asset
x
Dr. Inventory
Cr. Cash
x
x
Dr. Lease receivable
Cr. Unearned interest income
Cr. Sales
x
x
x
Cr.
3. Payment by the lessee or receipt by the lessor
Dr. Lease liability
x
Dr. Cash
Dr. Interest expense
x
Cr. Rent income
Cr. Cash
x
4. To record depreciation of the leased asset
Dr. Depreciation expense
x
Dr. Depreciation expense
Cr. Accumulated depreciation
x Cr. Accumulated depreciation
Dr. Amortization of IDC
Cr. IDC
5. Expiration under guaranteed residual value: FV = RV / ( FV > RV )
Dr. Lease liability
x
Dr. Accumulated depreciation
x
Cr. RUA
x
6. Expiration under guaranteed residual value: FV < RV
Dr. Lease liability
x
Dr. Accumulated depreciation
x
Cr. RUA
x
Dr. Loss on finance lease (Impairment Loss)
Cr. Cash
x
x
x
Dr. Cash
Cr. Lease receivable
x
Dr. Unearned interest income
Cr. Interest income
x
x
x
x
Cost of Sales (if Unguaranteed RSV) x
Dr. Cost of sales
Cr. Inventory
x
Dr. Cash
Cr. Lease receivable
x
x
Dr. Unearned interest income
Cr. Interest income
x
x
No Journal entry
x
x
x
No Journal entry
x
x
x
Dr. Leased asset
Cr. Lease receivable
x
Dr. Leased asset
Dr. Cash
Cr. Lease receivable
x
x
Dr. Leased asset
Dr. Loss on finance lease
Cr. Lease receivable
x
x
Dr. Inventory
Cr. Lease receivable
x
Dr. Inventory
Dr. Cash
x Cr. Lease receivable
x
x
Dr. Inventory
Dr. Loss on sales type lease
x Cr. Lease receivable
x
x
x
x
x
x
x
7. Expiration under unguaranteed residual value: FV < RV
Dr. Lease liability
x
Dr. Accumulated depreciation
x
Cr. RUA
x
x
Pro-forma entries- Sales Type Lease
*570,000 Unguaranteed
Page 26 of 80
Lease of Land and Building
Lease of land and buildings
When a lease includes both land and buildings, a lessor should assess the classification of each element as a finance lease or an
operating lease separately. Lease payments should be allocated between the land and the buildings elements in proportion to the
relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception date. Fair
value of leasehold interest can be defined as a fair value of the underlying asset less its present value of the residual value. IASB
believes that allocation based on fair values of the leasehold interests better reflects compensating the lessor for the benefits
‘used up’ during a lease (IFRS 16.BCZ245-BCZ247).
IFRS 16 emphasizes that land normally has an indefinite economic life (IFRS 16.B55-B57), it is therefore impossible that the lease
term will be for the major part of the economic life of the underlying asset. It is however possible that for very long-term leases
(e.g. 99 years), the present value of the lease payments will represent substantially all of the fair value of the land.
For a lease of land and buildings in which the amount for the land element is immaterial to the lease, a lessor may treat the land
and buildings as a single unit for the purpose of lease classification (IFRS 16.B57).
Lease of land and building are considered separately for the purpose of lease classification.
Generally, a lease of land will be regarded as an operating lease unless the title passes to the lessee. But even if there is no transfer
of title, a lease of land may be accounted for as a finance lease if the lease extends to a relatively very long period of time.
If the land and building are accounted for as finance lease, use the following:
With relative fair value
Allocate the minimum lease payments (including any lump-sum upfront payments) to the
land and building using relative fair value method.
No reliable allocation bases
Account the land and building as a single item under a finance lease.
Land is immaterial
Account the land and building as a single item under a finance lease. In this case, the
economic life of the building is regarded as the economic life of the entire leased asset.
If the land and building are accounted for as operating lease, a recording of the rent expense is made at the time it is incurred.
Land and building as Investment Property
Fair value model is to be used.
Account the land and building as a single item under a finance lease since no depreciation
is to be recorded on the building.
Cost model is to be used.
Allocate the minimum lease payment to the land and building using relative fair value
method.
Accounting for Sublease
A 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 (IFRS 16.
Appendix A).
An intermediate lessor shall
classify the sublease as a
finance lease or an operating
lease
as
follows
(IFRS
16.B58):
a. if the head lease is a
short-term
lease
that the entity, as a
lessee,
has
accounted for using
the practical
expedient,
the
sublease is classified
as
an
operating
lease.
b. otherwise,
the
sublease is classified
by reference to the
right-of-use asset
arising from the
head lease, rather
than by reference to
the underlying asset.
If the leased asset is subleased, the head lease does not qualify as a lease of a low-value asset.
Page 27 of 80
Owner/Head Lessor
HEAD LEASE
Account for the lease either operating or finance lease
Intermediate lessor's point of view
Account the head lease as:
Dr. Right of use asset
C r. Lease liability
Head Lessee/Intermediate lessor or Sublessor
SUBLEASE
Sublessee
Assuming the Sublease is treated as finance lease*
Dr. Lease receivable
Dr. Loss on subleasing
C r. Unearned interest income
C r. Right of use asset
C r. Gain on subleasing
Sub-lessee's point of view
Account the sublease as:
Dr. Right of use Asset
C r. Lease liablity
*Note: If the sublease is treated as operating lease by the intermediate lessor, no journal entry is to be made to
derecognize the right of use asset.
Page 28 of 80
Page 29 of 80
SALE AND LEASEBACK
Page 30 of 80
A s a l e a n d l e a s e b a c k are an arrangement whereby one party sells an asset to another party and then immediately leases the
asset back from the new owner.
Sale and leaseback transactions
If an entity (the seller-lessee) transfers an asset to another entity (the buyer-lessor) and then leases it back from the buyer, the
seller-lessee must assess whether the transfer should be accounted for as a sale.
For this purpose, the seller must apply IFRS 15 Revenue from Contracts with Customers to decide whether a performance obligation
has been satisfied. This normally occurs when the buyer obtains control of the asset. Control of an asset refers to the ability to
obtain substantially all of the remaining benefits.
Transfer is not sale
If the transfer is not a sale then the seller-lessee continues to recognize the transferred asset and will recognize a financial liability
equal to the transfer proceeds.
In simple terms, the transfer proceeds are treated as a loan. The detailed accounting treatment of financial assets and financial
liabilities.
Transfer of the asset is not a sale
If the transfer of an asset by the seller-lessee does not satisfy the requirement of IFRS 15 to be accounted for as a sale of the
asset:
a. The seller-lessee shall continue to recognize the transferred asset and shall recognize a financial liability equal to the
transfer proceeds. It shall account for the financial liability applying IFRS 9. The journal entry is:
Cash
xxx
Financial liability
xxx
b. The buyer-lessor shall not recognize the transferred asset and shall recognize a financial asset equal to the transfer
proceeds. The journal entry is:
Financial asset (receivable)
xxx
Cash
xxx
Transfer is sale
If the transfer does qualify as a sale then the seller–lessee must measure the right-of-use asset as the proportion of the previous
carrying amount that relates to the rights retained.
This means that the seller-lessee will recognize a profit or loss based only on the rights transferred to the buyer-lessor.
Measurement of lease liability under sale and leaseback
The seller-lessee shall account for the leaseback as a finance lease. The lease liability is measured at the present value of lease
payments.
M e a s u r e m e n t o f r i g h t - o f - u s e a s s e t u n d e r s a le a n d l e a s e b a c k
If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the seller measures the right-of-use asset at the
proportion of the previous carrying amount that relates to the right of use retained. Accordingly, the seller only recognises the
amount of gain or loss that relates to the rights transferred to the buyer. [IFRS 16:100a)]
If the fair value of the sale consideration does not equal the asset’s fair value, or if the lease payments are not market rates, the
sales proceeds are adjusted to fair value, either by accounting for prepayments or additional financing. [IFRS 16:101]
If selling price is not equal to fair value:
Fair value
Less: Selling price
(Additional financing)/ Prepayments
Sale price above fair value

Any excess sale price over fair value shall be
accounted for as additional financing provided by
the buyer-lessor to seller –lessee.

The excess of sale price over fair value shall be
deducted from the initial measurement of lease
liability for purposes of establishing the allocation
fraction.
X
(x)
(x)/x
Sale price below fair value

If the sale price is below fair value, the difference is
accounted for as prepayment of lease payment.

The excess of fair value over sale price shall be added
to the initial measurement of lease liability for
purposes of establishing the allocation fraction.
Gain or loss on sale and leaseback may be computed as follows:
Fair value
Less: Carrying amount
Total gain (or loss) on sale and leaseback


X
(x)
X
The gain or loss that pertains to the right retained by the seller-lessee is not recognized. The right retained by the
seller-lessee is the proportion of the initial lease liability in relation to the fair value of the asset.
The gain or loss that pertains to the right transferred to the buyer-lessor is recognized.
Page 31 of 80



Right transferred = Fair value - Right Retained
Gain to be recognized = Total gain x (Right transferred ÷ Fair Value)
Gain not to be recognized = Total gain x (Right retained ÷ Fair Value) or Total gain – Gain to be recognized
Lease Liability + FV - SP
CV
x
FV
x
SP
x
CV
[Lease liability - Financing + Prepaid ]
=
x
FV
Right-of-use Asset
FV
(CV)
G/L
x
CV - RUA
CV
=
Gain or loss to be recognized
The jour nal entry on the part of the Seller-Lessee:
Debit
Pxxx
Pxxx
Cash
Rights of use
Gains on rights tra nsferred
Lease liability
Building
Pxxx
Pxxx
Pxxx
Interest expense
Lease liability
Cash
Pxxx
Xxx
Pxxx
The jour nal entry on the part of the Buyer-Lessor:
Debit
Building
Pxxx- FV vs SP ( whic he ver is lower)
Financial asset
Pxxx-If applicable (if FV is lower)
Cash
Assuming Operating Lease
Cash
Rent income
Cash
Financial asset
Interest income
Credit
Pxxx
Allocate the Cash to: Rent
income and financial asset
Credit
Pxxx
Pxxx
Pxxx
Pxxx
Pxxx
Assuming Finance Lease
Lease receivable
Pxxx
Unearned interest income
Pxxx
Building
Pxxx
N o t e : Recognition of interest income shall be based on the implicit rate of the lease computed using interpolation based on the
fair value of the asset.
FINANCIAL STATEMENT PRESENTATION
A lessee shall either present in the statement of financial position, or disclose in the notes:
a. Right –of-use assets separately from other assets. If a lessee does not present right-of-use assets separately in the
statement of financial position, the lessee shall:
1. Include right-of-use assets within the same line item as that within which the corresponding underlying assets would be
presented if they were owned, and
2. Disclose which line items in the statement of financial position include those right-of-use assets.
b. Lease liabilities separately from other liabilities. If the lessee does not present lease liabilities separately in the statement of
financial position present lease liabilities separately in the statement of financial position, the lessee shall disclose which line
items in the statement of financial position include those liabilities.
In the statement of profit or loss and other comprehensive income, a lessee shall present interest expense on the lease liability
separately from the depreciation charge for the right-of-use asset. Interest expense on the lease liability is a component of finance
costs.
In the statement of cash flows, a lessee shall classify:
a. Cash payments for the principal portion of the lease liability within financing activities;
b. Cash payments for the interest portion of the lease liability; and
c. Short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the
measurement of the lease liability within operating activities.
PRESENTATION
Summary of how the lessee reports the information related to leases in the financial statements.
All leases *
Statement of financial position
Income statement
Page 32 of 80
*Except low-value and short-term lease
Right -of – use asset**
Depreciation expense
Lease liability
Interest expense
**Separately from other assets or
together with other assets as if they
were owned, with disclosure of the line
items that include the right-of-use
assets.
Summary of lessor presentation of lease information
Finance lease
Statement of financial position
Lease receivable presented separate
from other assets
Derecognize the leased asset
Operating lease
Income statement
Interest revenue
Selling profit or loss for a sales-type
lease
Continue to recognize assets (applicable
to movable asset, e.g. machinery,
automobile, equipment) subject to
operating leases as property, plant, and
equipment.
Revenue generally
straight-line basis
Continue to recognize assets (applicable
to Immovable asset, e.g. land and
building) subject to operating leases as
investment property.
Changes in fair value under Fair value
model on the leased asset
Depreciation
asset
recognized
expense
on
the
on
a
leased
DISCLOSURE
The objective of IFRS 16’s disclosures is for information to be provided in the notes that, together with information provided in the
statement of financial position, statement of profit or loss and statement of cash flows, gives a basis for users to assess the effect
that leases have. Paragraphs 52 to 60 of IFRS 16 set out detailed requirements for lessees to meet this objective and paragraphs 90
to 97 set out the detailed requirements for lessors. [IFRS 16:51, 89]
Lessees and lessors must also provide additional qualitative and quantitative disclosures to help financial statement users
assess the amount, timing, and uncertainty of future cash flows. These disclosures are intended to supplement the amounts provided
in the financial statements.
Qualitative Lease Disclosures both lessees and lessors
• Nature of its leases, including general description of those leases.
• How variable lease payments are determined.
• Existence and terms and conditions for options to extend or terminate the lease and for residual value guarantees.
• Information about significant assumptions and judgments (e.g., discount rates).
Lessee Quantitative Disclosures
• Total lease cost.
• Finance lease cost, segregated between the depreciation of the right-of-use assets and interest on the lease liabilities.
• Low-value and short-term lease cost.
• Weighted-average remaining lease term and weighted-average discount rate.
• Maturity analysis of finance lease liabilities, on an annual basis for a minimum of each of the next five years, the sum of the
undiscounted cash flows for all years thereafter.
Lessor Quantitative Disclosures
• Lease-related income, including profit and loss recognized at lease commencement for sales-type and direct financing leases, and
interest income.
• Income from variable lease payments not included in the lease receivable.
• The components of the net investment in sales-type and other financing leases, including the carrying amount of the lease
receivable, the unguaranteed residual asset, and any deferred profit on direct financing leases.
• A maturity analysis for operating lease payments and a separate maturity analysis for the lease receivable (sales-type and direct
financing leases).
• Management approaches for risk associated with residual value of leased assets (e.g., buyback agreements or third-party
insurance).
Is There A Contract of Lease?
Scenario 1
A customer enters into a contract with a supplier for the lease of a retail shop in a shopping centre for a period of 5 years. The lease
payment are based on 3% of the gross sales of the store. The supplier decides on the opening and closing hours of the shopping
centre. The customer has the right to determine the design of the store, what products are to be sold, the price of the products, and
the quantities that would be available.
Question 1a
Is there an identified asset?
Page 33 of 80
A.
B.
Yes, the identified asset is the specific shop.
No, because the arrangement is for a portion of the space within the shopping centre.
Correct
There is an identified asset being a specific shop in the shopping centre.
Question 1b
Does the customer have the right to obtain substantially all of the economic benefits from use of the asset throughout
the period of use?
A.
B.
Yes - because the customer receives substantially all of the gross benefits.
No - because the lessor is also receiving a portion of the output of the asset (i.e. 3% of gross sales from the store).
A requirement for a customer to pay the lessor a portion of the output of the asset (e.g. in this case the 3% of gross sales) does not
mean that the customer is not obtaining substantially all of the economic benefits associated with the asset. Although certain
benefits are passed on to the supplier, the customer receives substantially all of the gross benefits.
Question 1c
Does the customer have right to direct use of the asset? (I.e. does the customer have the right to operate the asset
throughout the period of use, without the supplier having the right to change those operating instructions?)
A. Yes. The customer has the right to determine what products are to be sold, the price of the products, the quantities that would
be available, and the design of the store.
B. No. The supplier decides on the opening and closing hours of the shopping centre.
Correct
The customer has the sole right to determine what products are to be sold, the price of the products, the quantities that would be
available, and the design of the store. These decisions have a more significant impact on the economic benefits derived from the
shop, than the supplier's right to determine the operating hours of the store.
Does the arrangement contain a lease?
A.
B.
Yes
No
Correct
The arrangement contains a lease because:
 There is an identifiable asset, being the specific shop (Question 1a)
 The customer has the right to obtain substantially all of the economic benefits from use of the asset (Question 1b), and
 The customer has the right to direct use of the asset (Question 1c).
Scenario 2
A coffee company enters into a 5-year arrangement with a rail network provider to rent space on five platforms or rail concourses.
The coffee company will use these spaces to sell coffee and other items.
Under the terms of the contract:



The space offered must be within an agreed list of stations on the network
The coffee company must provide its own kiosk to sell its goods, and
The kiosk must be easily movable.
The rail network has the right to change the locations (must be within the agreed list of stations that are located in the CBD) of the
kiosk at any time during the 5-year period.
Question 2a
Is there an identified asset?
A.
B.
Yes, because the space offered must be within the specified list of stations on the network.
No, because the rail network has the practical ability to change the location of any of the coffee kiosks and would benefit
economically from changing the space in order to make the best use of space at stations.
Correct
There is no specified asset in the contract (i.e. no set spaces in each CBD station as they are easily movable) and the rail network
has the right, and practical ability, to require the coffee company to relocate the kiosks to any station, platform or concourse in the
CBD.
The rail network has a substantive right to find alternative spaces that the coffee company can use because:
Page 34 of 80


It has the practical ability to change the location (either within the same station or to a different agreed
station) of any of the coffee kiosks during the 5-year period without the approval of the coffee company, and
It would benefit economically from changing the space offered to coffee company in order to make the best
use of space at stations. Given that the kiosks are easily movable, any costs associated with changing the
space would be minimal.
Question 2b
Does the arrangement contain a lease?
A.
B.
Yes
No
Correct
The arrangement does not contain a lease because there is no identifiable asset (Question 2a).
Scenario 3
Large Multinational Co. entered into a contract with Aircraft Supplier to lease an aircraft for a period of two years for its exclusive
use.
Under the terms of the agreement, Large Multinational Co. specifies the model of aircraft, the interior fit-out of the aircraft, as well
as the exterior paint work. There are significant costs associated with the fit-out.
Under the terms of the lease:




There are certain countries to/over which Large Multinational Co is unable to fly the plane.
Other than the above restrictions, Large Multinational Co. determines the route and the passengers that will
use the aircraft.
Large Multinational Co. has exclusive use of the aircraft during the period.
Aircraft Supplier is responsible for maintaining the aircraft, and for providing the crew.
Aircraft Supplier has the right to substitute the aircraft used so long as it is the same model aircraft and meets fit-out specifications
in the contract.
Question 3a
Is there an identified asset?
A.
B.
Yes, because the agreement specifies the exclusive use of a specified model of aircraft. The agreement also has specified the
interior fit out, as well as the exterior paint work of the aircraft, and the costs of the customised fit out is significant.
No, because Aircraft Supplier has the right to substitute the aircraft used.
There is an identified asset. While Aircraft Supplier has the right to substitute the aircraft used, this right is not substantive because
there are significant costs associated with fitting out another aircraft to Large Multinational Co.'s specifications under the agreement.
Question 3b
Does the customer have the right to obtain substantially all of the economic benefits from use of the asset throughout
the period of use?
A. Yes
B. No
Large Multinational Co. has the right to obtain substantially all of the economic benefits from the use of the asset as it has exclusive
use of the aircraft.
Question 3c
Does the customer have right to direct use of the asset? (I.e. does the customer have the right to operate the asset
throughout the period of use, without the supplier having the right to change those operating instructions?)
A. Yes, because Large Multinational Co. decides where the aircraft flies and the passengers of the aircraft.
B. No, because:
 There are certain restrictions over certain countries to/over which Large Multinational Co. cannot fly the plane, and
 Aircraft Supplier is responsible for maintaining the aircraft, and for providing the crew.
Correct
It has the ability direct the use of the aircraft (where the aircraft flies and the passengers) within the bounds of the contractual
agreement. The restrictions on countries the aircraft is able to fly over is simply to define the scope of use of the aircraft during the
contractual period.
Even though the maintenance of the aircraft and the crew used are essential to the efficient operation of the aircraft, Aircraft
Supplier does not control the aircraft because it cannot control use of the aircraft during the lease period.
Question 3d
Does the arrangement contain a lease?
Page 35 of 80
A.
B.
Yes
No
Correct
The arrangement contains a lease because:



There is an identifiable asset, being the specified aircraft (Question 3a)
The customer has the right to obtain substantially all of the economic benefits from use of the aircraft (Question 3b), and
The customer has the right to direct use of the aircraft (Question 3c).
REVIEW QUESTIONS
Case 1: Customer X enters into a contract with Supplier Y for the use of a specific car for one year. The car shall be modified
according to the specifications of Customer X. Customer X shall have exclusive use of the car during the duration of the contract. If
at any time the car is not working properly, Supplier Y shall provide a replacement car of the same type. Supplier Y cannot retrieve
the car during the duration of the contract for reasons other than the default of Customer X. At the time of signing of contract.
Supplier Y does not yet have the car described in the contract.
Requirement: Identify if the contract is (or contain) a lease using the guidance in PFRS 16. Provide brief explanations.
Solution:
The contract is a lease.
a. Identified asset – the car is implicitly specified at the time that the asset is made available for use by the customer.
* Substitution right – Supplier Y’s substitution rights is not substantive because it is not available to him throughout the period of
use.
b.
Right to obtain economic benefits from use – Customer X has the exclusive use of the car throughout the duration of the
contract.
c.
Right to direct the use – Customer X has the right to direct how and for what purpose the asset is used throughout the period of
use.
Case 2: Customer X enters into a three-year contract with Supplier Y for the use of a bus. The bus shall be used as a shuttle
service for Customer X’s guests. Supplier Y owns a fleet of buses and each of these buses meets the specifications of Customer X.
The contract requires Supplier Y to make available for Customer X the use of a bus throughout the duration of the contract. Supplier
Y provides a driver for the bus and decides which one of its many buses will be provided to Customer X. This would depend, for
example, on the number of guests that will be using the bus and the destination-whether long trip or short trips. Customer X
decides the time of use and the destination. Only the guests of Customer X shall be the passengers when the bus is used. After
Customer X’s use, the bus is kept in Supplier Y’s premises.
Requirement: Identify if the contract is (or contain) a lease using the guidance in PFRS 16. Provide brief explanations.
Solution:
The contract is not (does not contain) a lease because there is no identified asset.
* Substitution right – Supplier Y’s substitution rights is substantive.
LEASE CONTRACT
Problem 1: (Identified asset) Company A enters into a contract with supplier M for the use of a specified aircraft for a 3-year
period. Under the contract, the supplier can substitute the aircraft throughout the rental period, which is not contingent upon
another event. M has a fleet of equivalent aircraft and the aircraft is maintained at the supplier’s hangar. Is there an identified
asset?
A. Yes
B. No
Problem 2: (Identified asset) Similar to the previous scenario, Company A enters into a contract with Supplier M for the use of
specified aircraft. In this scenario, the aircraft is customized to fit to A’s fit-out specifications. The aircraft is maintained in the city
that A operates from when it is not being used. Is there an identified asset?
A. Yes
B. No
Problem 3: (Rights to use) Customer C enters into a two-year contract with Supplier S to transport cargo by sea from Singapore
to Sydney. The ship to be used for transport is explicitly specified in the contract and S has no substitution rights over the ship. C
did not design the ship.
The cargo will occupy substantially all of the ship’s capacity during the voyage. The contract specifies the cargo to be transported
and the pick-up and delivery dates.
S operates and maintains the ship, and is responsible for sale passage of the cargo on board. C is prohibited from operating
the ship itself, and from hiring another party to do so. Is this a lease?
A. Yes
B. No
Problem 4: (Rights to use) Customer C enters into a contract with Supplier S for the use of MV Santa Catalina, cargo ship for
five years. The ship is to be used for transport and S does not have substitution rights. C decides whether and what cargo will be
transported, and which ports to visit and when, throughout the five-year period.
C is prohibited from sailing the ship into waters at high risk of piracy, and from carrying explosive materials.
maintains the ship and is responsible for safe passage of the cargo on board. Is this a lease?
A. Yes
B. No
S operates and
Problem 5: (Lease and non-lease components)
Page 36 of 80




Lessor P leases a bulldozer to Lessee O to be used in Lessee’s mining operating for four years.
The contract includes maintenance service provided by P and P obtains its own insurance to the bulldozer.
Annual payments are P4,000,000 (P350,000 relate to maintenance services and P100,000 to insurance costs).
O is able to determine that similar maintenance services and insurance costs are offered by third parties for P400,000 and
P100,000 a year, respectively.

O is unable to find an observable stand-alone rental amount for a similar bulldozer because none is leased without related
maintenance services provided by the lessor.
How much should be allocated to the lease component?
A. P3,500,000 (P4,000,000 – P400,000 – P100,000)
C. P3,650,000 (P4,000,000 – P350,000)
B. P3,600,000 (P4,000,000 – P400,000)
D. P3,550,000 (P4,000,000 – P350,000 – P100,000)
REVIEW QUESTIONS
PROBLEMS (LESSEE ACCOUNTING)
Problem 1: (Lessee Book) On January 1, 20x18, Pamana Company entered into a ten-year non-cancelable lease, commencing on
that date, for office space. The office space has a useful life of 50 years and the lease specifies a rent of P120,000 per year. The
interest rate implicit on the lease is 5%. The incremental borrowing rate is 7%.
Assume the following independent cases, prepare the necessary journal entries at the commencement date on the books of lessee:
(Round off PV factors 4 decimal places.)
1. Assume that the lease payment shall be made every January 1 and the first lease payment every January 1 and the first
lease payment was made on January 1, 20x18.
Right-of-use asset
Lease liability
C ash
972,936
Computation:
Annual lease payment
x PV factor
PV of lease payment
Add: First payment
RUA
852,936
120,000
120,000
7.1078
852,936
120,000
972,936
Present value of ordinary annuity for 9 years using 5%.
Payment (Fixed or Variable)
Purchase option (Certain)
Guaranteed RV
If, termination penalties
Total Lease liability
X
X
X
X
X
Lease liability + Advance payment (immediately)
Direct cost
Dismantling cost at PV
Lease Bonus
Lease Incentives
2.
Dr. RUA
Cr. Cash (if paid immediately on the date of commencement)
Cr. Lease liability
Dr. RUA
Cr. Cash
Dr. RUA
Cr. Dismantling liability
Dr. RUA
Cr. Cash
Dr. Cash
Cr. RUA
Assume that the lease payment shall be made every January 1 and the first lease payment was made on January 1, 20x18.
Also assume that the lessee made the following additional payment:
Payment to a former tenant occupying the floor building
P15,000
Commission paid to real estate agent
5,000
Leasehold improvement (5-year useful life)
14.000
As incentive to the lessee, the lessor made the following reimbursements:
Lessee’s leasehold improvement
Commission paid to real estate agent
Right-of-use asset
Lease liability
C ash
972,936
Right-of-use asset
C ash
20,000
Leasehold improvement
C ash
14,000
C ash
Leasehold improvement
Right-of-use asset
12,000
P7,000
5,000
852,936
120,000
20,000
14,000
7,000
5,000
Page 37 of 80
3.
Assume that the lease payment shall be made every January 1 and that the first lease payment was made on January 1,
20x18 also assume that lessee paid P60,000 lease bonus to obtain the lease, security deposit of P40,000 to be refunded
upon expiration of the lease and P10,000 real property tax on the underlying asset.
Right-of-use asset
Lease liability
C ash
972,936
Right-of-use asset
C ash
60,000
Security deposit
Discount/Prepaid Lease Deposit
C ash
24,556
15,444
Security deposit (.6139 x P40,000)
24,556
Real property tax expense
C ash
10,000
Note:
1.
2.
3.
4.
852,936
120,000
60,000
40,000
10,000
The security deposit is debited at present value of 1 over 10 year lease term using 5% rate.
The lease bonus is debited for the right of use asset.
The real property tax payment is treated as expense. This is known as executory cost and treated as expense.
Executory costs represent supplemental costs such as taxes, maintenance fees, or insurance incurred for leased
property. Executory costs are paid by either the lessor or the lessee.
Assume that the lease payment shall be made every December 31 and that the first payment is to be made on December
31, 20x18 also assume that the lessee has a purchase option of P50,000 and it is certain that the company will
exercise this option.
Computation:
Annual lease payment
x PV factor
PV of lease payment
Add: PV of purchase otpion(50,000 x .6139)
120,000
7.7217
926,604
30,695
RUA
957,299
Right-of-use asset
Lease liability
5.
957,299
957,299
Assume that the lease payment shall be made every December 31 and that the first payment is to be made on December
31, 20x18 also assume that, based on some benchmark interest rate, rent for the first four years will be P120,000 per year
and P140,000 per year for the last six years.
1st 4 years (120,000 x 3.5460)
Last 6 years (140,000 x 4.1758*)
425,520
584,612
* (7.7217 - 3.5460)
584,612
1,010,132
RUA
OR
1st 4 years (120,000 x 3.5460)
Last 6 years (140,000 x 5.0757)
x PV of 1 at 5% for 4 periods
RUA
Right-of-use asset
Lease liability
6.
425,520
710,598
0.8227
584,609
1,010,129
1,010,129
3 Differece due to rounding off
1,010,129
Assume that the lease payment shall be made every at the beginning of each year of P120,000. The contract states
that lease payments will increase after two years based on the increase in the Consumer Price Index (CPI) in the preceding
2 years.
The CPI’s are as follows: January 1, 20x18 (125); January 1, 20x20 (150)
Page 38 of 80
Computation:
Annual lease payment
x PV factor (5% at 9 periods)
PV of Lease payment
Add: First payment
Right of use asset
Date
1/1/20x18
1/1/20x18
1/1/20x19
1/1/20x20
1/1/20x21
1/1/20x22
1/1/20x23
1/1/20x24
1/1/20x25
1/1/20x26
1/1/20x27
120,000
7.1078
852,936
120,000
972,936
Payments
Interest
Amortization
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
42,647
38,779
34,718
30,454
25,977
21,276
16,339
11,160
5,714
120,000
77,353
81,221
85,282
89,546
94,023
98,724
103,661
108,840
114,286
Present Value
972,936
852,936
775,583
694,362
609,080
519,534
425,511
326,786
223,126
114,286
0
Depreciation expense ( 972,936/ 10years)
97,294
Jan. 1, 20x20
The revised lease payments are computed as follows:
Original payments
Multiply by: C hange in C PI
Revised lease payments
120,000
150/125
144,000
The revised lease liability is computed as follows:
Revised lease payments
PV of an annuity due 1@5%, n =8
(5.7864 + 1)
Revised carrying amount - 1/1/20x21
C arring amount of lease liability - 1/1/20x20 (P775,583+38,779)
Adjustment (Increase)
144,000
6.7864
977,242
814,362
162,880
Date
1/1/20x20
1/1/20x20
1/1/20x21
1/1/20x22
1/1/20x23
1/1/20x24
1/1/20x25
1/1/20x26
1/1/20x27
Payments
Interest
144,000
144,000
144,000
144,000
144,000
144,000
144,000
144,000
41,662
36,545
31,172
25,531
19,612
13,388
6,848
Amortization
144,000
102,338
107,455
112,828
118,469
124,388
130,612
137,152
C urrent-accrual
C urrent
Total current
Non-current
Total liabilities
42,647
77,353
120,000
775,583
895,583
Lease liability
120,000
C ash
120,000
(To record payment 1.1.20x19)
(694,362+120,000)
RUA
Lease liability
162,880
162,880
Present Value
977,242
833,242
730,904
623,449
510,621
392,152
267,764
137,152
(0)
Depreciation expense ( ( 972,936 x 8/10years)+162,880) /8
7.
RUA
972,936
C ash
120,000
Lease liability
852,936
(To record RUA and Lease liability)
Interest expense
42,647
Lease liability
42,647
(To record interest 12.31.20x18)
1/1/20x18
852,936
Accrual
42,647
12/31/20x18
895,583
117,654
Assume that the lease payment shall be made every December 31 and that in addition to the annual rent of P120,000, the
lessor and lessee agreed on the following additional terms: Additional rent is computed at 6% of net sales over P1,500,000
up to P3,000,000 and 5% of net sales over P3,000,000 per calendar year. Net sales for 20x18 were P5,000,000.
Computation:
Annual lease payment
x PV factor (5% at 10 periods)
PV of Lease payment
Date
1/1/20x18
12/31/20x18
12/31/20x19
12/31/20x20
12/31/20x21
12/31/20x22
12/31/20x23
12/31/20x24
12/31/20x25
12/31/20x26
12/31/20x27
120,000
7.7217
926,604
Payments
Interest
Amortization
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
120,000
46,330
42,647
38,779
34,718
30,454
25,977
21,275
16,339
11,159
5,718
73,670
77,353
81,221
85,282
89,546
94,023
98,725
103,661
108,841
114,282
RUA
Lease liability
926,604
Lease expense
C ash
190,000
Present Value
926,604
852,934
775,581
694,360
609,078
519,532
425,508
326,784
223,123
114,282
0
C urrent
Non-current
12/31/20x18
77,353
775,581
852,934
926,604
Variable lease payment linked to future sale
1,500,000 to 3,000,000 at 6%
In excess of P3,000,000 at 5%
Total lease expense
190,000
Page 39 of 80
90,000
100,000
190,000
Variable lease payment linked to future sale is treated as lease. (rent) expense and not to be capitalized as right-of-useasset. This is treated a contingent rent and additional rent expense in the period incurred.
8.
Assume instead that the lease term is for twelve months and the company opted to treat the payment as rent expense.
Rent expense
C ash
120,000
120,000
Problem 2:
(Variable payments) On January 1, 20x1, Lessee Company entered into an 8-year lease of a floor of a building
with useful life of 15 years with the following terms:
Annual rental for the first three years payable at the end of each year
P300,000
Annual rental for the next five years payable at the end of each year
400,000
Implicit interest rate
10%
Incremental borrowing rate
12%
The lease provides for neither a transfer of title to the lessee nor a purchase.
Date
1/1/20x1
12/31/20x1
12/31/20x2
12/31/20x3
12/31/20x4
Payment
10% interest
300,000
300,000
300,000
400,000
Principal
PV
1,884,000
1,772,400
1,649,640
1,514,604
1,266,064
188,400
177,240
164,964
151,460
111,600
122,760
135,036
248,540
Required: (Round off PV factors to 2 decimal places)
1. What is the lease liability on January 1, 20x1?
A. P1,884,000
B. P188,400
C. P177,240
D. P1,649,640
2. What is the interest expense for 20x1?
A. P1,884,000
B. P188,400
C. P177,240
D. P1,649,640
3. What is the interest expense for 20x2?
A. P1,884,000
B. P188,400
C. P177,240
D. P1,649,640
4. What is the lease liability on December 31, 20x2?
A. P1,884,000
B. P188,400
C. P177,240
D. P1,649,640
Annual rental for first three years
PV 10% for 3 periods
Annual rental for next five years
PV 10% for 5 periods
300,000
2.49
747,000
400,000
3.79
1,516,000
x PV of 1 at 10% for three periods
0.75
PV -January 1, 20x1
1,137,000
1,884,000
The PV of the annual rental for the next five years starting January 1, 20x4 is rediscounted
for three periods at the beginning of the lease on January 1, 20x11
OR
PV 10% for 8 periods = 5.33
(5.33 – 2.49) = 2.84
(300,000 x 2.49) + ( 400,000 x 2.84) = P1,883,000
Problem 3: (Guaranteed residual value) On January 1, 2019, Lessee, Inc. leased two automobiles for executive use. The lease
requires Lessee to make five annual payments of P260,000 beginning January 1, 2019. At the end of the lease term, December 31,
2023, Lessee guarantees that the residual value of the automobiles will total P200,000.
The property reverts to the lessor at the end of the lease term. The estimated useful life of the automobiles is 6 years and Lessee
uses straight-line method for all its assets. Lessee’ incremental borrowing rate is 10%. The interest rate implicit in the lease, which is
known to Lessee, Inc., is 9%.
Required:
a. At what amount should Lessee, Inc. record the right-of-use equipment on January 1, 2019?
Page 40 of 80
b.
c.
d.
e.
f.
At what amount should the lease liability be recognized at January 1, 2019, after making the first payment of P260,000 to
the lessor?
Prepare an amortization table for the five-year term of the lease.
Prepare journal entries in the books of Lessee, Inc. for years 2019 and 2020 to record all transactions relating to the lease.
Prepare the journal entry at the end of the lease term to record the transfer of the leased automobiles to the lessor.
Assuming that the residual value of the two automobiles amounted to P150,000 at the end of the lease term, prepare the
journal entry to record the transfer of the leased automobiles to the lessor.
(a)
Cash payment
260,000 x 3.2397
200,000 x 0.6499
Total capitalized cost
(b)
Total present value of lease liability at commencement = 842,322 + 129,880 = 972,302
(c)
(d)
260,000
842,322
129,980
1,232,302
Amortization Table
Total Annual
Interest Expense
Date
Payment
01/01/19
01/01/20
260,000
87,507
01/01/21
260,000
71,983
01/01/22
260,000
55,061
01/01/23
260,000
36,617
12/31/23
200,000
16,530*
*Adjusted; difference is due to rounding off.
2019
Jan. 1
Dec. 31
31
2020
Jan. 1
Dec. 31
31
Reduction in
Principal
972,302
799,809
611,792
406,853
183,470
-
172,493
188,017
204,939
223,383
183,470
Right-of-Use Automobiles
Lease Liability
Cash
1,232,302
972,302
260,000
Interest expense
Lease Liability
87,507
87,507
Depreciation expense
Accumulated depreciation
(1,232,302-200,000)/5
206,460
Lease Liability
Cash
260,000
206,460
260,000
Interest expense
Lease Liability
71,983
71,983
Depreciation expense
Accumulated depreciation
206,460
Accumulated depreciation
Interest expense
Lease Liability
Right-of-Use Automobiles
*adjusted; balancing figure
1,032,300
16,532*
183,470
(e)
Dec. 31
(f)
Dec. 31
Lease Obligation
Impairment Loss (Loss on finance lease)
Accumulated depreciation
Interest expense
Lease Liability
Right-of-Use Automobiles
Cash
206,460
50,000
1,032,300
16,532
183,470
1,232,302
1,232,302
50,000
Note:
If the fair value is higher than the residual value guarantee, no additional entry is necessary because there is no cash
settlement.
Problem 4: (Unguaranteed Residual Value) On January 1, 20x1, ABC Co. entered into a 4-year lease agreement with XYZ, Inc.
for industrial equipment. Lease payment is P100,000 payable starting on January 1, 20x1. ABC knows that the lessor expects a
10% return on the lease. ABC has a 12% incremental borrowing rate. The equipment is expected to have an estimated useful life of
5 years and an unguaranteed residual value of P25,000. The lease agreement contained a purchase option at P50,000
exercisable at the end of the lease term. It is reasonably certain as of inception of the lease that ABC will exercise the option in the
future. ABC uses the straight-line method of depreciation.
Required: (Round off PV factors to 6 decimal places)
a. Provide the journal entries.
b. Determine the carrying amounts of the right-of-use asset and lease liability on December 31, 20x1.
1.
Solutions:
Requirement (a): Journal entries
Lease payments
Annual rent
100,000
PV factors @10%, n=3
PV of an annuity due of ₱1
2.486852
PV of MLP
248,685
Page 41 of 80
Purch. Opt.
Lease liability
50,000
Jan. 1, 20x1
Jan. 1,
20x2
0.683013
Right-of-use asset
Lease liability
Cash
Amortization table:
Date
Jan. 1, 20x1
Jan. 1, 20x2
Jan. 1, 20x3
Jan. 1, 20x4
Jan. 1, 20x5
Dec. 31,
20x1
Dec. 31,
20x1
PV of ₱1
34,151
282,836
382,836
Payments
Interest expense
Amortization
100,000
100,000
100,000
50,000
28,284
21,112
13,223
4,545
71,716
78,888
86,777
45,455
282,836
100,000
Present value
282,836
211,120
132,232
45,455
0
Interest expense
Lease liability
Depreciation expense
[(382,836) ÷ 5 yrs.]
Right of use asset (Accumulated Depreciation)
Lease liability
Cash
28,284
28,284
76,567
76,567
100,000
100,000
Subsequent entries follow the same pattern.
Requirement (b): Carrying amounts
Right-of-use asset
382,836 – 76,567 = 306,269
Lease liability
211,120 + 100,000 = 311,120
Or (282,836+28,284)
Problem 5: ( Purchase Option) On January 1, 20x1, Lessee Corporation leased a machinery from Lessor Company on a five-year
lease term at P150,000 annual rental payments, paid in advance. There is a purchase option on December 31, 20x5 of P240,000.
The economic life of the equipment is 15 years. The interest rate implicit in this lease, which is known to Lessee is 12%.
Required:
a. At what amount should the asset be recorded on January 1, 20x1?
b. Prepare an amortization table for the entire term of the lease.
c. How much depreciation will be taken up by Lessee for the year 20x1
d. Prepare the entries in the books of Lessee to record foregoing for the years 20x1 and 20x2.
e. Assume that at the end of the lease term, Lessee exercised its purchase option. Give the entry for the exercise.
f.
Give the journal entry at the end of the lease term assuming that Lessee failed to exercise its purchase option.
(a)
Payment at commencement
PV of Lease Liability of P150,000 x 3.0373
PV of BPO
240,000 x 0.5674
Total capitalized cost
P150,000
455,595
136,176
P741,771
(b)
Total Annual
Interest Expense
Date
Payment
01/01/19
01/01/20
150,000
71,013
01/01/21
150,000
61,534
01/01/22
150,000
50,918
01/01/23
150,000
39,028
12/31/23
240,000
25,736*
*Adjusted; difference is due to rounding off.
(c)
(d)
20x1
Jan. 1
Dec. 31
Reduction in
Principal
591,771
512,784
424,318
325,236
214,264
-
78,987
88,466
99,082
110,972
214,264
741,771 / 15 years
Right-of-Use Machinery
Lease Liability
Cash
Interest expense
Lease Liability
Lease Obligation
P49,451
741,771
71,013
591,771
150,000
71,013
Page 42 of 80
31
20x2
Jan. 1
Dec. 31
31
(e)
(f)
Dec. 31
Dec. 31
Depreciation expense
Accumulated depreciation
Lease Liability
Cash
49,451
150,000
Interest expense
Lease Liability
61,534
Depreciation expense
Accumulated depreciation
49,451
Interest expense
Lease Liability
Accumulated depreciation
Machinery
Right-of-Use Machinery
Cash
25,736
214,264
247,255
494,516
Interest expense
Lease Liability
Accumulated depreciation
Loss on Failure to Exercise PO
Right-of-Use Machinery
25,736
214,264
247,255
254,516
49,451
150,000
61,534
49,451
741,771
240,000
741,771
Problem 6: (Low Value Assets/Short term) On January 1, 20x1, ABC Co. enters into a 4-year lease of office equipment. Annual
rental payable at the end of each is P12,000. As inducement in entering into the lease, the lessor makes the first 3 months of the
lease as rent-free.
Lease bonus paid to the lessor at commencement P20,000
ABC Co. opts to use the practical expedient allowed under the PFRS 16 for leases of low value assets.
Required: Provide the journal entries.
20x1 (12K x 9/12)
20x2
20x3
20x4
Total
Divide by: Lease term
Annual lease expense
Jan. 1, 20x1
9,000
12,000
12,000
12,000
45,000
4
11,250
20,000
Dec. 31, 20x1
Prepaid rent
Cash
Rent expense
Cash
Rent payable
5,000
Dec. 31, 20x2
Rent expense
Prepaid rent
Rent expense
Rent payable
Cash
Dec. 31, 20x3
Dec. 31, 20x4
Rent expense
Prepaid rent
Rent expense
Rent payable
Cash
Rent expense
Prepaid rent
Rent expense
Rent payable
Cash
Rent expense
Prepaid rent
11,250
11,250
750
5,000
11,250
750
5,000
11,250
750
5,000
20,000
9,000
2,250
5,000
12,000
5,000
12,000
5,000
12,000
5,000
Problem 7: Lessee, Inc. leases an equipment from Lessor Company on December 31, 2019. The equipment has a fair value of
P1,011,840 at this date. Annual lease payments are P135,000 and are payable each December 31. The first payment was made on
December 31, 2019. At the end of the 12 year-lease term, title to the equipment will pass to Lessee, Inc. The equipment has an
estimated residual value of P40,000 at the end of the 15 year useful life.
Required:
a. What is the lessor’s implicit interest rate in this lease?
b. Prepare a partial amortization table for the first three years of the lease term.
c. How much depreciation will be taken up by Riza for the year 2019?
Page 43 of 80
d.
e.
Prepare the entries in the books of Riza to record the foregoing for the years 2019 and 2020.
How much of the lease liability on December 31, 2019 will be classified as current liabilities and non-current liabilities?
Suggested Answer:
(a)
1,011,840/135,000 = 7.4951 PV of an annuity due for 12 periods
From Table VI across 12 periods, 7.4951 is under 10% interest rate.
(b)
Total Annual
Interest Expense
Reduction in
Date
Payment
Principal
12/31/19
12/31/20
135,000
87,684
47,316
12/31/21
135,000
82,952
52,048
12/31/22
135,000
77,748
57,252
Lease Obligation
876,840*
829,524
777,476
720,224
*1,011,840 – 135,000 = 876,840
(c)
(d)
(1,011,840 – 40,000) / 15 years
P64,789
12/31/19
Right-of-Use Equipment
Cash
Lease Liability
12/31/20
Lease Liability
Interest expense
Cash
47,316
87,684
Depreciation expense
Accumulated depreciation
(1,011,840 – 40,000) / 15
64,789
(e)
1,011,840
Lease obligation as of December 31, 2019:
Current portion
Noncurrent portion
135,000
876,840
135,000
64,789
P
47,316
829,524
Problem 8: (Executory Cost) On July 1, 2019, the Lessee, Inc. signs a 10-year non- cancellable lease agreement for a storage
building owned by Lessor, Inc. The following information pertains to the lease agreement.




Annual rental payment is P750,000 beginning on July 1, 2019. This rental payment includes P50,000 for taxes and
insurance.
The fair value of the building on July 1, 2019 is P4,478,000.
The building has an estimated economic life of 12 years. Unguaranteed residual value at the end of 10 years is P150,000.
Interest rate implicit on the lease is 10%
Required:
a. At what amount should Lessee record the building on July 1, 2019?
b. What is the annual depreciation on the building? record the foregoing for the years 2019 and 2020. The company adopts the
calendar year as its reporting period.
c. Prepare the entries in the books of Lessee
a.
Cash paid
PV of future payments (700,000 x 5.7590)
Capitalized cost
b.
Annual depreciation = P4,731,300 / 10 years
P700,000
4,031,300
P4,731,300
P473,130
c.
July 1, 2019
Dr. Right of Use Building
Dr. Taxes and Insurance Expense
Cr. Cash
Cr. Lease Liability
December 31, 2019
Dr. Interest expense
Cr. Lease Liability
Dr. Depreciation expense
Cr. Accumulated depreciation -RoUB
Dr. Prepaid taxes and Insurance
Cr. Taxes and Insurance
July 1, 2020
Dr. Lease liability
Dr. Interest expense
Dr. Taxes and Insurance Expense
Cr. Cash
Dr. Interest expense
Cr. Lease Liability
4,031,300 – (700,000 – 403,130) x 10% x 6/12
P4,731,300
50,000
P750,000
4,031,300
201,565
201,565
236,565
236,565
25,000
25,000
498,435
201,565
50,000
750,000
186,721
186,721
Page 44 of 80
Dr. Depreciation expense
Cr. Accumulated depreciation -RoUB
473,130
473,130
REASSESSMENT OF THE LEASE LIABILITY
Remeasurement of Lease Liability
PV of New Lease Liability = Revised Lease Payments x Revised Discount Rate
PV of New Lease Liability = Revised Lease Payments x Unchanged Discount Rate
1. Change in the lease term
2. Change in the assessement of an option to purchase the underlying asset
1. Change in the amounts expected to be payable under a residual value guarantee
2. Change in future lease payments Resulting from a change in index or rate used to determined those payments
Problem 1: ( Remeasurement of Lease Liability) Assume the following data before remeasurement of lease liability:
Present value of the lease liability before remeasurement
P650,000
Carrying amount of the right-of-use asset
370,000
Required: Prepare the necessary adjusting entry in lease liability:
Case 1: Assume that the present value of the lease liability as remeasured amounted to P700,000.
Case 2: Assume that instead that the present value of lease liability as remeasured is P70,000.
Case 1
Case 2
Dr. Right of use asset
Cr. Lease liability
Dr. Lease Liability
Cr. Right of use asset
Cr. Income from remeasurement of lease liability
P50,000
P50,000
P580,000
P370,000
P210,000
Problem 2: ( IFRS-Extension of lease term) Lessee Company entered into a lease of building on January 1, 2017 with the
following information:
Annual rental payable at the end of each year
P500,000
Lease term
5 years
Useful life building
20 years
Implicit interest rate
10%
PV of an ordinary annuity of 1 at 10% for 5 period
3.79
The lease contained an option for the lessee to extend for a further 5 years.
At the commencement date, the exercise of the extension option is not reasonably certain.
After 3 years on January 1, 2020, the lessee decided to extend the lease for a further 5 years.
New annual rental payable at the end of each year
New implicit interest rate
PV of an ordinary annuity of 1 at 8% for 5 periods
PV of 1 at 8% for 2 periods
PV of an ordinary annuity of 1 at 8% for 2 periods
Required:
1. What is the lease liability on December 31, 2019?
A. P867,245
B. P1,242,950
C. P1,584,500
D. P1,895,000
2. What is the depreciation for 2017?
a. P379,000
B. P378,000
C. P377,000
D. P376,000
3. What is the new lease liability on January 1, 2020?
A. P2,948,840
B. P2,900,000
C. P2,800,000
D. P2,900,300
4. What is the carrying amount of right of use asset on January 1, 2020?
A. P2,839,595
B. P2,800,000
C. P2,900,000
D. P2,900,800
5. What is the depreciation for 2020?
A. P405,656
B. P406,456
D. P409,000
C. P407,600
P600,000
8%
3.99
0.86
1.78
Page 45 of 80
8.1
Date
1/1/2017
12/31/2017
12/31/2018
12/31/2019
Payment
Interest-10%
500,000
500,000
500,000
189,500
158,450
124,295
Principal
PV
1,895,000
1,584,500
1,242,950
867,245
310,500
341,550
375,705
8.2
Depreciation
1,895,000
5
379,000
8.3
Remeasurement of lease liability
On January 1, 2020, the lease liability is remeasured using the new implicit interest
rate of 8%.
Annual rental for reamining 2 years of old lease term
x PV of an OA of 1 at 8% for 2 periods
PV of old rentals - January 1, 2020
500,000
1.78
890,000
Annual rental for 5 years starting January 1, 2022
x PV of an OA of 1 at 8% for 5 periods
600,000
3.99
2,394,000
0.86
2,058,840
x PV of 1 at 8% for 2 periods
PV of of new rental - January 1, 2020
The PV of the new rentals on January 1, 2022 is rediscounted for 2 periods on the
date of extension on January 1, 2020.
PV of remaining rentals of old lease term
PV of rentals of extended lease term
Total PV -January 1, 2020
Less: PV -December 31, 2019 (see table)
Increase in lease liability - January 1, 2020
890,000
2,058,840
2,948,840
(867,245)
2,081,595
AJE : ( To remeasure the lease liability on January 1, 2020)
Right of use asset
Lease liability
2,081,595
2,081,595
New Table
Date
1/1/2020
12/31/2020
12/31/2021
12/31/2022
12/31/2023
12/31/2024
12/31/2025
12/31/2026
8.4
Payment
Interest-8%
500,000
500,000
600,000
600,000
600,000
600,000
600,000
235,907
214,780
191,962
159,319
124,065
85,990
39,137
Right of use asset - January 1, 2017
Accumulated depreciation -December 31, 2019
(379,000 x 3 years)
CV -December 31, 2019
Increase in liability -January 1, 2020
New carrying amount -January 1, 2020
1,895,000
Principal
264,093
285,220
408,038
440,681
475,935
514,010
560,863
PV
2,948,840
2,684,747
2,399,527
1,991,489
1,550,808
1,074,873
560,863
(0)
(1,137,000)
758,000
2,081,595
2,839,595
IFRS 16, par 39, provides that the increase in the remeasurement of the lease liability is
an adjustment of the carrying amount of the right of use asset
8.5
Deprecation for 2020
2,839,595
7
405,656
Problem 3: (Change in lease term) On January 1, 20x1, Entity X enters into a 3-year lease of an office space. The annual
rent is P100,000 payable in advance. Entity X has an option to extend the lease for another 3 years at an annual rent of
P120,000, which Entity A is uncertain to exercise because it believes there is no economic incentive to do so. The implicit rate
is 12%.
On December 31, 20x2, due to a significant change in circumstances, Entity X is now reasonably certain to extend the lease.
The revised implicit rate is 10%.
Required: Based on the above data, prepare the necessary journal entries.

Initial measurement
Fixed payments
Multiply by: PV of an annuity due of P1@12%, n=3*
Total
P100,000
2.69005
P269,005
*The lease term is 3 years (excluding extension)
January 1, 20x1
Dr. Right-of-use asset
Cr. Cash
Cr. Lease liability


Subsequent measurement
Date
1/1/x1
1/1/x2
1/1/x3
P269,005
P100,000
169,005
Payments
100,000
100,000
Interest
Amortization
20,281
10,714
79,719
89,286
Present Value
P169,005
89,286
0
Annual depreciation of right-of-use asset: P269,005 ÷ 3 years = P89,668
Reassessment of lease liability
On December 31, 20x2, due to a significant change in circumstances, Entity X is now reasonably certain to extend the lease.
The revised implicit rate is 10%.
Page 46 of 80
Accounting







The total lease term is changed from 3 to 6 years, of which 4 years remain (i.e. 20x3 to 20x6)
The revised lease payments are P100,000 due on January 1, 20x3 and P120,000 each due on January 1, 20x4, 20x5
and 20x6.
The present value of the revised lease payments is computed as follows:
Revised lease payments
PV factors @ 10%
PV
Due on 1/1/x3
100,000 (PV of 1, n=0) =1
P100,000
Due on 1/1/x4; x5 and x6
120,000 (PV OA, n =3) = 2.48685
298,422
P398,422
The adjustment is computed as follows:
Carrying amount before assessment
Present value 1/1/x3 (see original amortization table)
P0
Add back: Payment on 1/1/x3
100,000
Carrying amount after assessment
Increase in lease liability
P100,000
398,422
P298,422
Adjusting entry:
December 31, 20x2
Dr. Right of use asset
Cr. Lease liability
P298,422
P298,422
Revised amortization table
Date
Payments
12/31/x2
1/1/x3
100,000
1/1/x4
120,000
1/1/x5
120,000
1/1/x6
120,000
Interest
Amortization
29,842
20,826
10,909
100,000
90,158
99,174
109,091
Present Value
P398,422
298,422
208,264
109,091
0
Revised depreciation
Initial measurement
Multiply By:
Carrying amount on 12/31/x2
Adjustment
Total
Divide by: Remaining lease term
Revised annual depreciation
P269,005
1/3
P89,668
298,422
P388,090
4
P97,023
LEASE MODIFICATION
Lease Modification
Accounted for as a separate lease
Increase in the scope of the lease
Both
Not accounted for as a separate lease
Consideration increases commensurate to stand-alone price
No gain or loss on lease modification:
Dr. Right of use asset
Cr. Lease liability
Other lease modification
Decrease in the scope of the lease
With possible gain or loss on lease modification
Dr. Lease liability
Dr. Loss on lease modification
Cr. Right of use asset
Cr. Gain on lease modification
Problem 1: (Lease Modification – Separate Lease) Entity X enters into a 10-year lease for a retail space at an annual rent of
P100,000. At the end of the 4th year, the lease is amended to include the lease of an adjacent retail space for the remaining 6-year
term of the lease at an additional rent of P110,000 per year. The additional rent reflects the market rate for the lease of the
additional retail space, adjusted for the discount that Entity X receives for the cost savings of the lessor (e.g., marketing and
negotiation costs that the lessor would have otherwise incurred if the additional space was leased to a new tenant).
Analysis:
The lease modification shall be accounted for as a separate lease because both the criteria (a) increase in scope due to the
addition of a right to use or more underlying assets (i.e., additional retail space), and (b) increase in consideration by an amount
that reflects the stand-alone price for the increase in scope (i.e., additional rent of P110,000) are met.
Accordingly, Entity X
a. Continues to account for the lease liability and right-of-use asset from the original 10-year lease without
remeasurement; and
b. Recognize a separate lease liability and right-of-use asset from the 6-year lease of the additional retail space.
Problem 2: (Lease Modification – Not a Separate Lease)
Fact pattern
On January 1, 20x1, Lessee enters into a 5-year lease of a 1,000 square meter office space.
Annual rent is
Page 47 of 80
P100,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined.
Lessee’s incremental borrowing rate at the commencement date is 12% per annum.
Initial measurement:
Annual rent payable at end year end
PV of ordinary annuity of 1 @ 12%, n=5
Present value of lease payments
100,000
3.604776
P360,478
Amortization table:
Date
1/1/x1
12/31/x1
12/31/x2
12/31/x3
12/31/x4
12/31/x5
Payments
Interest
100,000
100,000
100,000
100,000
100,000
Amortization
43,257
36,448
28,822
20,281
10,714
56,743
63,552
71,178
79,719
89,286
Present Value
P360,478
303,735
240,183
169,005
89,286
0
Case 1: Increase in scope of lease – extension of lease term
On January 1, 20x4, Lessee and Lessor agree to amend the original lease by extending the contractual lease term by 2
years. The annual lease payments are unchanged (i.e., P100,000 payable at the end of each year from 20x4 to 20x7).
Lessee’s incremental borrowing rate on January 1, 20x4 is 13%
Analysis:
The lease modification does not qualify as a separate lease because the criteria are not met. Accordingly, it is accounted for as
remeasurement of the existing lease liability and right-of-use asset.
Remeasurement:
Annual rent payable at each year end
PV of ordinary annuity of 1 @13%, n = 4
Present value of lease payment
P100,000
2.97447
P297,447
(5-3+2)
Carrying amount before lease modification (see table
above)
Carry amount after lease modification
Increase in lease liability
January 1, 20x4
Dr. Right of use asset
Cr. Lease liability
P169,005
297,447
P128,442
P128,442
P128,442
Case 2: Decrease in scope of lease
On January 1, 20x4, Lessee and Lessor agree to amend the original lease by reducing the rented space from 1,000 square
meters to 500 square meters. The annual lease payments are also reduced from P100,000 to P60,000, payable at the end
of 20x4 and 20x5. Lessee’s incremental borrowing rate on January 1, 20x4 is 11%.
Analysis:
The lease modification does not qualify as a separate lease because the criteria are not met. Accordingly, it is accounted for as
remeasurement of the existing lease liability and right-of-use-asset.
Step 1:
Lessee reduces the carrying amounts of the existing right-of-use asset and lease liability in proportion to the decrease in
the scope of the lease, i.e., from 1,000 to 500 sq.m. or 50%.
January 1, 20x4
Dr. Lease liability (169,005 x 50%)
Cr. Right of use asset (360,478 x 2/5) x 50%
Cr. Gain
P84,503
P72,096
12,407
Step 2:
Remeasurement:
Annual rent payable at each year end
PV of ordinary annuity of 1 @11%, n=2
Present value of lease payments
P60,000
1.71252
P102,751
Lease liability before modification (see table above)
Adjustment (see entry in Step 1 above)
Total
Lease liability after modification
Increase in liability
P169,005
(84,503)
P84,502
P102,751
P18,249
January 1, 20x4
Dr. Right-of-use asset
Cr. Lease liability
P18,249
P18,249
Page 48 of 80
Case 3: Full termination
On January 1, 20x4, Lessee and Lessor terminate the lease and Lessor sells the entire building to the Lessee for
P2,000,000
Step 1: Lessee reduces the carrying amounts of the existing right-of use asset and lease liability in proportion to the decrease in
the scope of the lease, i.e., full termination or 100%.
January 1, 20x4
Dr. Lease liability
Cr. Right-of-use-asset (P360,478 x 2/5)
Cr. Gain
P169,005
P144,191
24,814
Step 2: Lessee records the purchase as follows:
January 1, 20x4
Dr. Building
Cr. Cash
P2,000,000
P2,000,000
LEASE MODIFICATION
Problem 1: AAA Company entered into a lease of building on January 1, 2020 with the following information:
Annual rental payable at the end of each year
Lease term
Useful life of building
Implicit interest rate
PV on an ordinary annuity of 1 at 9% for 5 periods
The lease contained an option for the lessee to extend the lease for a further 5 years.
At the commencement date, the exercise of the extension option is not reasonably certain.
After 3 years on January 1, 2023, the lessee decided to extend the lease for a further 5 years.
New annual rental payable at the end of each year
New implicit interest rate
PV of an ordinary annuity of 1 at 12% for 5 periods
PV of 1 at 12% for 2 periods
PV of an ordinary of 1 at 12% for 2 periods
Required:
1. Prepare a table of amortization for 2020, 2021 and 2022.
2. Prepare journal entries for 2020.
3. Remeasure the lease liability on January 1, 2023.
4. Prepare a new table of amortization from 2023 to 2029.
5. Prepare journal entries for 2023.
P600,000
5 years
20 years
9%
3.890
P800,000
12%
3.605
0.797
1.690
Page 49 of 80
Requirement No. 1
Initial Measurement
Annual Payments
PV on OA of 1 at 9% for 5 periods
Total
Year
600,000
3.890
2,334,000
Requirement No. 2
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
2,334,000
2,334,000
Dec 31 2020
Interest Expense
Lease Liability
Cash
210,060
389,940
600,000
Depreciation Expense
466,800
Accumulated Depreciation
466,800
*=2,334,000/5 lease term no purchase option lease term vs useful life which ever is shorter
Right of Use Asset
2,334,000
Lease Term
5
Annual Depreciation
466,800
Carrying Amount as of Dec 31, 2023
Accumulated Depreciation of 3 years
Carrying Amount as of Dec 31, 2023
Requirement No. 3
Remeasurement of Lease Liability
Old Lease Payment of 600,000
PV of an ordinary annuity of 1 at 12% for 2 periods
Remaining Old Lease Term
2,334,000
1,400,400
933,600
New Lease Payment of 800,000
PV of an ordinary annuity of 1 at 12% for 5 periods
PV of 1 at 6% for 2 periods
Present Value of Lease Payment for new lease term
800,000
3.605
2,884,000
0.797
2,298,548
Lease Liability as of Jan 1, 2023
Carrying Amount of Old Lease Liability
Increase In Lease Liability
3,312,548
1,055,738
2,256,810
Carrying Amount of Right of Use Asset
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
933,600
2,256,810
3,190,410
600,000
1.690
1,014,000
1 01 2020
31 12 2020
31 12 2021
31 12 2022
Annual Payments Interest Expense Amortization
Carrying amount
2,334,000
600,000
210,060
389,940
1,944,060
600,000
174,965
425,035
1,519,025
600,000
136,712
463,288
1,055,738
New Amortization Table
Requirement No. 4
Year
Annual Payments Interest Expense Amortization
Carrying amount
1 01 2023
3,312,548
31 12 2023
600,000
397,506
202,494
3,110,054
31 12 2024
600,000
373,206
226,794
2,883,260
31 12 2025
800,000
345,991
454,009
2,429,251
31 12 2026
800,000
291,510
508,490
1,920,762
31 12 2027
800,000
230,491
569,509
1,351,253
31 12 2028
800,000
162,150
637,850
713,403
31 12 2029
800,000
86,597
713,403
Requirement No. 5
Journal Entries
Jan 1 2023
Right of Use Asset
Lease Liability
Dec 31 2023
Interest Expense
Lease Liability
Cash
2,256,810
2,256,810
397,506
202,494
600,000
Depreciation Expense
Accumulated Depreciation
455,773
Right of Use Asset
Lease Term 2yrs plus 5 yrs
Annual Depreciation
3,190,410
7
455,773
455,773
Problem 2: On January 1, 2020, BBB Company entered into a 5-year lease of a floor of a building with the following terms:
Annual rental for the first two years payable at the end of each year
P200,000
Annual rental for the next three years payable at the end of each year
300,000
Initial direct cost paid by lessee
100,000
Leasehold improvement
250,000
Present value of restoration cost required by contract at 8%
50,000
Useful life of building
20 years
Implicit interest rate
8%
PV of an ordinary annuity of 1 at 8% for two periods
1.783
PV of an ordinary annuity of 1 at 8% for three periods
2.577
PV of 1 at 8% for two periods
0.857
Required:
1. Compute the lease liability on January 1, 2020.
2. Compute the cost of right of use asset.
3. Compute the depreciation for 2020.
4. Prepare a table of amortization
5. Prepare journal entries for 2020.
6. Prepare the journal entry on December 31, 2022.
Page 50 of 80
Requirement No. 1
Initial Measurement
Annual rental for the first two years payable every December 31
PV of an ordinary annuity of 1 at 8% for 2 periods
Amount
200,000
1.783
356,600
Annual rental for the next three years payable every December 31
PV of an ordinary annuity of 1 at 8% for 3 periods
Amount
PV of 1 at 8% for 2 periods
Amount
300,000
2.577
773,100
0.857
662,547
Lease Liability
Requirement No. 2
Lease Liability
Initial Direct C ost paid by lessee
present value of restoration cost required by contract
Right of Use of Asset
Requirement No. 3
Right of Use Asset
Lease Term
Annual Depreciation
1,169,147
5
233,829
Right of Use Asset
Lease Term
Annual Depreciation
Requirement No. 4
Year
Annual Payments
Interest Expense
1 01 2020
31 12 2020
200,000
81,532
31 12 2021
200,000
72,054
31 12 2022
300,000
61,819
31 12 2023
300,000
42,764
31 12 2024
300,000
22,685
Requirement No. 5
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
C ash
Estimated Liability -Restoration C ost
Dec 31 2020
Interest Expense
Lease Liability
C ash
Interest expense (50,000 x 8%)
Estimated Liability -Restoration C ost
Depreciation Expense- ROUA
Accumulated Depreciation- ROUA
Depreciation Expense- Lease Improvement
Accumulated Depreciation- Lease Improvement
(250,000 / 5)
Requirement No. 6
Dec 31 2022
Interest Expense
Lease Liability
C ash
Interest expense (54,000 x 8%)
Estimated Liability -Restoration C ost
Depreciation Expense- ROUA
Depreciation Expense- Lease Improvement
Accumulated Depreciation- ROUA
Accumulated Depreciation- Lease Improvement
1,019,147
1,019,147
100,000
50,000
1,169,147
250,000
5
50,000
Total Annual Depreciation
283,829
Amortization C arrying amount
1,019,147
118,468
900,678
127,946
772,733
238,181
534,551
257,236
277,315
277,315
-
1,169,147
1,019,147
100,000
50,000
81,532
118,468
200,000
4,000
4,000
233,829
233,829
50,000
50,000
61,819
238,181
300,000
4,320
4,320
233,829
50,000
233,829
50,000
Problem 3: On January 1, 2020, CCC Company entered into a lease agreement with the following information:
Floor space
1,500 square meters
Annual rental payable at the end of each year
P200,000
Implicit rate in the lease
12%
Lease term
12 years
Present value of an ordinary annuity at 12% for 12 periods
6.1944
Page 51 of 80
On January 1, 2023, CCC Company and the lessor agreed to amend the original terms of the lease with the following information:
Additional floor space
2,000 square meters
Increase in rental payable at the end of each year
P300,000
Implicit rate in the lease
10%
Present value of an ordinary annuity of 1 at 10% for 9 periods
5.759
The increase in rental for the additional 2,000 square meters is equivalent to the current market rent.
Required:
1. Prepare journal entries for 2020.
2. Prepare journal entries for 2023 pertaining to the lease modification.
Initial Measurement
Annual Payments
PV on OA of 1 at 12% for 12 periods
Total
200,000
6.1944
1,238,880
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
1,238,880
1,238,880
Dec 31 2020
Interest Expense
Lease Liability
Cash
148,666
51,334
200,000
Depreciation Expense
Accumulated Depreciation
Right of Use Asset
Lease Term
Annual Depreciation
103,240
103,240
1,238,880
12
103,240
Initial Measurement
Annual Payments
PV on OA of 1 at 10% for 9 periods
Total
Journal Entries
Jan 1 2023
Right of Use Asset
Lease Liability
300,000
5.759
1,727,700
Lease Modification
Year
Annual Payments
Interest Expense
Amortization
Carrying amount
1 01 2023
1,727,700
31 12 2023
300,000
172,770
127,230
1,600,470
Lease Modification
1,727,700
1,727,700
Dec 31 2020
Interest Expense
Lease Liability
Cash
172,770
127,230
300,000
Depreciation Expense
Accumulated Depreciation
Right of Use Asset
Lease Term
Annual Depreciation
Year
Annual Payments
Interest Expense
Amortization
Carrying amount
1 01 2020
1,238,880
31 12 2020
200,000
148,666
51,334
1,187,546
31 12 2021
200,000
142,505
57,495
1,130,051
31 12 2022
200,000
135,606
64,394
1,065,657
191,967
191,967
1,727,700
9
191,967
Problem 4: On January 1, 2020, DDD Company leased an office building with the following terms:
Annual rental at the end of each year
Lease term and useful life of the building
Implicit rate in the lease
Present value of an ordinary annuity of 1 at 10% for 4 periods
P300,000
4 years
10%
3.17
On January 1, 2022, DDD Company and the lessor agreed to amend the original terms of the lease with the following information:
Annual rental payable at end of each year
P300,000
Extension of lease term
3 years
Implicit rate in the lease
12%
Present value of an ordinary annuity of 1 at 12% for 5 periods
3.605
Required:
1. Prepare a table of amortization for 2020 and 2021.
2. Prepare journal entries for 2020
3. Remeasure the lease liability on January 1, 2022
4. Prepare a new table of amortization from 2022 to 2026
Page 52 of 80
5.
Prepare journal entries for 2022.
Requirement No. 1
Initial Measurement
Annual Payments
PV on OA of 1 at 10% for 4 periods
Total
300,000
3.17
951,000
Requirement No. 2
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
Requirement No. 1
Year
Annual Payments
Interest Expense Amortization Carrying amount
1 01 2020
951,000
31 12 2020
300,000
95,100
204,900
746,100
31 12 2021
300,000
74,610
225,390
520,710
Requirement No. 4
New Amortization Table
951,000
951,000
Dec 31 2020
Interest Expense
Lease Liability
Cash
95,100
204,900
300,000
Depreciation Expense
Accumulated Depreciation
237,750
237,750
Right of Use Asset
Lease Term
Annual Depreciation
951,000
4
237,750
Carrying Amount as of Dec 31, 2021
Accumulated Depreciation of 2 years
Carrying Amount as of Dec 31, 2021
951,000
475,500
475,500
Remeasurement of Lease Liability
Lease Payment
PV of an ordinary annuity of 1 at 12% for 5 periods
Present Value of Lease Payment for new lease term
300,000
3.605
1,081,500
Requirement No. 3
Lease Liability as of Jan 1, 2022
Carrying Amount of Old Lease Liability
Increase In Lease Liability
1,081,500
520,710
560,790
Carrying Amount of Right of Use Asset
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
475,500
560,790
1,036,290
Year
1 01 2022
31 12 2022
31 12 2023
31 12 2024
31 12 2025
31 12 2026
Requirement No. 5
Journal Entries
Jan 1 2022
Right of Use Asset
Lease Liability
Dec 31 2022
Interest Expense
Lease Liability
Cash
Annual Payments
Interest Expense Amortization Carrying amount
1,081,500
300,000
129,780
170,220
911,280
300,000
109,354
190,646
720,634
300,000
86,476
213,524
507,110
300,000
60,853
239,147
267,963
300,000
32,037
267,963
-
560,790
560,790
129,780
170,220
300,000
Depreciation Expense
Accumulated Depreciation
207,258
Right of Use Asset
Lease Term 2yrs plus 3 yrs
Annual Depreciation
1,036,290
5
207,258
207,258
Problem 5: On January 1, 2020, EEE Company entered into a lease for floor space with the following information:
Floor space
5,000 square meters
Annual rental payable at the end of each year
P200,000
Lease term
5 years
Implicit rate in the lease
10%
Present value of an ordinary annuity of 1 for 10% at 5 periods
3.7908
On January 1, 2022, EEE Company and the lessor agreed to amend the original terms of the lease with the following information:
Floor space
3,750 square meters
Annual rental payable at the end of each year
P150,000
Implicit rate in the lease
8%
Present value of an ordinary annuity of 1 for 8% at 3 periods
2.5771
Required:
1. Prepare the amortization schedule for 2020 and 2021.
2. Prepare the journal entries for 2020.
3. Compute the termination gain or loss on January 1, 2022.
4. Remeasure the lease liability on January 1, 2022.
5. Prepare the amortization schedule for 2022, 2023 and 2024
Page 53 of 80
6.
Prepare the journal entries for 2022
Requirement No. 1
Initial Measurement
Annual Payments
PV on OA of 1 at 10% for 5 periods
Total
Requirement No. 2
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
Requirement No. 1
Year
200,000
3.7908
758,160
1 01 2020
31 12 2020
31 12 2021
Annual Payments
Interest Expense Amortization
Carrying amount
758,160
200,000
75,816
124,184
633,976
200,000
63,398
136,602
497,374
1 01 2022
31 12 2022
31 12 2023
31 12 2024
Annual Payments
Interest Expense Amortization
Carrying amount
386,565
150,000
30,925
119,075
267,490
150,000
21,399
128,601
138,889
150,000
11,111
138,889
-
Requirement No. 5
New Amortization Table
758,160
758,160
Dec 31 2020
Interest Expense
Lease Liability
Cash
Year
75,816
124,184
200,000
Depreciation Expense
Accumulated Depreciation
151,632
151,632
Right of Use Asset
Lease Term
Annual Depreciation
758,160
5
151,632
Carrying Amount as of Dec 31, 2021
Accumulated Depreciation of 2 years
Carrying Amount as of Dec 31, 2021
Requirement No. 3
Floor Space
Amended
Percent of Reduction
758,160
303,264
454,896
5000 sqm
3750 sqm
1250 sqm
Decrease In CA of Lease Liability
Decrease in CA of ROUA
Termination Gain
124,344
113,724
10,620
Carrying Amount of Lease Liability
Decrease In CA of Lease Liability
Remaining Lease Liability
497,374
124,344
373,030
Requirement No. 4
Remeasurement of Lease Liability
Lease Payment
PV of an ordinary annuity of 1 at 8% for 3 periods
Present Value of Lease Payment for new lease term
150,000
2.5771
386,565
Lease Liability as of Jan 1, 2022
Carrying Amount of Old Lease Liability
Increase In Lease Liability
386,565
373,030
13,535
Carrying Amount of Right of Use Asset
x (100% - 25%)
Remaining Carrying amount
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
454,896
75%
341,172
13,535
354,707
Journal Entries
Jan 1 2022
Lease Liability (25% x 303,264)
Accumulated depreciation (25% x 758,160)
Right of use asset (25% x 758,160)
Termination gain
Right of Use Asset
Lease Liability
100%
75%
25%
Dec 31 2022
Interest Expense
Lease Liability
Cash
124,344
75,816
189,540
10,620
13,535
13,535
30,925
119,075
150,000
Depreciation Expense
Accumulated Depreciation
118,236
Right of Use Asset
Lease Term 5yrs less 2 yrs
Annual Depreciation
354,707
3
118,236
118,236
Problem 6: On January 1, 2020, FFF Company leased a machine with the following information:
Annual rental payable at the end of each year
Lease term
Implicit rate in the lease
Present value of an ordinary annuity of 1 at 6% for 5 periods
P100,000
5 years
6%
4.2124
On January 1, 2022, FFF Company and the lessor agreed to amend the original terms of the lease by reducing the annual lease
payment by P20,000 and increasing the implicit rate to 8%.
The present value of an ordinary annuity of 1 at 8% for 3 periods is 2.5771.
Required:
1. Prepare the table of amortization for 2020 and 2021.
2. Prepare journal entries for 2020.
3. Remeasure the lease liability on January 1, 2022.
4. Prepare the table of amortization for 2022, 2023 and 2024.
5. Prepare the journal entries for 2022.
Page 54 of 80
Requirement No. 1
Initial Measurement
Annual Payments
PV on OA of 1 at 6% for 5 periods
Total
Requirement No. 2
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
Requirement No. 1
Year
100,000
4.2124
421,240
1 01 2020
31 12 2020
31 12 2021
Annual Payments Interest Expense Amortization Carrying amount
421,240
100,000
25,274
74,726
346,514
100,000
20,791
79,209
267,305
Requirement No. 4
New Amortization Table
421,240
Year
421,240
Dec 31 2020
Interest Expense
Lease Liability
Cash
1 01 2022
31 12 2022
31 12 2023
31 12 2024
25,274
74,726
Annual Payments Interest Expense Amortization Carrying amount
206,168
80,000
16,493
63,507
142,661
80,000
11,413
68,587
74,074
80,000
5,926
74,074
0
100,000
Depreciation Expense
Accumulated Depreciation
84,248
84,248
Right of Use Asset
Lease Term
Annual Depreciation
421,240
5
84,248
Carrying Amount as of Dec 31, 2021
Accumulated Depreciation of 2 years
Carrying Amount as of Dec 31, 2021
421,240
168,496
252,744
Remeasurement of Lease Liability
Lease Payment
PV of an ordinary annuity of 1 at 8% for 3 periods
Present Value of Lease Payment for new lease term
80,000
2.5771
206,168
Requirement No. 3
Lease Liability as of Jan 1, 2022
Carrying Amount of Old Lease Liability
Decrease In Lease Liability
206,168
267,305
(61,137)
Carrying Amount of Right of Use Asset
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
252,744
(61,137)
191,607
Journal Entries
Jan 1 2022
Lease Liability
Right of Use Asset
Dec 31 2022
Interest Expense
Lease Liability
Cash
61,137
61,137
16,493
63,507
80,000
Depreciation Expense
Accumulated Depreciation
63,869
Right of Use Asset
Lease Term 2yrs plus 3 yrs
Annual Depreciation
191,607
3
63,869
63,869
Problem 7: On January 1, 2020, GGG Company entered into an 8-year lease of a floor of building with useful life of 15 years with
the following terms:
Annual rental for the first three years payable at the end of each year
P300,000
Annual rental for the next five years payable at the end of each year
P400,000
Implicit interest rate
10%
PV of an ordinary annuity of 1 at 10% for three periods
2.49
PV of an ordinary annuity of 1 at 10% for five periods
3.79
PV of 10% for three periods
0.75
The lease provides for neither a transfer of title to the lessee nor a purchase option.
1.
What is the lease liability on January 1, 2020?
A. P1,516,000
B. P2,2630,000
C. P1,884,000
D. P1,697,250
2.
What is the interest expense for 2020?
A. P188,400
B. P226,300
C. P151,600
D. P169,725
3.
What is the interest expense for 2023?
A. P151,460
B. P126,606
C. P164,964
D. P200,000
4.
What is the lease liability on December 31, 2023?
A. P 1,614,604
B. P1,266,064
C. P1,366,064
D. P1,214,604
Page 55 of 80
PROBLEMS (LESSOR ACCOUNTING-OPERATING LEASE)
Problem 1: (Free rent) On January 1, 20x1, Lessor leased an office space to Lessee. Payments on the lease will be made as
follows:
Year
Rental payment
December 31, 20x1
P200,000
December 31, 20x2
240,000
December 31, 20x3
260,000


As an inducement to enter to the lease, Lessor granted Lessee the first six months of the lease as rent free.
Additional rent (contingent rent) of 10% is to be paid for any excess of sales of Lessee over P2,000,000. Lessee’s sales for
20x1, 20x2, and 20x3 are P1,800,000, P2,000,000 and P3,000,000 respectively.
Required: Provide all journal entries in the books of Lessor.
Solutions:
Annual rent income is computed using the straight line method as follows:
Total rentals
First six-month rent-free (200,000 x 6/12)
Adjusted total rentals
Divide by: Lease term
Annual rent income
The entries are:
January 1, 20x1
December 31, 20x1
Cash
Rent receivable
Rent income
December 31, 20x2
Cash
Rent income
Rent receivable
December 31, 20x3
Cash
Rent income
Rent receivable
Cash
Rent income
(10% x (3M – 2M))
To record contingent rent receivable
P 700,000
( 100,000)
600,000
3
P200,000
No Entry
100,000
100,000
200,000
240,000
200,000
40,000
260,000
200,000
60,000
100,000
100,000
Problem 2: (Lease Bonus) On January 1, 20x1, Lessor enters into a 4-year lease of equipment. The equipment has a remaining
useful life of 15 years. The annual lease payments, payable at the end of each year, are as follows:
20x1 P100,000
20x2
120,000
20x3
140,000
20x4
160,000
Page 56 of 80
As an inducement to enter to the lease, Lessor granted Lessee the first six months of the lease as rent-free. Lessor receives a lease
bonus of P20,000.
The equipment is depreciated P50,000 per year
Required: Provide all journal entries in the books of Lessor.
Lease bonus
20x1 (100,000 x 6/12)
20x2
20x3
20x4
Total
Divide by:
20,000
50,000
120,000
140,000
160,000
490,000
4
Annual lease income
122,500
The entries are as follows:
Jan. 1, 20x1
Cash
20,000
Unearned rent income
Dec. 31, 20x1
Dec. 31, 20x2
Dec. 31, 20x3
Dec. 31, 20x4
20,000
Cash
Unearned rent income (20K ÷ 4)
Rent receivable (squeeze)
Rent income (Lease income)
50,000
5,000
67,500
Depreciation expense
Accumulated depreciation
Cash
Unearned rent income (20K ÷ 4)
Rent income (Lease income)
Rent receivable (squeeze)
50,000
Depreciation expense
Accumulated depreciation
Cash
Unearned rent income (20K ÷ 4)
Rent income (Lease income)
Rent receivable (squeeze)
Depreciation expense
Accumulated depreciation
Cash
Unearned rent income (20K ÷ 4)
Rent income (Lease income)
Rent receivable (squeeze)
Depreciation expense
Accumulated depreciation
120,000
5,000
50,000
140,000
5,000
50,000
160,000
5,000
50,000
122,500
50,000
122,500
2,500
50,000
122,500
22,500
50,000
122,500
42,500
50,000
Problem 3: (Operating Lease) Mindoro Company purchased a new machine on January 1, 20x20 at a cost of P2,000,000 for the
purpose of leasing it. The machine is estimated to have a useful life of ten years with a residual value of P200,000. Depreciation is
computed by Mindoro on a straight line basis. On January 2, 20x20, Mindoro entered into a lease contract with Oriental Company for
a term of four years. The lease fee is P1,000,000 per year and was paid in advance by Oriental. Mindoro paid P120,000
commissions associated with negotiating the lease and receive an additional P400,000 as lease bonus.
Required:
1.
Mindoro Company should present the machine in its statement of financial position as
A. Inventory
B. Inventory Property
C. Other noncurrent investment
D. Property, plant and equipment
PPE are tangible items that are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and are expected to be used during more than one period.
2.
3.
Net amount in P/L________________
Amount to be reported as machine, net_____
Fixed annual rental
Amortization of lease bonus (P400,000 / 4)
Depreciation (P2M-P.2M)/10
Amortization of IDC (P120,000/4)
Net amount in P/L
P1,000,000
100,000
(180,000)
(30,000)
P890,000
Cost
Accumulated depreciation
P2,000,000
(180,000)
Page 57 of 80
CA, 12/31/20x20
Unamortized IDC (P120,000 – P30,000)
Amount to be reported
P1,820,000
90,000
P1,910,000
PROBLEMS (DIRECT FINANCING LEASE-LESSOR)
Problem 1: (Direct Financing Lease- With Direct Cost) On January 1, 20x1 ABC Financing Co. issued equipment to DEF, Inc.
Information on the lease is shown below:
Cost of equipment
P600,000
Useful life of equipment
5 years
Lease term
4 years
Annual rental payable at the end of each year
220,000
Additional information:
The annual lease payments includes P18,098 pertaining to non-lease component. This amount reflects the stand alone selling price
of the service. Direct costs incurred by ABC Financing Co. in negotiating the lease amounted to P40,000. The implicit interest rate
after adjustment for the foregoing items is 10%.
Requirements: Compute for the following:
a. Gross investment in the lease on January 1, 20x1.
b. Net investment in the lease on January 1, 20x1.
c. Unearned interest income on January 1, 20x1.
d. Prepare the amortization table.
Solutions:
Requirement (a) – Gross investment on Jan. 1, 20x1
Gross investment in the lease is computed as follows:
Lease payment (220,000 – 18,098)
Multiply by: Lease term
Gross investment in the lease – Jan. 1, 20x1
P 201,902
4
P 807,608
Requirement (b) – Net investment on Jan. 1, 20x1
Net investment in the lease is computed as follows:
Lease payment (220,000 – 18,098)
PV of ordinary annuity of P1 @10%, n=4
Net investment in the lease – Jan. 1, 20x1
P 201,902
3.1698654
P 640,000
Net investment in the lease may also be computed as follows:
Cost of equipment
Initial direct cost
Net investment in the lease – Jan. 1, 20x1
P 600,000
40,000
P 640,000
Requirement (c) – Unearned interest income on Jan. 1, 20x1
Unearned interest income is computed as follows:
Gross investment in the lease
Net investment in the lease
Unearned interest income – Jan. 1, 20x1
P807,608
( 640,000)
P167,608
Requirement (d) – Amortization table
Date
1/1/x1
12/31/x1
12/31/x2
12/31/x3
12/31/x4
Collections
Interest
Amortization
201,902
201,902
201,902
201,902
64,000
50,210
35,041
18,354
137,902
151,692
166,861
183,548
Present value
640,000
502,098
350,406
183,544
0
Problem 2: (Direct Financing Lease) On January 1, 20x1, Lessor enters into a lease of equipment. Information on the lease is
shown below:
Cost of equipment
P278,948
Useful life of equipment
5 years
Lease term
4 years
Annual rent payable at the beginning of each year
80,000
Interest rate implicit in the lease
10%
Requirements: (Round off PV factors to 6 decimal places)
a. Compute for the gross investment in the lease, net investment in the lease and unearned interest income on initial recognition.
b. Provide all the journal entries over the lease term.
Requirement (a):
Gross investment = (80,000 x 3) = 240,000
Net investment = 80,000 x PV of ordinary annuity of 1 @10%, n= 3 = 198,948
Unearned interest = 240,000 – 198,948 = 41,052
Requirement (b):
Date
1/1/x1
1/1/x1
1/1/x2
1/1/x3
1/1/x4
Collections
Interest
Amortization
80,000
80,000
80,000
80,000
19,895
13,884
7,273
80,000
60,105
66,116
72,727
Present value
278,948
198,948
138,843
72,727
0
Page 58 of 80
Jan. 1, 20x1
Dec. 31,
20x1
Jan. 1, 20x2
Dec. 31,
20x2
Jan. 1, 20x3
Dec. 31,
20x3
Jan. 1, 20x4
Cash
Finance lease receivable
Equipment
Unearned interest income
Unearned interest
Interest income
Cash
Finance lease receivable
Unearned interest
Interest income
Cash
Finance lease receivable
Unearned interest
Interest income
Cash
Finance lease receivable
80,000
240,000
278,948
41,052
19,895
19,895
80,000
80,000
13,884
13,884
80,000
80,000
7,273
7,273
80,000
80,000
Problem 3: (Direct Financing Lease) Lessor Controls Corporation is in the business of leasing equipment. Lessor Controls
purchased a new equipment on December 31, 2010. The equipment was delivered the same day (by prior arrangement) to Lessee
investment Company, a lessee. The corporation accountant revealed the following information relating to the lease transaction:
Cost of equipment to Lessor Controls
P550,000
Estimated useful life and lease term
8 years
Expected residual value (unguaranteed)
40,000
Lessor Control’s implicit rate of interest
12%
Lessee’s incremental borrowing rate
12%
Note: Lessee, paid in advance on December 31, 2010.
Additional information is as follows:
(a) At the end of the lease, the equipment will revert to Lessor Control.
(b) Lessee is aware of Lessor Controls rate of implicit interest.
(c) The lease rental consists of equal annual payments.
REQUIRED: Prepare the 2010 and 2011 journal entries relating to the lease on the books of Lessor Controls and Lessee Investment
Company (Round off present value factors to four decimal places.)
Cost of equipment
PV of residual value (40,000 x .4039)
Net investment to be recovered from rental
Divide by PV of an advance annuity
Annual Rental
P550,000
(16,156)
P533,844
5.5638
P95,950
Debit
Credit
LESSOR'S BOOKS
December 31, 2010
Commencement of finance lease
Finance lease receivable
807,600
Equipment
550,000
Equipment (Initial Direct Cost)
IDC if any
Discount on FLR
257,600
To record initial payment
Cash
95,950
Finance lease receivable
95,950
December 31, 2011
To record the second payment
Cash
95,950
Finance lease receivable
95,950
To record amortization of discount on FLR
Discount on FLR
54,486
Interest income
54,486
LESSEE'S BOOKS
December 31, 2010
To recognize asset and liability
RUA
533,844
Finance lease liability
533,844
To record initial payment
Finance lease liability
95,950
Page 59 of 80
Cash
95,950
December 31, 2011
To record the second payment
Interest expense
52,547
Finance lease liability
43,403
Cash
95,950
To record depreciation
Depreciation
66,731
Accumulated depreciation
66,731
Amortization schedule - lessor (guaranteed or unguaranteed, included in PV amount)
Date
Payment
Interest
Principal
Carrying amount
12/31/2010
550,000
12/31/2010
95,950
95,950
12/31/2011
95,950
454,050
54,486
41,464
412,586
12/31/2012
12/31/2013
95,950
49,510
46,440
366,146
95,950
43,938
52,012
314,134
12/31/2014
95,950
37,696
58,254
255,880
12/31/2015
95,950
30,706
65,244
190,636
12/31/2016
95,950
22,876
73,074
117,562
12/31/2017
95,950
14,107
81,843
35,719
12/31/2018
40,000
4,280
35,720
(0)
Amortization schedule - lessee (guaranteed included / (unguaranteed not included), in PV amount)
Date
Payment
Interest
Principal
Carrying amount
12/31/2010
533,844
12/31/2010
95,950
95,950
12/31/2011
95,950
437,894
52,547
43,403
12/31/2012
394,491
95,950
47,339
48,611
345,880
12/31/2013
95,950
41,506
54,444
291,436
12/31/2014
95,950
34,972
60,978
230,458
12/31/2015
95,950
27,655
68,295
162,163
12/31/2016
95,950
19,460
76,490
85,673
12/31/2017
95,950
10,278
85,672
0
PROBLEM (SALES TYPE LEASE-LESSOR)
Problem 1: XYZ Company is a dealer in machinery. On January 1, 20x5, a machinery was leased to another entity with the
following provisions:
Annual rental payable at the end of each year
P 800,000
Lease term
5 years
Useful life of machinery
5 years
Cost of machinery
P2,000,000
Estimated residual value
P 200,000
Initial direct costs paid by lessor
P100,000
Implicit interest rate
10%
Present value of an ordinary annuity of 1 for 5 periods at 10%
3.7908
Present value of 1 for 5 periods at 10%
0.6209
At the end of the lease term on December 31, 20x9, the machinery will revert to XYZ Company. The perpetual inventory system
is used. (Prepare the necessary journal entries in the books of Lessor)
Guaranteed Residual Value
Unguaranteed Residual Value
Gross rentals
Add: Guaranteed residual value
Gross Lease Receivables
4,000,000
200,000
4,200,000
Gross rentals
Add: unguaranteed residual value
Gross Lease Receivables
4,000,000
200,000
4,200,000
PV of Gross rentals
Add: PV of Guaranteed residual value
MLP
3,032,640
124,180
3,156,820
PV of Gross rentals
Add: PV of Unguaranteed residual value
MLP
3,156,820
PV of Gross rentals
Add: PV of Guaranteed residual value
Total Sales=PV of MLP
Cost of machinery
PV of Gross rentals
3,156,820
Total Sales= PV of rentals
3,032,640
Cost of machinery
Less: PV of Unguaranteed residual value
Page 60 of 80
Add: Initial direct cost
Cost of sales
2,100,000
Add: Initial direct cost
Cost of sales
1,975,820
Amortization Table (Whether guaranteed or unguaranteed)
10% x PV
Interest
Payment
Jan. 1, 20x5
Dec. 31, 20x5
Dec. 31, 20x6
Dec. 31, 20x7
Dec. 31, 20x8
Dec. 31, 20x9
800,000
800,000
800,000
800,000
800,000
315,682
267,250
213,975
155,373
90,910
Payment – Interest
Principal
484,318
532,750
586,025
644,627
709,090
Present value
3,156,820
2,672,502
2,139,752
1,553,727
909,100
200,000
 (Bal) Res. Value
When the lease expires on Dec. 31, 20x9, the machinery will revert to the lessor.
Guaranteed
Unguaranteed
Dec. 31, 20x9 Inventory
200,000
200,000
Lease receivable
200,000
200,000
Assume, Dec. 31, 20x9, Fair value of machinery is P180,000, the machinery will revert the lessor
Guaranteed
Unguaranteed
Cash
20,000
Zero
Inventory
180,000
180,000
Loss on finance lease
Zero
20,000
Lease receivable
200,000
200,000
Problem No. 2 (With Suggested Answer) Excel Inc. leases equipment to its customer under noncancelable leases. On January
1, 2010, Excel leased equipment costing P4,000,000 to Microsoft Co., for nine years. The rental cost was P440,000 payable in
advance semiannually (January 1 and July 1). The equipment had an estimated life of 15 years and sold for P5,330,252 with an
estimated unguaranteed residual value of P800,000. The implicit interest rate is 12%.
REQUIRED: Prepare the 2010 journal entries relating to the lease on the books of Excel and Microsoft (Round off present value
factors to four decimal places).
Debit
Credit
LESSOR'S BOOKS
January 1, 2010
Commencement of finance lease
Finance lease receivable
8,720,000
Cost of sales
3,719,012
Sales
5,050,012
Discount on FLR
3,389,748
Inventory
4,000,000
To record initial payment
Cash
440,000
Finance lease receivable
440,000
July 1, 2010
To record the second payment
Cash
440,000
Finance lease receivable
440,000
To record amortization of discount on FLR
Discount on FLR
293,415
Interest income
293,415
December 31, 2010
To record amortization of discount on FLR
Discount on FLR
284,620
Interest income
284,620
LESSEE'S BOOKS
January 1, 2010
To recognize asset and liability
Right of use asset
Lease liability
5,050,012
5,050,012
To record initial payment
Page 61 of 80
Lease liability
440,000
Cash
440,000
Amortization schedule (partial) lessor
Date
Payment
Interest
Principal
1/1/10
Carrying amount
5,330,252
1/1/10
440,000
440,000
7/1/10
440,000
4,890,252
293,415
146,585
1/1/11
4,743,667
440,000
284,620
155,380
4,588,287
7/1/11
440,000
275,297
164,703
4,423,584
1/1/12
440,000
265,415
174,585
4,248,999
Principal
Carrying amount
Amortization schedule (partial) lessee
Date
Payment
Interest
1/1/10
5,050,012
1/1/10
440,000
440,000
7/1/10
440,000
4,610,012
276,601
163,399
1/1/11
4,446,613
440,000
266,797
173,203
4,273,410
7/1/11
440,000
256,405
183,595
4,089,815
1/1/12
440,000
245,389
194,611
3,895,204
PROBLEMS (SUBLEASE)
On January 1, 20x18, Lessee Company enters into a 10-year lease for 5,000 square meters of office space for annual lease payment
of P150,000 every December 31. The rate implicit in the lease at the commencement date is 10%. On January 1, 20x22, when the
present value of the lease liability is P653,289 and the cost of right of use asset is P921,685 and accumulated depreciation of
P368,674, the Lessee (intermediate lessor) subleases the 5,000 square meters of office space for the remaining terms of 6 years to
the sublessee for P180,000 when the implicit rate of 9%.
Required:
Case No. 1: Assuming the intermediate lessor treats the sublease as a finance lease.
Case No. 2: Assuming the intermediate lessor treats the sublease as an operating lease.
Case No. 1: Sublease as finance lease
The journal entry on the part of intermediate lessor is:
1/1/20x22
Lease Receivable (180,000 x 6)
Accumulated depreciation
Right of use asset
Unearned interest income (1,080,000 - 807,465)
Gain on subleasing
12/31/20x22
C ash
Lease receivable
Unearned interest income
Interest income (807,465 x 9%)
1,080,000
368,674
921,685
272,535
254,454
180,000
180,000
72,672
72,672
Note: Present value of the net investment is P807,465 computed as P180,000 x 4.4859, which is the present value of 9% for the
remaining 6 periods.
When the intermediate lessor enters into the sublease, the intermediate lessor:
a. Derecognizes the right of use asset relating to the head lease that it transfers to the sublessee and recognizes the net
investment in the sublease;
b. Recognizes any difference between the right of use asset and the net investment in the sublease in profit or loss; and
c. Retains the lease liability relating to the head lease in its statement of financial position, which represents the lease
payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognizes both finance income on the sublease and interest expense on the
head lease.
The journal entry on the part of the sublessee is:
1/1/20x22
Right of use asset
Lease liability
807,465
12/31/20x22
Depreciation expense (807,465/6)
Accumulated depreciation
134,577
Interest expense (807,465 x 9%)
Lease liability (180,000 - 72,672)
C ash
72,672
107,328
807,465
134,577
180,000
Case 2: Sublease as operating lease
The journal entry on the part of intermediate lessor is
1/1/20x22
No journal entry
12/31/20x22
C ash
Rent income
Depreciation expense (921,685 /10)
Accumulated depreciation
Page 62 of 80
180,000
180,000
92,169
92,169
During the term of the sublease, the intermediate lessor:
a. Recognizes a depreciation charge for the right of use asset and interest on the lease liability; and
b. Recognizes lease income from the sublease.
The journal entry on the part of the sublessee is:
1/1/20x22
Right of use asset
Lease liablity
807,465
807,465
Depreciation expense (807,465 / 6)
Accumulated depreciation
134,577
Interest expense (807,465 x 9%)
Lease liability (180,000 - 72,672)
C ash
72,672
107,328
134,577
180,000
PROBLEMS (SALE AND LEASEBACK)
Problem 1: (Short-term) At the beginning of the current year, an entity sold a machinery with a remaining life of 10 years for
P4,000,000 which is equal to the fair value of the machinery. The entity immediately leased the machinery back for 1 year at the
prevailing annual rental of P600,000.
The machinery has a carrying amount of P3,600,000, net of accumulated depreciation of P2,400,000.
Required:
Prepare the necessary journal entries.
Books of seller-lessee
Books of buyer-lessor
2. To record the
purchase
1. To record the sale
Cash
4,000,000
Accumulated depreciation
Machinery
2,400,000
Gain on right transferred
Machinery
Cash
6,000,000
4,000,000
400,000
2. To record annual
rental
2. To record annual rental
Rent expense
4,000,000
600,000
Cash
Cash
600,000
The seller-lessee used the operating lease model, because the
lease
is short term or one year
600,000
Rent income
600,000
3. To record depreciation of the machinery
Depreciation expense
Accumulated
depreciation
(4,000,000/ 10)
400,000
400,000
Part I: Transfer of the asset is sale
Problem 2:
Sale and Leaseback
C a s e 1 : S a le s p r i c e = F a i r v a l u e
On January 1, 20X7, an entity sold an equipment with remaining life of 10 years and immediately lease it back for 4 years at the
prevailing market rental.
Sales price at fair value
P12,000,000
Carrying amount of equipment
9,000,000
Annual rental payable at the end of each year
1,600,000
Implicit interest rate
10%
Present value of an ordinary annuity of 1 at 10% for four years
3.170
Required: Prepare the necessary journal entries.
Books of seller-lessee
1. To record the sale and leaseback:
Cash
12,000,000
Right of use asset
3,804,000
Equipment-net
Lease liability
Gain on right transferred
9,000,000
5,072,000
1,732,000
Books of buyer-lessor
1. To record the purchase of the underlying asset:
Equipment**
12,000,000
Cash
12,000,000
Page 63 of 80
2. To record the annual rental for the first year:
2. To record the annual rental
Interest expense
Cash
Lease liability
507,200
1,092,800
Cash
1,600,000
Rent income
1,600,000
1,600,000
3. To record the annual depreciation of right of use asset:
3. To record annual depreciation of equipment
Depreciation expense
Depreciation expense
951,000
Accumulated depreciation
951,000
1,200,000
Accumulated depreciation
1,200,000
(3,804,000/ 4 years)
(12,000,000/10 years)
** The buyer-lessor shall app ly the operating lease model, because the lease term is 4 years or only 40%
of the useful life of the under asset:
Measurement of lease liability
Date
1/1/20X7
12/31/20X7
12/31/20X8
12/31/20X9
12/31/20Y0
Sale price
Less: Fair value
Additional financing (Prepayment)
Right of use asset =
Right of use asset =
Payment
10% interest
1,600,000
1,600,000
1,600,000
1,600,000
Principal
507,200
397,920
277,712
145,168
1,092,800
1,202,080
1,322,288
1,454,832
PV
5,072,000
3,979,200
2,777,120
1,454,832
-
12,000,000
(12,000,000)
Carrying amount
x PV of lease liability "Less"additional financing "Add" prepayment
Fair Value
9,000,000
5,072,000
12,000,000
3,804,000
Fair Value
Rights retained
Rights transferred
5,072,000
6,928,000
12,000,000
Carrying amount
Gain
3,804,000
5,196,000
9,000,000
1,268,000
1,732,000
C a s e 2 : S a le s p r i c e > F a i r v a l u e
On January 1, 20X7, an entity sold a building with remaining life of 20 years and immediately leased it back for 5 years.
Sale price
P40,000,000
Fair value of building
36,000,000
Carrying amount of building
20,000,000
Annual rental payable at the end of each year
3,000,000
Implicit interest rate
6%
Present value of an ordinary annuity of 1 at 6% for five periods
4.212
Required: Prepare the necessary journal entries.
Books of seller-lessee
1. To record the sale and leaseback:
Cash
40,000,000
Right of use asset
4,797,778
Building -net
Lease liability
Gain on right transferred
20,000,000
12,636,000
12,161,778
2. To record the annual rental for the first year:
Interest expense
758,160
Lease liability
2,241,840
Cash
3,000,000
Books of buyer-lessor
1. To record the purchase of the building:
Building**
36,000,000
Financial asset
4,000,000
Cash
40,000,000
2. To record the annual rental related to lease
Cash
2,050,332
Rent income
2,050,332
3. To record the annual rental related to financing
Cash
Financial asset
Interest income
949,668
709,668
240,000
3. To record the annual depreciation of right of use asset:
Depreciation expense
959,556
Accumulated depreciation
959,556
4. To record annual depreciation of equipment
Depreciation expense
1,800,000
Accumulated depreciation
1,800,000
(4,797,778/ 5 years)
(36,000,000/20 years)
** The buyer-lessor shall apply the operating lease mode because of the lease term is 5 years or only 25%
of the 20-year useful life of the under lying ass et.
Page 64 of 80
Moreover, the PV of rentals related to the lease of P8,636,000 is less than 90% of the fair value of the
asset of P36,000,000.
Measurement of lease liability
Date
1/1/20X7
12/31/20X7
12/31/20X8
12/31/20X9
12/31/20Y0
12/31/20Y1
Payment
6% interest
3,000,000
3,000,000
3,000,000
3,000,000
3,000,000
Sale price
Less: Fair value
Additional financing (Prepayment)
Principal
758,160
623,650
481,069
329,933
171,189
PV
12,636,000
10,394,160
8,017,810
5,498,878
2,828,811
(0)
2,241,840
2,376,350
2,518,931
2,670,067
2,828,811
40,000,000
(36,000,000) Lease liability
4,000,000 (3,000,000 x 4.212)
12,636,000
Carrying amount
x PV of lease liability "Less"additional financing "Add" prepayment
Fair Value
20,000,000
8,636,000
36,000,000
4,797,778
Right of use asset
Right of use asset
Fair Value
Rights retained
Rights transferred
Carrying amount
Gain
4,797,778
3,838,222
15,202,222
12,161,778
20,000,000
8,636,000
27,364,000
36,000,000
Allocation of annual rental
Present value
Rental income
Financial asset
Total present value
Annual rental
8,636,000
4,000,000
12,636,000
Date
1/1/20X7
12/31/20X7
12/31/20X8
12/31/20X9
12/31/20Y0
12/31/20Y1
3,000,000
Payment
6% interest
949,668
949,668
949,668
949,668
949,668
Allocation
2,050,332
949,668
3,000,000
Principal
240,000
197,420
152,285
104,442
54,191
PV
709,668
752,248
797,383
845,225
895,477
4,000,000
3,290,332
2,538,085
1,740,702
895,477
(0)
C a s e 3 : S a le s p r i c e < F a i r v a l u e
On January 1, 20X7, an entity sold an equipment with remaining life of 8 years and leased it back for 5 years.
Sale price
Fair value of equipment
Carrying amount of equipment
Annual rental payable at the end of each year
Implicit interest rate
Present value of an ordinary annuity of 1 at 8% for five periods
Required: Prepare the necessary journal entries.
Books of seller-lessee
Books of buyer-lessor
1. To record the purchase of the
equipment:
1. To record the sale and leaseback:
Cash
Right of use asset
10,000,000
Equipment
5,954,473
Equipment-net
Cash
Cash
10,000,000
7,187,400
767,073
2. To record the annual rental for the first year:
Lease liability
10,000,000
8,000,000
Lease liability
Gain on right
transferred
Interest expense
P10,000,000
11,000,000
8,000,000
1,800,000
8%
3.993
574,992
2. To record the annual rental related to
lease
Cash
1,225,008
Rent income
1,800,000
1,800,000
1,800,000
Page 65 of 80
3. To record the annual depreciation of right of use
asset:
Depreciation expense
Accumulated
depreciation
4. To record annual depreciation of
equipment
1,190,895
Depreciation expense
1,190,895
1,250,000
Accumulated depreciation
(5,954,473/ 5 years)
1,250,000
(10,000,000/8 years)
Measurement of lease liability
Date
1/1/20X7
12/31/20X7
12/31/20X8
12/31/20X9
12/31/20Y0
12/31/20Y1
Payment
8% interest
1,800,000
1,800,000
1,800,000
1,800,000
1,800,000
Sale price
Less: Fair value
Additional financing (Prepayment)
Principal
574,992
476,991
371,151
256,843
132,623
PV
1,225,008
1,323,009
1,428,849
1,543,157
1,667,377
10,000,000
(11,000,000) Lease liability
(1,000,000) (1,800,000 x 3.993)
7,187,400
5,962,392
4,639,383
3,210,534
1,667,377
(0)
7,187,400
x PV of lease liability "Less"additional financing "Add" prepayment
Carrying amount
Fair Value
8,000,000
8,187,400
11,000,000
5,954,473
Right of use asset
Right of use asset
Fair Value
Rights retained
Rights transferred
8,187,400
2,812,600
11,000,000
Carrying amount
Gain
5,954,473
2,045,527
8,000,000
2,232,927
767,073
Problem 3: (Sales price = Fair value with loss) On January 1, 20X7, an entity sold a building with
remai ning l ife of 25 years and immed iately leas ed it bac k for 3 years .
Sale price
P20,000,000
Fair value of building
20,000,000
Carrying amount of building
24,000,000
Annual rental payable at the end of each year
1,000,000
Implicit interest rate
8%
Present value of an ordinary annu ity of 1 at 8% for three periods
2.577
Required:
Prepare the necessary journal entries.
Books of seller-lessee
Books of buyer-lessor
1. To record the sale and leaseback:
1. To record the purchase of the building:
Cash
20,000,000
Building
Right of use asset
3,092,400
Loss on right transferred
3,484,600
20,000,000
Cash
Building-net
24,000,000
Lease liability
2,577,000
20,000,000
-
2. To record the annual rental for the first year:
Interest expense
206,160
Lease liability
793,840
Cash
Cash
(3,092,400/ 3 years)
1,000,000
Rent income
1,000,000
1,000,000
3. To record the annual depreciation of right of use
asset:
Depreciation expense
Accumulated
depreciation
2. To record the annual rental related to
lease
1,030,800
4. To record annual depreciation of
building
Depreciation expense
1,030,800
Accumulated depreciation
800,000
800,000
(20,000,000/25 years)
Page 66 of 80
Measurement of lease liability
Date
1/1/20X7
12/31/20X7
12/31/20X8
12/31/20X9
Payment
1,000,000
1,000,000
1,000,000
Sale price
Less: Fair value
Additional financing (Prepayment)
Right of use asset
Right of use asset
8% interest
Principal
206,160
142,653
74,187
793,840
857,347
925,813
20,000,000
(20,000,000) Lease liability
(1,000,000 x 2.577)
PV
2,577,000
1,783,160
925,813
(0)
2,577,000
Carrying amount
Fair Value
24,000,000
20,000,000
3,092,400
x PV of lease liability "Less"additional financing "Add" prepayment
Fair Value
Carrying amount
3,092,400
20,907,600
24,000,000
Rights retained
Rights transferred
2,577,000
17,423,000
20,000,000
2,577,000
Loss
(515,400)
(3,484,600)
Part II: Transfer of the asset is not a sale
If the transfer of an asset by the seller-lessee does not satisfy the requirement of IFRS 15 to be accounted for as a sale of the asset:
a. The seller-lessee shall continue to recognize the transferred asset and shall recognize a financial liability equal to the transfer
proceeds. It shall account for the financial liability applying IFRS 9. The journal entry is:
Cash
xxx
Financial liability
xxx
b. The buyer-lessor shall not recognize the transferred asset and shall recognize a financial asset equal to the transfer proceeds.
The journal entry is:
Financial asset (receivable)
xxx
Cash
xxx
LESSEE ACCOUNTING
Use the following information for the next five (5) questions:
At the beginning of current year, ABC Company leased a building from a lessor with the following pertinent information:
Annual rental payable at the end of each year
P1,500,000
Initial direct cost paid
405,000
Lease bonus paid to lessor before commencement of the lease
300,000
Lease incentive received
50,000
Cost of restoring building as required by contract
1,500,000
Present value of restoration cost discounted at 8% for six periods
945,000
Unguaranteed residual value
500,000
Leasehold improvement – useful life 8 years
600,000
Purchase option that is reasonably certain to be exercised
1,000,000
Lease term
6 years
Useful life of building
10 years
Implicit interest rate
10%
Incremental borrowing rate
12%
PV of an ordinary annuity of 1 for 6 periods at 10%
4.36
PV of an ordinary annuity of 1 for 10 periods at 10%
6.14
Present value of 1 for 6 periods at 10%
0.56
Present value of 1 for 10 periods at 10%
0.39
Present value of 1 for 6 periods at 8%
0.63
1.
What is the initial lease liability?
A. P7,100,000
B. P6,540,000
C. P9,210,000
D. P9,600,000
2.
What is the cost of the right of use asset?
A. P8,750,000
B. P8,700,000
C. P9,255,000
D. P7,755,000
3.
What total amount of interest expense should be reported for the current year?
A. P710,000
B. P785,600
C. P804,500
D. P830,000
4.
What is the lease liability at year-end?
A. P6,310,000
B. P5,694,000
C. P9,060,000
D. P5,600,000
5.
What is the total depreciation expense for current year?
A. P1,450,000
B. P1,550,000
C. P970,000
D. P870,000
Page 67 of 80
Lease liabillity
P
Payments
O
Options
G
Guaranteed
I
If, termination penalties
Lease liabillity
Others
+ Direct cost
+ Dismantling cost
+ Lease bonus
- Lease incentives
RUA
Interest expense
Interest expense
7,100,000
945,000
(1,500,000 x 4.36)
(1,000,000 x .56)
6,540,000
560,000
7,100,000
405,000
945,000
300,000
(50,000)
10%
8%
1,600,000
8,700,000
710,000
75,600
785,600
8,700,000
10
870,000
Transfer Ownership or Purchase option = Useful life
Depreciation
600,000
6
100,000
970,000
Use the following information for the next three (3) questions:
On December 31, 20x20, DEF Company leased to automobiles for executive use. The lease required the entity to make five
annual payments of P1,500,000 beginning December 31, 20x20. At the end of the lease term, December 31, 20x25, the
entity had a residual value guarantee of the automobiles at P1,000,000. The interest rate implicit in the lease is 10% and
present value factors at 10% for 5 periods are 4.17 for an annuity due, 3.79 for an ordinary annuity and 0.62 for present value
of 1.
6.
What is the lease liability on December 31, 20x21?
A. P4,412,500
B. P5,375,000
C. P6,062,500
D. P4,805,000
7.
What is the current portion of the lease liability on December 31, 20x21?
A. P1,500,000
B. P1,058,750
C. P962,500
D. P750,000
8.
What is the interest expense for 20x22?
A. P480,500
B. P537,500
D. P606,250
Interest
12/31/20x20
12/31/20x20
12/31/20x21
12/31/20x22
9.
537,500
441,250
C. P441,250
Payment
Principal
(1,500,000)
(1,500,000)
(1,500,000)
(1,500,000)
(962,500)
(1,058,750)
CV
6,875,000
5,375,000
4,412,500
3,353,750
On January 1, 20x20, GHI Company entered into a 5-year lease with a lessor. Annual lease payments of P1,200,000 including
annual executory cost of P200,000 are payable at the end of each year. The entity knows that the lessor expects an 8% implicit
rate on the lease. The entity has a 10% incremental borrowing rate. The equipment is expected to have a useful life of 10
years. In addition, a third party has guaranteed to pay the lessor a residual value of P500,000 at the end of the lease. The
present value of an ordinary annuity of 1 for 5 years is 3.99 at 8% and 3.79 at 10%. The present value of 1 at 8% for 5 periods
is 0.68 and at 10% for 5 periods is 0.62. On December 31, 20x20, what is the principal amount of the lease obligation?
A. P3,990,000
B. P3,309,200
C. P3,676,400
D. P3,971,040
Interest
1/1/20x20
12/31/20x20
319,200
Payment
(1,000,000)
1,000,000
3.99
Principal
(680,800)
CV
3,990,000
3,309,200
3,990,000
10. At the beginning of current year, JKL Company entered into an 8-year finance lease for an equipment. The entity accounted for
the acquisition of the finance lease at P5,000,000 which included a P500,000 bargain purchase option that is reasonably certain
to be exercised. The expected fair value of the equipment is P400,000 at the end of the 10-year useful life. What amount of
straight line depreciation should be recognized for the current year?
A. P575,000
B. P460,000
C. P625,000
D. P450,000
5,000,000
(400,000)
4,600,000
10
460,000
11. At the beginning of current year, MNO Company entered into an 8-year lease for an equipment. The entity accounted for the
acquisition as a finance lease for P6,000,000 which included a P600,000 residual value guarantee. At the end of the lease,
the asset will revert back to the lessor. It is estimated that the fair value of the asset at the end of the 10-year useful life
would be P400,000. What amount should be recognized as straight line depreciation on the leased asset for the current year?
A. P675,000
B. P700,000
C. P540,000
D. P560,000
Page 68 of 80
6,000,000
(600,000)
5,400,000
8
675,000
12. IFRS 16 Leases permits a simplified treatment for certain assets. For which of the following leases would be simplified not be
permitted?
A. Motor car with cost of $10,000, leased for 9 months
B. Telephone with cost of $500, leased for 24 months
C. Motor car with original cost of $10,000, current fair value of $500, leased for 24 months
D. Desk with cot of $750, leased for 24 months
C – The simplified treatment under IFRS 16 Leases is permitted for assets of low-value or where the lease period is for less than 12
months. The standard does not specify a monetary amount for low-value but within the basis for conclusion indicates $5,000 or
below as a guide. Low-value is based on original cost.
13. IFRS 16 leases permits certain assets to be exempt from the recognition treatment for right-of-use assets. Which of the
following assets leased to an entity would be permitted to be exempt?
A. A used motor vehicle with an original cost of $15,000 and a current fair value of $700, leased for 24 months
B. A new motor vehicle with a cost of $15,000 leased for 24 months
C. A new motor vehicle with a cost $15,000, leased for 24 months, to be rented to customers on a daily rental basis
D. A new motor vehicle with a cost of $15,000, leased for 12 months
D – Assets permitted to be exempted from recognition are low-value assets and those with a lease term of 12-months or less. The
use of the asset is irrelevant, and, although IFRS 16 Leases does not define low-value, it is the cost when new that is considered
rather than current fair value.
14. Which statement is correct regarding accounting for leases in accordance with PFRS 16?
A. PFRS 16 does not require a company to recognize assets and liabilities for lease of delivery vehicles.
B. Lease term is the non-cancellable period for which a lessee has the right to use an underlying asset, together with periods
covered by an option to terminate the lease if the lessee is reasonably certain to exercise the option
C. The lease term begins at the inception date.
D. Right of use assets that meet the definition of investment property shall be presented in the statement of financial position
as investment property.
15. The IASB amended IFRS 16 in response to COVID 19 pandemic. It added a practical expedient to provide relief for lessees from
lease modification accounting for rent concessions related to COVID-19. What is that practical expedient?
A. The practical expedient allows lessees to account for all leases as operating leases as result of COVID-19-related rent
concession received.
B. The practical expedient allows lessees to account for COVID-19 related rent concession received as income over the
remaining lease term.
C. The practical expedient requires lessees to carry out an assessment to decide whether a COVID-19 related rent concession
received is a lease modification or not.
D. The practical expedient avoids the need for lessees to carry out an assessment to decide whether a COVID-19 related rent
concession received is a lease modification or not.
LESSOR ACCOUNTING
Operating Lease
1.
On January 1, 20x20, an entity purchased a new machine for P5,000,000 for the purpose of leasing it. The machine had an
estimated 10-year life. On April 1, 20x20, the entity leased the machine to a lessee for three years at a monthly rental of
P400,000. The lessee paid the rental for one year of P4,800,000 on April 1, 20x20 and additionally paid P900,000 to the lessor
as a lease bonus to obtain the three-year lease. On April 1, 2020, the entity paid P300,000 to broker as a finder fee. What is
the net rental income for 20x20?
A. P3,375,000
B. P4,350,000
C. P3,250,000
D. P4,400,000
Rent income
(4,800,000 x 9/12)
Amortization of lease bonus (900,000/ 3 x 9/12)
Amortization of IDC (300,000/ 3 x 9/12)
Depreiciation ( 5M/10)
Net income
2.
3,600,000
225,000
(75,000)
(500,000)
3,250,000
On July 1, 20x20, an entity leased an equipment to a lessee under a 3-year operating lease. Total rental for the lease term is
P3,600,000, payable P50,000 monthly for the first lease year, P75,000 monthly for the second lease year and P175,000 monthly
for the third lease year. All payments were made when due. On June 30, 20x22, what amount should be reported as accrued
rent receivable?
A. P2,100,000
B. P1,200,000
C. P900,000
D. P0
Cash
July 1, 20x20
July 1, 20x21
June 30, 20x22
600,000
900,000
Rent income
1,200,000
1,200,000
Rent receivable
600,000
300,000
900,000
Finance Lease (Sales Type Lease)
Use the following information for the next five (5) questions:
DDD Company is a dealer in equipment. At the beginning of current year, an equipment was leased to another entity with the
following provisions:
Annual rental payable at the end of each year
P1,500,000
Lease term and useful life of machinery
5 years
Cost of equipment
4,000,000
Page 69 of 80
Fair value of equipment on date of lease
Guaranteed residual value
Implicit interest rate
PV of an ordinary annuity of 1 for 5 periods at 12%
PV of 1 for 5 periods at 12%
6,000,000
500,000
12%
3.60
0.57
The equipment will revert to the lessor at the end of lease term. The fair value of the asset is P350,000 at the end of the
lease term. The perpetual inventory system is used. The lessor incurred initial direct cost of P200,000 in finalizing the lease
agreement.
3.
What is the gross investment in the lease?
A. P7,500,000
B. P8,000,000
C. P4,000,000
D. P6,000,000
4.
What is the net investment in the lease?
A. P5,400,000
B. P5,685,000
C. P4,000,000
D. P3,500,000
5.
What is the total financial revenue?
A. P2,315,000
B. P2,285,000
C. P2,000,000
D. P2,600,000
6.
What amount of interest income should be recognized for the current year?
A. P682,200
B. P648,000
C. P720,000
D. P480,000
7.
What amount should be reported as profit on sale for the current year?
A. P1,485,000
B. P1,685,000
C. P1,800,000
D. P2,000,000
1,500,000
500,000
5
7,500,000
500,000
8,000,000
1,500,000
500,000
3.60
0.57
Net investment
5,400,000
285,000
5,685,000
Total financial revenue
2,315,000
Gross investment
Interest income
5,685,000
12%
682,200
Sales
Cost of sales ( P4,000,000 + P200,000)
Gross profit
What if unguarateed?
Sales
Cost of sales
Gross profit
5,685,000
(4,200,000)
1,485,000
4,200,000
Lease receivable
Cost of sales
Sales
Inventory
Unearned interest income
Cash
(285,000)
5,400,000
(3,915,000)
1,485,000
8,000,000
4,200,000
12,200,000
5,685,000
4,000,000
2,315,000
200,000
12,200,000
Finance Lease (Direct Finance Lease)
Use the following information for the next four (4) questions:
FFF Company is in the business of leasing new sophisticated equipment under a direct finance lease. The lessor expects a
12% return on net investment. At the end of the lease term, the equipment will revert to the lessor. At the beginning of
current year, an equipment is leased to a lessee with the following information:
Cost of equipment to the lessor
P5,000,000
Residual value – unguaranteed
600,000
Annual rental payable in advance at the beginning of each year
900,000
Initial direct cost incurred by the lessor
250,000
Useful life and lease term
8 years
Implicit interest rate
12%
8.
What is the gross investment in the lease?
A. P7,200,000
B. P7,800,000
C. P5,000,000
D. P5,250,000
9.
What is the net investment in the lease?
A. P5,000,000
B. P5,250,000
C. P4,400,000
D. P4,650,000
10. What is the total unearned interest income?
A. P2,550,000
B. P1,950,000
C. P3,150,000
D. P1,500,000
11. What amount of interest income should be recognized for the current year?
A. P594,000
B. P522,000
C. P630,000
D. P450,000
Page 70 of 80
Cost + IDC
5,250,000
PV
(5.563757 x P900,000)
5,007,381
(.403883 x P600,000)
242,330
5,250,000
Difference due to round off
Gross investment
P900,000 x 8 years
UGRV
Gross investment
Net investment
Total unearned interest income
Interest income (12% x P4,350,000)
5,249,711
(288.90)
7,200,000
600,000
7,800,000
5,250,000
2,550,000
522,000
Equipment
Cash
250,000
250,000
Lease receivable
Equipment
Unearned interest income
7,800,000
5,250,000
2,550,000
12. EEE Company acquired an asset costing P3,165,000. The asset is leased to another entity for 5 years. The five annual lease
payments are due at the end of each year. The unguaranteed residual value of the asset at the end of the lease term is
P500,000. The asset will revert to the lessor at the end of the lease term. The lessor’s implicit interest rate is 12%. The PV
of 1 at 12% for 5 periods is .57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is 3.60. What is the annual rental
payment?
A. P879,166
B. P740,278
C. P800,000
D. P500,000
PV of Payment
PV of UGR (500,000 x 0.57)
Net investment
Squeeze
2,880,000
285,000
3,165,000
2,880,000
3.60
Annual rental payment
800,000
Use the following information for the next two (2) questions:
GGG Company decided to enter the leasing business. The entity acquired a specialized packaging machine for P2,300,000. At
the beginning of current year, the entity leased the machine for a period of six years, after which title to the machine is
transferred to the lessee. The six annual lease payments are due in advance at the beginning of each year. The residual
value of the machine is P200,000. The lease terms are arranged so that a return of 12% is earned by the lessor. The present
value of 1 at 12% for six periods is 0.51, the present value of an annuity in advance of 1 at 12% for six periods is 4.60 and the
PV of an ordinary annuity of 1 at 12% for six periods is 4.11.
13. What is the annual lease payment payable in advance required to yield the desired return?
A. P500,000
B. P477,826
C. P559,610
D. P460,000
14. What is the total financial revenue?
A. P1,057,660
B. P1,257,660
D. P900,000
(2,300,000 / 4.60)
Gross investment (500,000 x 6)
Net invetment
Total financial revenue
C. P700,000
500,000
3,000,000.00
2,300,000.00
700,000.00
If the machine will not be revert to lessor, the residual value is not included in net investment.
LEASEBACK
1.
(Short-term) At the beginning of the current year, an entity sold a machinery with a remaining life of 10 years for P4,000,000
which is equal to the to the fair value of the machinery. The entity immediately leased the machinery back for 1 year at the
prevailing annual rental of P600,000. The machinery has a carrying amount of P3,600,000, net of accumulated depreciation of
P2,400,000. What amount gain on right transferred should be reported?
A. P400,000
B. P600,000
C. P800,000
D. P1,000,000
Selling price
Machinery, net
Gain on sale
4,000,000
(3,600,000)
400,000
Use the following information for the next four (4) questions:
At the beginning of current year, an entity sold an equipment with remaining life of 10 years and immediately leased it back for
4 years at the prevailing market rental.
Sale price at fair value
P6,000,000
Carrying amount of equipment
4,500,000
Annual rental payable at the end of each year
800,000
Implicit interest rate
10%
Page 71 of 80
Present value of an ordinary annuity of 1 at 10% for four periods
What is the initial lease liability?
A. P2,536,000
B. P3,200,000
C. P3,000,000
D. P0
3.
What is the cost of right of use asset?
A. P1,902,000
B. P2,598,000
C. P2,536,000
D. P0
4.
What is the gain on right transferred?
A. P866,000
B. P634,000
C. P750,000
D. P0
What is the annual depreciation of the right use asset?
A. P475,500
B. P190,200
C. P634,000
D. P253,600
2.
5.
CV
FV
SP
4,500,000
6,000,000
6,000,000 (SP - FV) if + financing
(Financing ->minus in lease liability
Lease liability
(800,000 x 3.17)
2,536,000
RUA
1,902,000
6,000,000
(4,500,000)
1,500,000
3.17
CV
x
FV
x
SP
x
CV
[Lease liability - Financing + Prepaid ]
=
4,500,000
6,000,000
x
FV
Right-of-use Asset
FV
(CV)
G/L
x
CV - RUA
CV
=
Gain or loss to be recognized
x (4,500,000 - 1,902,000)
4,500,000
1,500,000
Gain on right transferred
Depreciation
Depreciation
2,598,000
4,500,000
866,000
1,902,000.00
4
475,500
Cash
RUA
Lease liability
Equipment
Gain on right transferred
6,000,000
1,902,000
2,536,000
4,500,000
866,000
Use the following information for the next three (3) questions:
At the beginning of current year, an entity sold a building with remaining life of 20 years and immediately leased it back for 5
years.
Sale price at above fair value
P20,000,000
Fair value of building
18,000,000
Carrying amount of building
10,800,000
Annual rental payable at the end of each year
1,500,000
Implicit interest rate
12%
Present value of an ordinary annuity of 1 at 12% for five periods
3.60
6.
What is the initial lease liability?
A. P5,400,000
B. P3,400,000
C. P7,500,000
D. P7,400,000
7.
What is the cost of right of use asset
A. P2,040,000
B. P4,000,000
C. P2,000,000
D. P3,000,000
8.
What is the gain on right transferred?
A. P7,200,000
B. P1,500,000
C. P5,600,000
D. P5,840,000
Page 72 of 80
CV
FV
SP
Lease liability
10,800,000
18,000,000
20,000,000 (SP - FV) if + financing
(Financing ->minus in lease liability
(1,500,000 x 3.6)
5,400,000
(2,000,000)
3,400,000
2,040,000
RUA
18,000,000
(10,800,000)
7,200,000
CV
x
FV
x
SP
x
CV
[Lease liability - Financing + Prepaid ]
=
FV
Right-of-use Asset
FV
(CV)
G/L
10,800,000
18,000,000
x
x
CV - RUA
CV
=
Gain or loss to be recognized
x (10,800,000 - 2,040,000)
10,800,000
7,200,000
8,760,000
10,800,000
Gain on right transferred
5,840,000
Cash
RUA
Lease liability
Building
Gain on right transferred
20,000,000
2,040,000
5,400,000
10,800,000
5,840,000
Use the following information for the next three (3) questions:
At the beginning of current year, an entity sold building with remaining useful life of 30 years and immediately leased it back
for 5 years.
Sale price at below fair value
P18,000,000
Fair value of building
20,000,000
Carrying amount of building
24,000,000
Annual rental payable at the end of each year
1,000,000
Implicit interest rate
12%
Present value of an ordinary annuity of 1 at 12% for 5 periods
3.60
9.
What is the initial lease liability?
A. P3,600,000
B. P4,000,000
C. P4,800,000
D. P0
10. What is the cost of right of use asset
A. P3,000,000
B. P4,320,000
C. P5,760,000
D.
11. What is the loss on right transferred?
A. P4,000,000
B. P2,880,000
C. P5,760,000
D. P6,720,000
CV
FV
SP
Lease liability
24,000,000
20,000,000
18,000,000 (SP - FV) if - prepaid
(Prepaid ->plus in lease liability
(1,000,000 x 3.60)
3,600,000
2,000,000
5,600,000
6,720,000
RUA
20,000,000
(24,000,000)
(4,000,000)
(4,000,000)
Loss on right transferred
Cash
RUA
Loss on right transferred
Lease liability
Building
24,000,000
20,000,000
CV
x
FV
x
SP
x
P6,720,000
CV
[Lease liability - Financing + Prepaid ]
x
FV
= Right-of-use Asset
FV
(CV)
G/L
x (24,000,000 - 6,720,000)
20,000,000
x
CV - RUA
CV
= Gain or loss to be recognized
17,280,000
24,000,000
(2,880,000)
18,000,000
6,720,000
2,880,000
3,600,000
24,000,000
REMEASUREMENT OF LEASE LIABILITY
Page 73 of 80
Use the following information for the next five (5) questions:
Problem A (IFRS – Extension of lease term) AAA Company entered into a lease of building on January 1, 20x19 with the
following information:
Annual rental payable at the end of each year
P500,000
Lease term
5 years
Useful life building
20 years
Implicit interest rate
10%
PV of an ordinary annuity of 1 at 10% for 5 periods
3.79
The lessee contained an option for the lessee to extend for a further 5 years.
At the commencement date, the exercise of the extension option is not reasonably certain.
After 3 years on January 1, 20x22, the lessee decided to extend the lease for a further 5 years.
New annual rental payable at the end of each year
New implicit interest rate
PV of an ordinary annuity of 1 at 8% for 5 periods
PV of 1 at 8% for 2 periods
PV of an ordinary annuity of 1 at 8% for 2 periods
P600,000
8%
3.99
0.86
1.78
1.
What amount should be reported as lease liability on December 31, 20x21?
A. P1,895,000
B. P1,584,500
C. P1,242,950
D. P867,245
2.
What amount should be reported as depreciation for 20x19?
A. P379,000
B. P100,000
D. P25,000
3.
What amount should be reported as new lease liability on January 1, 20x22?
A. P2,948,840
B. P2,058,840
C. P2,394,000
D. P3,261,245
4.
What is the carrying amount of right of use asset on January 1, 20x22?
A. P2,081,595
B. P2,839,595
C. P2,190,840
D. P1,608,000
5.
What amount should be reported as depreciation for 20x22?
A. P405,656
B. P297,370
D. P141,980
Initial Measurement
Annual Payments
PV on OA of 1 at 10% for 5 periods
Total
Year
1 01 2019
31 12 2019
31 12 2020
31 12 2021
Annual Payments Interest Expense Amortization
Carrying amount
1,895,000
500,000
189,500
310,500
1,584,500
500,000
158,450
341,550
1,242,950
500,000
124,295
375,705
867,245
New Amortization Table
1,895,000
Year
1,895,000
Dec 31 2020
Interest Expense
Lease Liability
Cash
1 01 2022
31 12 2022
31 12 2023
31 12 2024
31 12 2025
31 12 2026
31 12 2027
31 12 2028
189,500
310,500
500,000
Depreciation Expense
Accumulated Depreciation
379,000
Annual Payments Interest Expense Amortization
Carrying amount
2,948,840
500,000
235,907
264,093
2,684,747
500,000
214,780
285,220
2,399,527
600,000
191,962
408,038
1,991,489
600,000
159,319
440,681
1,550,808
600,000
124,065
475,935
1,074,873
600,000
85,990
514,010
560,863
600,000
39,137
560,863
-
379,000
Right of Use Asset
Lease Term
Annual Depreciation
1,895,000
5
379,000
Carrying Amount as of Dec 31, 2022
Accumulated Depreciation of 3 years
Carrying Amount as of Dec 31, 2022
1,895,000
1,137,000
758,000
New Lease Payment of 600,000
PV of an ordinary annuity of 1 at 8% for 5 periods
C. P379,000
500,000
3.790
1,895,000
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
Remeasurement of Lease Liability
Old Lease Payment of 500,000
PV of an ordinary annuity of 1 at 8% for 2 periods
Remaining Old Lease Term
C. P94,750
500,000
1.780
890,000
PV of 1 at 8% for 2 periods
Present Value of Lease Payment for new lease term
600,000
3.990
2,394,000
0.860
2,058,840
Lease Liability as of Jan 1, 2022
Carrying Amount of Old Lease Liability
Increase In Lease Liability
2,948,840
867,245
2,081,595
Carrying Amount of Right of Use Asset
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
758,000
2,081,595
2,839,595
Journal Entries
Jan 1 2023
Right of Use Asset
Lease Liability
2,081,595
2,081,595
Dec 31 2023
Interest Expense
Lease Liability
Cash
235,907
264,093
500,000
Depreciation Expense
Accumulated Depreciation
Right of Use Asset
Lease Term 2yrs plus 5 yrs
Annual Depreciation
405,656
405,656
2,839,595
7
405,656
Page 74 of 80
Use the following information for the next four (4) questions:
Problem B (IFRS – Variable payments) On January 1, 20x19, BBB Company entered into an 8-year lease of a floor of a building
with a useful life of 15 years with the following terms:
Annual rental for the first three years payable at the end of each year
P300,000
Annual rental for the next five years payable at the end of each year
400,000
Implicit interest rate
10%
PV of an ordinary annuity of 1 at 10% for three periods
2.49
PV of an ordinary annuity of 1 at 10% for five periods
3.79
PV of 1 at 10% for three periods
0.75
The lease provides for neither a transfer of title to the lessee nor a purchase option.
6.
What amount should be reported as lease liability on January 1, 20x19?
A. P1,516,000
B. P2,263,000
C. P1,884,000
D. P1,697,250
7.
What amount should be reported as interest expense for 20x19?
A. P188,400
B. P226,300
C. P151,600
D. P169,725
8.
What amount should be reported as interest expense for 20x22?
A. P151,460
B. P126,606
C. P164,964
D. P200,000
9.
What amount should be reported as lease liability on December 31, 20x21?
A. P1,614,604
B. P1,266,064
C. P1,366,064
Initial Measurement
Annual rental for the first two years payable every December 31
PV of an ordinary annuity of 1 at 10% for 3 periods
Amount
400,000
3.790
1,516,000
0.750
1,137,000
Lease Liability
1,884,000
Right of Use of Asset
1,884,000
Right of Use Asset
Lease Term
Annual Depreciation
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
1,884,000
5
376,800
Dec 31 2020
Interest Expense
Lease Liability
Cash
Depreciation Expense- ROUA
Accumulated Depreciation- ROUA
Dec 31 2022
Interest Expense
Lease Liability
Cash
Depreciation Expense- ROUA
Accumulated Depreciation- ROUA
Year
Annual Payments Interest Expense Amortization Carrying amount
1 01 2019
1,884,000
31 12 2019
300,000
188,400
111,600
1,772,400
31 12 2020
300,000
177,240
122,760
1,649,640
31 12 2021
300,000
164,964
135,036
1,514,604
31 12 2022
400,000
151,460
248,540
1,266,064
31 12 2023
400,000
126,606
273,394
992,671
31 12 2024
400,000
99,267
300,733
691,938
31 12 2025
400,000
69,194
330,806
361,132
31 12 2026
400,000
38,868
361,132
-
300,000
2.490
747,000
Annual rental for the next three years payable every December 31
PV of an ordinary annuity of 1 at 10% for 5 periods
Amount
PV of 1 at 8% for 3 periods
Amount
Total Annual Depreciation
D. P1,214,604
376,800
1,884,000
1,884,000
188,400
111,600
300,000
376,800
376,800
151,460
248,540
300,000
376,800
376,800
Use the following information for the next three (3) questions:
Page 75 of 80
Problem C (IFRS – Increase in scope) On January 1, 20x19, CCC Company entered into a lease agreement with the following
information:
Floor space
1,500 square meters
Annual rental payable at the end of each year
200,000
Implicit rate in the lease
12%
Lease term
12 years
Present value of an ordinary annuity at 12% for 12 periods
6.1944
On January 1, 20x22, the lessee and the lessor agreed to amend the original terms of the lease with the following information:
Additional floor space
2,000 square meters
Increase in rental payable at the end of each year
300,000
Implicit rate in the lease
10%
Present value of an ordinary annuity of 1 at 10% for 9 periods
5.759
10. What amount should be reported as lease liability on January 1, 20x19?
A. P1,238,880
B. P1,151,800
C. P3,097,200
D. P1,727,700
11. What amount should be reported as additional lease liability on January 1, 20x22?
A. P1,151,800
B. P2,879,500
C. P1,727,700
D. P2,700,000
12. What amount should be reported as total interest expense for 20x22?
A. P300,649
B. P172,770
C. P207,324
D. P335,203
Initial Measurement
Annual Payments
PV on OA of 1 at 12% for 12 periods
Total
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
1,238,880
1,238,880
Dec 31 2020
Interest Expense
Lease Liability
Cash
103,240
103,240
1,238,880
12
103,240
300,000
5.759
1,727,700
Lease Modification
Year
Annual Payments
Interest Expense
Amortization
Carrying amount
1 01 2022
1,727,700
31 12 2022
300,000
172,770
127,230
1,600,470
Lease Modification
1,727,700
1,727,700
Dec 31 2020
Interest Expense
Lease Liability
Cash
172,770
127,230
300,000
Depreciation Expense
Accumulated Depreciation
Right of Use Asset
Lease Term
Annual Depreciation
127,879
172,770
300,649
200,000
Initial Measurement
Annual Payments
PV on OA of 1 at 10% for 9 periods
Total
Journal Entries
Jan 1 2023
Right of Use Asset
Lease Liability
1,500 Square meters
2,000 Square meters
Total interest Expense 2022
148,666
51,334
Depreciation Expense
Accumulated Depreciation
Right of Use Asset
Lease Term
Annual Depreciation
Year
Annual Payments
Interest Expense
Amortization
Carrying amount
1 01 2019
1,238,880
31 12 2019
200,000
148,666
51,334
1,187,546
31 12 2020
200,000
142,505
57,495
1,130,051
31 12 2021
200,000
135,606
64,394
1,065,657
31 12 2022
200,000
127,879
72,121
993,536
200,000
6.1944
1,238,880
191,967
191,967
1,727,700
9
191,967
Use the following information for the next three (3) questions:
Problem D: (IFRS- Decrease in scope) On January 1, 20x19, DDD Company entered into a lease for floor space with the
following information:
Floor space
5,000
Annual rental payable at the end of each year
200,000
Lease term
5 years
Implicit rate in the lease
10%
Page 76 of 80
Present value of an ordinary annuity of 1 at 10% for 5 periods
3.7908
On January 1, 20x21, the lessee and the lessor agreed to amend the original terms of the lease with the following information:
Floor space
3,750 square meters
Annual rental payable at the end of each year
150,000
Implicit rate in the lease
8%
Present value of an ordinary annuity of 1 at 8% for 3 periods
2.5771
13. What amount should be reported as lease liability on December 31, 20x20 before modification?
A. P758,160
B. P633,976
C. P497,374
D. P386,565
14. What amount should be recorded as termination gain or loss on January 1, 20x21?
A. P42,478 gain
B. P42,478 loss
C. P10,620 gain
D. P10,620 loss
15. What amount should be recorded as increase in the lease liability due to the modification on January 1, 20x21?
A. P386,565
B. P373,030
C. P13,535
D. P0
Initial Measurement
Annual Payments
PV on OA of 1 at 10% for 5 periods
Total
Year
200,000
3.7908
758,160
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
Annual Payments
Interest Expense Amortization
Carrying amount
758,160
200,000
75,816
124,184
633,976
200,000
63,398
136,602
497,374
New Amortization Table
758,160
758,160
Dec 31 2020
Interest Expense
Lease Liability
Cash
Year
1 01 2021
31 12 2021
31 12 2022
31 12 2023
75,816
124,184
Annual Payments
Interest Expense Amortization
Carrying amount
386,565
150,000
30,925
119,075
267,490
150,000
21,399
128,601
138,889
150,000
11,111
138,889
-
200,000
Depreciation Expense
Accumulated Depreciation
151,632
Right of Use Asset
Lease Term
Annual Depreciation
758,160
5
151,632
Carrying Amount as of Dec 31, 2021
Accumulated Depreciation of 2 years
Carrying Amount as of Dec 31, 2021
758,160
303,264
454,896
Floor Space
Amended
Percent of Reduction
1 01 2019
31 12 2019
31 12 2020
5000 sqm
3750 sqm
1250 sqm
Journal Entries
Jan 1 2022
151,632 Right of Use Asset
Lease Liability
13,535
13,535
Dec 31 2022
Interest Expense
Lease Liability
Cash
30,925
119,075
150,000
Depreciation Expense
Accumulated Depreciation
100%
75%
25%
Right of Use Asset
Lease Term 5yrs less 2 yrs
Annual Depreciation
Decrease In CA of Lease Liability
Decrease in CA of ROUA
Termination Gain
124,344
113,724
10,620 decrease In liability is greater than decrease in asset
Carrying Amount of Lease Liability
Decrease In CA of Lease Liability
Remaining Lease Liability
497,374
124,344
373,030
Remeasurement of Lease Liability
Lease Payment
PV of an ordinary annuity of 1 at 8% for 3 periods
Present Value of Lease Payment for new lease term
150,000
2.5771
386,565
Lease Liability as of Jan 1, 2022
Carrying Amount of Old Lease Liability
Increase In Lease Liability
386,565
373,030
13,535
Carrying Amount of Right of Use Asset
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
454,896
13,535
468,431
156,144
156,144
468,431
3
156,144
Page 77 of 80
Use the following information for the next three (3) questions:
Problem E: (IFRS – Lease modification) On January 1, 20x19, FFF Company leased an office building with the following terms:
Annual rental at the end of each year
P300,000
Lease term and useful life of the building
4 years
Implicit rate in the lease
10%
Present value of an ordinary annuity of 1 at 10% for 4 periods
3.17
On January 1, 20x21, the lessee and the lessor agreed to amend the original terms of the lease with the following information:
Annual rental payable at end of each year
P300,000
Extension of lease term
3 years
Implicit rate in the lease
12%
Present value of an ordinary annuity of 1 at 12% for 5 periods
3.605
16. What amount should be reported as lease liability on December 31, 20x20?
A. P951,000
B. P746,100
C. P520,710
D. P600,000
17. What amount should be reported as increase in the lease liability as a result of the modification on January 1, 20x21?
A. P130,500
B. P560,790
C. P520,710
D. P0
18. What amount should be reported as depreciation for 20x21?
A. P216,300
B. P207,258
Initial Measurement
Annual Payments
PV on OA of 1 at 10% for 4 periods
Total
C. P112,158
Year
300,000
3.17
951,000
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
1 01 2019
31 12 2019
31 12 2020
D. P237,750
Annual Payments
Interest Expense Amortization Carrying amount
951,000
300,000
95,100
204,900
746,100
300,000
74,610
225,390
520,710
New Amortization Table
951,000
951,000
Dec 31 2020
Interest Expense
Lease Liability
Cash
Year
1 01 2021
31 12 2021
31 12 2022
31 12 2023
31 12 2024
31 12 2025
95,100
204,900
300,000
Depreciation Expense
Accumulated Depreciation
Annual Payments Interest Expense Amortization Carrying amount
1,081,500
300,000
129,780
170,220
911,280
300,000
109,354
190,646
720,634
300,000
86,476
213,524
507,110
300,000
60,853
239,147
267,963
300,000
32,037
267,963
-
237,750
Right of Use Asset
Lease Term
Annual Depreciation
951,000
4
237,750
Carrying Amount as of Dec 31, 2021
Accumulated Depreciation of 2 years
Carrying Amount as of Dec 31, 2021
951,000
475,500
475,500
Remeasurement of Lease Liability
Lease Payment
PV of an ordinary annuity of 1 at 12% for 5 periods
Present Value of Lease Payment for new lease term
300,000
3.605
1,081,500
Lease Liability as of Jan 1, 2022
Carrying Amount of Old Lease Liability
Increase In Lease Liability
1,081,500
520,710
560,790
Carrying Amount of Right of Use Asset
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
475,500
560,790
1,036,290
237,750 Journal Entries
Jan 1 2022
Right of Use Asset
Lease Liability
560,790
560,790
Dec 31 2022
Interest Expense
Lease Liability
Cash
129,780
170,220
300,000
Depreciation Expense
Accumulated Depreciation
Right of Use Asset
Lease Term 2yrs plus 3 yrs
Annual Depreciation
207,258
207,258
1,036,290
5
207,258
Use the following information for the next three (3) questions:
Problem F: (IFRS – Lease modification) On January 1, 20x19, GGG Company leased machine with the following information
Page 78 of 80
Annual rental payable at the end of each year
Lease term
Implicit rate in the lease
Present value of an ordinary annuity of 1 at 6% for 5 periods
P100,000
5 years
6%
4.2124
On January 1, 20x21, the lessee and the lessor agreed to amend the original terms of the lease by reducing the lease payment by
P20,000 and increasing the implicit rate to 8%.
The present value of an ordinary annuity of 1 at 8% for 3 periods is 2.5771.
19. What amount should be reported as lease liability on December 31, 20x20 before modification?
A. P421,240
B. P346,514
C. P267,305
D. P206,168
20. What amount should be reported as modified lease liability on January 1, 20x21?
A. P206,168
B. P240,000
C. P200,000
D. P257,710
21. What amount should be reported as interest expense for 20x21?
A. P16,493
B. P12,370
D. P12,800
C. P21,384
22. What amount should be reported as depreciation of the right of use asset for 20x21?
A. P84,248
B. P50,549
C. P63,869
Initial Measurement
Annual Payments
PV on OA of 1 at 6% for 5 periods
Total
Year
100,000
4.2124
421,240
Journal Entries
Jan 1 2020
Right of Use Asset
Lease Liability
1 01 2019
31 12 2019
31 12 2020
D. P89,102
Annual Payments Interest Expense Amortization Carrying amount
421,240
100,000
25,274
74,726
346,514
100,000
20,791
79,209
267,305
New Amortization Table
421,240
Year
421,240
Dec 31 2020
Interest Expense
Lease Liability
Cash
1 01 2021
31 12 2021
31 12 2022
31 12 2023
25,274
74,726
Annual Payments Interest Expense Amortization Carrying amount
206,168
80,000
16,493
63,507
142,661
80,000
11,413
68,587
74,074
80,000
5,926
74,074
0
100,000
Depreciation Expense
Accumulated Depreciation
84,248
Right of Use Asset
Lease Term
Annual Depreciation
421,240
5
84,248
Carrying Amount as of Dec 31, 2021
Accumulated Depreciation of 2 years
Carrying Amount as of Dec 31, 2021
421,240
168,496
252,744
Journal Entries
84,248 Jan 1 2022
Lease Liability
Right of Use Asset
61,137
61,137
Dec 31 2022
Interest Expense
Lease Liability
Cash
16,493
63,507
80,000
Depreciation Expense
Accumulated Depreciation
Remeasurement of Lease Liability
Lease Payment
PV of an ordinary annuity of 1 at 8% for 3 periods
Present Value of Lease Payment for new lease term
80,000
2.5771
206,168
Lease Liability as of Jan 1, 2022
Carrying Amount of Old Lease Liability
Decrease In Lease Liability
206,168
267,305
(61,137)
Carrying Amount of Right of Use Asset
Increase In Right of Use Asset
New Carrying Amount of Right of Use Asset
252,744
(61,137)
191,607
Right of Use Asset
Lease Term 2yrs plus 3 yrs
Annual Depreciation
63,869
63,869
191,607
3
63,869
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Page 80 of 80