OTHER ACCOUNTING ISSUES –
Lessee Accounting
- Remeasurement in case of an
extension
- Lease liability in variable
payments
-Lease modification
TAKE NOTE:
1. If the lease modification is brought about by:
- increase of scope of the lease
- the lease is increased equal to the increase of
scope and equivalent to the current market
rental, the modification shall be accounted for as a
separate lease.
2. Other modifications or amendments done in the
lease agreement, which does not qualify in no.1 shall
be treated as an adjustment to the carrying amount
of the right of use asset and lease liability.
EXTENSION OPTION
Note: Remeasurement of lease liability is an adjustment to
the carrying amount of the right of use asset.
Illustration:
An entity entered into a lease of building on January 1, 2020
with the following information:
Annual rental payable at the end of each year --Php 500,000
Lease term: 5 years; Useful life of building: 20 years
Implicit interest rate: 10%
PV of an ordinary annuity of 1 at 10% for 5 periods --- 3.791
The lease contained an option for the lessee to extend for a
further 5 years.
At the date of 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 -------------------------------------------------------------------------Php 600,000
New implicit interest rate ---------------------------------------- 8%
PV of an ordinary annuity of 1 at 8% for 5 periods ------3.993
PV of 1 at 8% for 2 periods ----------------------------------0.8557
PV of an ordinary annuity of 1 at 8% for 2 periods ----- 1.783
VARIABLE PAYMENTS
On January 1, 2020, an entity entered into an 8-year lease of
a floor of a building with the following items:
Annual rental for the first three years payable at the end of
each year -----------------------------------------------Php 300,000
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% ------------------- 2.487
PV of an ordinary annuity of 1 at 10% ------------------- 3.791
PV of 1 at 10% for three periods -------------------------- 0.751
The lease provides for neither a transfer of title to the lessee
nor a purchase option.
LEASE MODIFICATION
The following lease modification shall be accounted for
separately by the lessee (IFRS 16, Par.44):
- increase of scope of the lease
- the lease is increased equal to the increase of scope and
equivalent to the current market rental
ILLUSTRATION:
On January 1, 2020, an entity entered into a lease agreement
with the following information:
Floor space………………………………….............3,000 square meters
Annual rental payable at the end of each year…….Php 100,000
Implicit rate in the lease: 10%; Lease Term: 8 years
PV of an Ord. Annuity of 1 at 10% for 8 periods…………..5.3349
On January 1, 2022, the entity and the lessor agreed to
amend the original terms of the lease with the following
information:
Additional floor space…………………………....4,500 square meters
Increase in the rental payable at the end of each
year………………………………………………………………....…Php 200,000
Implicit rate in the lease: 8%
PV of an ordinary annuity of 1 at 8% for 6 periods…….…4.6229
The increase in the rental for the additional 4,500 square
meters is equivalent to the current market rent.
ILLUSTRATION – LEASE MODIFICATION: Extension of Lease Term
On January 1, 2020, an entity entered into a lease for office space
with the following information:
Annual rental payable at the end of each year beginning December
31, 2020……………………………………………….……………………..Php 200,000
Lease Term: 5 years; Implicit rate in the lease: 9%
PV of an ordinary annuity of 1 for 5 periods at 9%......................3.89
On January 1, 2022, the entity and the lessor agreed to amend the
original lease by extending the lease term by 3 more years with the
following information:
Annual rental payable at the end of each year beginning December
31, 2022……………………………………………............................Php 200,000
Implicit rate in the lease: 11%
PV of an ordinary annuity of 1 for 6 periods at 11%..................4.231
Decrease in Scope
- a gain or loss should be recognized as a
result of the partial termination of the lease.
- GAIN if: Decrease in carrying amount of the
lease liability is higher than the decrease in
the carrying amount of the right of use asset
- LOSS if: Decrease in carrying amount of the
right of use asset is higher than the decrease
in the carrying amount of the lease liability
ILLUSTRATION – LEASE MODIFICATION: Decrease in
Scope of Lease
On January 1, 2020, an entity entered into a lease of
office space with the following information:
Floor space………………...................800 square meters
Annual rental payable at the end of each
year............................................................Php 40,000
Lease Term: 10 years;
Implicit Rate in the Lessee: 8%
PV of an ordinary annuity of 1 for 8% for 10
periods…………………………………………….......……6.7101
AMENDMENT OF THE LEASE
On January 1, 2022, the lessee and the lessor
agreed to amend the original terms of the lease
with the following information:
Floor space…………………………........480 square meters
Annual rental payable at the end of each year…………
……………………………….…………………………….Php 30,000
Implicit rate in the lease: 10%
PV of an ordinary annuity of 1 at 10% for 8
periods………………………………………………………...5.3349
ILLUSTRATION – LEASE MODIFICATION:
Change in Rental
On January 1, 2020, an entity leased equipment
with the following information.
Annual rental payable at the end of each
year……………………………………………………....Php 80,000
Lease term: 6 years; Implicit rate in the lease: 7%
PV of an ordinary annuity of 1 at 7% for 6
periods………………………………………………………...4.7665
PV of lease payments – January 1, 2020
(Php 80,000 x 4.7665) = Php 381,320
AMENDMENT OF THE LEASE
On January 1, 2023, the entity and the lessor agreed
to amend the original terms of the lease by reducing
the lease payment to Php 70,000 and increasing the
implicit rate to 9%.
The present value of an ordinary annuity of 1 at 9%
for 3 periods is 2.5313.
References:
Intermediate Accounting 2 (2020 ed.)
Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix