LEASES – Books of Lessee
Lease – 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.
Underlying asset – an asset that is the subject of a lease, for which the right to use that asset has been
provided by a lessor to a lessee.
Identifying a lease
At inception of a contract, an entity shall assess whether the contract is, or contains a lease
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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 exchange for consideration.
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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 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
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If a customer has the right to control the use of an identified asset for only a portion of the term
of the contract, the contract contains a lease for that portion of the term.
Lease term – the non-cancellable period for which a lessee has the right to use an underlying asset, plus:
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Periods covered by an extension option if exercise of that option by the lessee is reasonably
certain; and
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Periods covered by a termination option if the lessee is reasonably certain not to exercise that
option.
Relevant dates
Inception date – the earlier of the date of a lease agreement and the date of commitment by the parties
to the principal terms and conditions of the lease.
Commencement date – the date on which a lessor makes an underlying asset available for use by a
lessee.
Types of leases
The accounting for lease is highly dependent to its appropriate classification. A lease may be accounted
for as a finance lease or operating lease.
Finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of
an asset. Title may or may nor eventually be transferred.
Operating lease is a lease other than a finance lease. (Residual definition)
Lessees shall account for all leases as finance lease except for:
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Short-term leases – those having a term of 12 months or less
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Low value leases – leases for which the underlying asset is of low value such as laptop
computers, small office furniture, and telephones.
A lessee accounting for a lease under a finance lease shall
1. Recognize the lease liability at the present value of lease payments.
2. Capitalize the right-of-use asset and subsequently account for it under PAS 16 or PAS 40.
Lease Liability
Initial. The lease liability at the commencement date of the lease shall be the discounted unpaid portion
lease payments computed using either the:
1. Implicit rate in the lease; or
2. Incremental borrowing rate of the lessee.
Lease payments include
a. Fixed payments, less any lease incentives receivable;
b. Variable lease payments dependent on an index or rate;
c. Residual value guarantees;
d. The exercise price of a reasonably certain purchase options; and
e. Lease termination penalties if a lessee termination option was considered in setting the lease
term
Subsequent. The lease liability shall be accounted for using the effective interest method.
At lessee accounting for a lease under a finance lease shall
1. Capitalize the right of use asset and subsequently account for it under PAS 16 or PAS 40 .
2. Recognize the lease liability at the present value of lease payments.
Right of use asset
Initial. The cost of the ROU asset is the total of:
a. The amount of the lease liability recognized;
b. Any lease payments made at or before the commencement date, less any lease incentives;
c. Any initial direct costs incurred; and
d. An estimate of costs to be incurred to dismantle and remove an asset and restore the site based
on the terms and conditions of the lease.
Subsequent. The ROU asset shall be presented as a line item in the non-current asset section separately
from other assets or within the same line item as the underlying asset and accounted for using any of
the ff:
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Apply PAS 16 PPE under the cost model
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Appy PAS 16 PPE under the revaluation model
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Apply PAS 40 investment property if it meets the definition of an investment property.
Depreciation.
1. Initial – There is a transfer of ownership or a purchase option that is reasonably certain to be
exercised.
Subsequent – ROU asset is depreciated over its economic life.
2. Initial – absence of item (1)
Subsequent – ROU asset is depreciated over its economic life or lease term, whichever is shorter