IFRS 16 LEASES - LESSOR


Lessor accounting under the new standard (IFRS16)
is substantially unchanged from the old standards
(IAS17).
Lessor shall classify leases either as operating or a
finance lease
Operating Lease – does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset
Lease payments are treated as income either on a
straight-line basis or another systematic basis




Ownership of property remains with lessor still
and bears executory costs
Initial Direct Costs – shall be added to the carrying
amount of the underlying asset and be amortised over
the lease term
Lease bonus – income over the lease term
Security Deposit – liability and refundable upon lease
expiration
Finance Lease – transfers substantially all the risks and
rewards incidental to ownership of an underlying asset
CRITERIA FOR BEING FINANCE LEASE
1.
Transfer of ownership of the underlying asset to the
lessee at the end of the lease term
2.
Option to purchase the asset at a price which is
expected to be sufficiently lower than the fair value at
the date the option becomes exercisable
3.
4.
Lease term is major part of the economic life of the
underlying asset
The present value of lease payments amounts to
substantially all of the fair value of the underlying asset
at the inception of the lease
OTHER CRITERIA
1.
The underlying asset is of such specialised nature that
only the lessee can use it without major modification
2.
If the lessee can cancel the lease, the lessor’s losses
associated with the cancellation are borne by the lessee
3.
Gains or losses from the fluctuation in the fair value of
the residual value accrue to the lessee
4.
The lessee has the ability to continue the lease for a
secondary period at a rent that is substantially lower
than market rent
DIRECT FINANCING LEASE
Gross Investment of the Lease – gross rentals for the entire lease
term plus absolute amount of the residual value
regardless whether guaranteed o unguaranteed
Net Investment in the Lease – Cost of the asset plus initial direct
cost paid by the lessor
Unearned Interest Income – gross investment of the lease less net
investment of the lease
Initial direct cost – added to the cost of the asset to arrive with
the net investment of the lease
SALES TYPE LEASE
Gross Investment of the Lease – gross rentals for the entire lease
term plus absolute amount of the residual value
regardless whether guaranteed o unguaranteed
Net Investment of the Lease – present value of the gross
investment of the lease
Unearned Interest Income – gross investment of the lease less net
investment of the lease
Sales Revenue – net investment of the lease or fair value of the
asset whichever is lower
Cost of Goods Sold – cost of the asset sold less the present value
of unguaranteed residual value plus initial direct cost paid
Initial direct cost – expensed immediately as part of COGS
Gross Income – sales revenue less COGS
Impact of Residual Value:
1.
Unguaranteed residual value scenario –
Deduct present value of unguaranteed RV from
total Sales Revenue and COGS
2.
Guaranteed residual value scenario
NO CHANGE in calculation of Sales Revenue and
COGS. Use the usual approach
************
PRACTICE QUESTIONS:
1.
The primary difference between a direct financing lease
and a sales type lease is the
a. Depreciation recorded each year by the lessor.
b. Manner in which rental collections are recorded as
rental income.
c. Allocation of initial direct costs incurred by the
lessor over the lease term.
d. Recognition of the manufacturer or dealer profit
at the inception of the lease.
2.
Gross investment in the lease is the
a. The minimum lease payments under a finance lease
of the lessor.
b. Present value of the minimum lease payments
under a finance lease of the lessor.
c. Present value of minimum lease payments under a
finance lease of the lessor and any
unguaranteed residual value.
d. Aggregate of the minimum lease payments under
a finance lease of the lessor and any
unguaranteed residual value accruing to the lessor
Page 1 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
3.
Net investment in a direct financing lease is equal to
a. Cost of the asset
b. Cost of the asset minus guaranteed residual value
c. Cost of the asset plus unguaranteed residual value
d. Cost of the asset plus initial direct cost paid by the
lessor
4.
Which is the correct accounting treatment for a finance
lease in the accounts of a lessor?
a. Treat as a noncurrent asset equal to net investment
in lease and recognize all finance payments in
income statement.
b. Treat as a receivable equal to gross amount
receivable on lease and recognize finance
payments in cash by reducing debt.
c. Treat as a receivable equal to net investment in the
lease and recognize finance payments in cash by
reduction of debt.
d. Treat as a receivable equal to net investment in
the lease and recognize finance
payments by reducing debt and taking interest to
income statement.
5.
The lease receivable in a direct financing lease is equal
to
a. The present value of minimum lease payments.
b. The cost of the leased asset on the part of lessor.
c. The cost of the asset less any accumulated
depreciation
d. The difference between the gross rentals and the
fair value of the leased asset.
6.
Lessors shall recognize asset held under a finance lease
as a receivable at an amount equal to the
a. Gross rentals
b. Net investment in the lease
c. Gross investment in the lease
d. Residual value, whether guaranteed or
unguaranteed
7.
All of the following would be included in the lease
receivable, except
a. Purchase option
b. Unguaranteed residual value
c. Guaranteed residual value
d. All would be included
8.
Under a direct financing lease, the excess of aggregate
rentals over the cost of leased
property shall be recognized as income of the lessor
a.
b.
c.
d.
In constant amounts during the term of the lease
In increasing amounts during the term of the lease
In decreasing amounts during the term of the
lease
After the cost of leased property has been fully
recovered through rentals
9.
Where there is a lease of land and building and the title
to the land is not transferred, generally the lease is
treated as if
a. The land is finance lease and the building is a
finance lease.
b. The land is an operating lease and the building is a
finance lease.
c. The land is a finance lease and the budding is an
operating lease.
d. The land is an operating lease and the building is an
operating lease
10. The lease of land and building when split causes
difficulty in the allocation of the lease payments. In this
case, the lease payments should be split
a. Using the sum of the digits method.
b. According to the relative fair value of two
elements.
c. According to any fair method devised by the entity.
d. By the entity based on the useful life of the two
elements.
11. Under a sales type lease, what is the meaning of gross
investment in the lease?
a. Present value of minimum lease payments
b. Absolute amount of minimum lease payments
c. Aggregate of minimum lease payments and
unguaranteed residual value
d. Present value of minimum lease payments plus
present value of unguaranteed residual
value
12. These are incremental costs that are directly
attributable to negotiating and arranging a lease.
a. Costs of services
b. Initial direct costs
c. Executory costs
d. Transaction costs
13. Initial direct cost incurred by a lessor in a sales type
lease shall be
a. Charged to cost of sales in the first period of the
lease term.
b. Deferred and allocated over the lease term on a
straight line basis.
c. Charged to unearned interest income in the first
period of the lease term.
d. Deferred and allocated over the lease term in
proportion to the recognition of rent
revenue.
14. Which of the following statements characterizes a sales
type lease?
a. The lessor recognizes only interest revenue over
the life of the asset.
b. The lessor recognizes only interest revenue over
the lease term.
c. The lessor recognizes a dealer's profit at lease
inception and interest revenue over the
lease term.
d. The lessor recognizes a dealer's profit at lease
inception and interest revenue over the
life of the asset.
Page 2 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
15. Net investment in a sales type lease is equal to
a. Cost of the leased asset
b. The minimum lease payments
c. Gross investment in the lease less unearned
finance income
d. The minimum lease payments less
unguaranteed residual value
16. What is the treatment of an unguaranteed residual
value in determining the cost of sales
under a sales type lease?
a. The unguaranteed residual value is ignored.
b. The unguaranteed residual value is added to the
cost of the leased asset.
c. The unguaranteed residual value is deducted from
the cost of the leased asset at present
value.
d. The unguaranteed residual value is deducted from
the cost of the leased asset at absolute amount.
17. The excess of the fair value of leased property at the
inception of the lease over the carrying amount shall be
recognized by the dealer lessor as
a. Unearned income from a sales type lease
b. Manufacturer's profit from a sales type lease
c. Unearned income from a direct financing lease
d. Manufacturer's profit from a direct financing lease
18. In a lease that is recorded as a sales type lease by the
lessor, interest revenue
a. Does not arise
b. Shall be recognized in full as revenue at the
inception of the lease
c. Shall be recognized over the period of the lease
using the interest method
d. Shall be recognized over the period of the lease
using the straight-line method
19. Which of the following statements is correct regarding
initial direct costs incurred by the lessor?
a. In a sales type lease, initial direct costs are
expensed as component of cost of sales.
b. In an operating lease, initial direct costs are
deferred and allocated over the lease term.
c. In a direct financing lease, initial direct costs are
added to the net investment in the lease.
d. All of these statements are correct.
20. The situations which would normally lead to a lease
being classified as a finance lease include all the
following, except
a. The lease transfers ownership of the asset to the
lessee by the end of the lease term.
b. The lease term is for the major part of the
economic life of the asset even if title is not
transferred.
c. The present value of the minimum lease payments
amounts to at least substantially all of the fair value
of the leased asset at the inception of the lease.
d. The lessee has the option to purchase the asset at
a price which is expected to be sufficiently higher
than the fair value at the date the option becomes
exercisable.
PROBLEM 1
CESS Company leased an office to Fox Company for a five-year
term beginning January 1, 2020. Under the terms of the operating
lease, rent for the first year is P800,000 and rent for years 2
through 5 is P1,250,000 per annum. However, as an inducement
to enter the lease, CESS Company granted AGEL Company the first
six months of the lease rent-free. What amount should be
reported as rental income for 2020?
PROBLEM 2
JONA Company purchased a new machine for P4,800,000 on
January 1, 2020 and leased it to East the same day. The machine
has an estimated 12-year life and will be depreciated P400,000
per year. The lease is for a three-year period expiring January 1,
2023 at an annual rental of P850,000. Additionally, East paid
P300,000 to JONA as a lease bonus to obtain the three-year lease.
JONA, incurred insurance expense of P80,000 for the leased
machine during the current year. What is the operating profit on
the leased asset for the current year?
PROBLEM 3
Hutch Company leased equipment to Elder Company on July 1,
2020 for a one-year period expiring June 30, 2021 for P60,000 a
month. On July 1, 2021, Hutch leased this piece of equipment to
Toil Company for a three-year period expiring June 30, 2023 for
P75,000 a month. The original cost of the equipment was
P4,800,000. The equipment, which has been continually on lease
since July 1, 2015, is being depreciated on a straight line basis over
an eight-year period with no residual value. Both the lease to
Elder and the lease to Toil are appropriately recorded as operating
lease. What is the amount of net rental income that would be
reported by Hutch Company for the year ended December 31,
2021?
PROBLEM 4
Camia Company is in the business of leasing new hi-tech
equipment. As lessor, Camia Company expects a 12% return on
the net investment. All leases are classified as direct
financing lease. At the end of the lease term, the equipment will
revert to Camia Company.
On January 1, 2020, an equipment is -leased to another entity
with the following information.
Cost of equipment to Camia Company 5,500,000
Residual value - guaranteed
400,000
Annual rental payable in advance
959,500
Useful life and lease term
8 years
Implicit interest rate
12%
First lease payment January 1, 2020
What amount of interest income should be recognized for 2020?
PROBLEM 5
Oceanic Company is engaged in leasing equipment. Such an
equipment was delivered to a lessee on January 1, 2020 under a
direct financing lease with the following provisions:
Cost of equipment
Unguaranteed residual value
Useful life and lease term
Implicit interest rate
4,361,200
200,000
8 years
10%
Page 3 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
The annual rental is payable at the end of each year. The
equipment will revert to the lessor upon the lease expiration.
What is the annual rental over the lease term?
PROBLEM 6
On January 1,2020, Glade Company leased computer equipment
to Blass Company under a direct financing lease. The equipment
has no residual value at the end of the lease and the lease does
not contain bargain purchase option. The entity wishes to earn 8%
interest on a 5-year lease of equipment with a cost of P3,234,000.
1.
What is the total interest revenue that Glade will earn
over the lease term?
2.
What is the interest revenue to be reported by Glade for
2020?
PROBLEM 7
Vanderbilt Company is a dealer in machinery. On January 1, 2020
machinery was leased to another enterprise with the following
provisions:
Annual rental payable at the end of each year
Lease term and useful life of machinery
Cost of machinery
Residual value-unguaranteed
Implicit interest rate
3,000,000
5 years
8,000,000
1,000,000
12%
At the end of the lease term, the machinery will revert to
Vanderbilt. The perpetual inventory system is used. Vanderbilt
incurred initial direct cost of P300,000 in finalizing the lease
agreement.
1.
2.
3.
What is the total financial revenue from the lease?
Vanderbilt Company should report profit on the sale in
2020
What is the earned financial revenue or interest income
for 2020?
PROBLEM 8
Reagan Company used leases as a method of selling products. In
2020, Reagan Company completed construction of a passenger
ferry. On January 1, 2020, the ferry was leased to the Super
Ferry Line on a contract specifying that ownership of the ferry will
transfer to the lessee at the end of the lease period. Annual lease
payments do not include executory costs.
Other terms of the agreement are as follows:
Original cost of the ferry
8,000,000
Fair value of ferry at lease date
12,555,000
Lease payments in advance
1,500,000
Estimated residual value
2,000,000
Implicit interest rate
12%
Date of first lease payment
January 1, 2020
Lease term
20 years
1.
2.
3.
PROBLEM 9
Frances Company is a dealer in equipment. On January 1, 2020, an
equipment was leased to another entity with the following
provisions:
Annual rental payable at the end of each year
Lease term and useful life of machinery
Cost of equipment
Residual value-unguaranteed
Implicit interest rate
1,500,000
5 years
4,000,000
500,000
12%
At the end of the lease term on December 31, 2024, the
equipment will revert to the lessor.
The perpetual inventory system is used. The entity incurred initial
direct cost of P200,000 in finalizing the lease agreement.
1.
2.
3.
What is the total financial revenue over the lease term
What amount of interest income should be reported for
2020?
What amount should be reported as gross profit on sale
for 2020?
PROBLEM 10
Marianas Company adopted the policy of leasing as the primary
method of selling products. The entity's main product is a small
cargo vessel. Marianas Company constructed such a cargo vessel
for Jade Company at a cost of P8,500,000.
The terms of the lease provided for annual advance payments of
P2,500,000 to be paid over 10 years with the ownership
transferring to Jade Company at the end of the lease period. It is
estimated that the cargo vessel will have a. residual value of
Pi,600,000 at that date.
The lease payments began January 1, 2020. Marianas Company
incurred initial direct cost of P500,000 in financing the lease
agreement with Jade Company.
The sale price of the cargo vessel is P14,875,000. Financing the
construction was at a 14% rate.
1.
2.
3.
What amount should be reported as gross profit on sale
for 2020?
What is the unearned interest income on January 1,
2020?
What is the interest income for 2020?
What is the total financial revenue over the lease term?
What is the gross profit on sale for 2020?
What is the interest income for 2020?
Page 4 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
PROBLEM 1
Suggested Answer:
1st
800,000
x 50%
400,000
2nd
1,250,000
1,250,000
3rd
1,250,000
1,250,000
4th
1,250,000
1,250,000
5th
1,250,000
1,250,000
TOTAL LEASE PAYMENTS
5,400,000
Divided by:
5
Annual rental income
1,080,000
PROBLEM 2
Suggested Answer:
Rental income
850,000
Lease bonus
100,000
Insurance expense
-80,000
Depreciation
-400,000
Operating profit
470,000
(300,000 / 3 yrs)
(4800,000/12 yrs)
PROBLEM 3
Suggested Answer:
Rental Income
-Elder
360,000
(1/1/2021 to 6/30/2021)
-Toil
450,000
(7/1/2021 to 12/31/2021)
Total Rental Income
810,000
Depreciation
600,000
Net Rental Income
210,000
(P4,800,000/8)
PROBLEM 4
Suggested Answer:
GROSS INVESTMENT
Annual Rental
959,500
8
G-Residual Value
7,676,000
400,000
TOTAL
8,076,000
NET INVESTMENT
5,500,000
Annual Rental
959,500
5.5638
5,338,466
G-Residual Value
400,000
0.4039
161,560
TOTAL
5,500,026
UNEARNED INTEREST INCOME
Dr. Lease Receivable
2,576,000
8,076,000
Cr. Equipment
5,500,000
Cr. Unearned Interest Income
2,576,000
#
Dr. Unearned Interest Income
Cr. Interest Income
(
5,500,000
660,000
660,000
***
x 12%)
Page 5 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
PROBLEM 5
P 800,000 = [(P 4,361,200 – P93,300)/5.3349]
Suggested Answer:
GROSS INVESTMENT
Annual Rental
800,000
8
6,400,000
UG-Residual Value
200,000
TOTAL
6,600,000
NET INVESTMENT
4,361,200
Annual Rental
800,000
5.3349
4,267,900
UG-Residual Value
200,000
0.4665
93,300
TOTAL
4,361,200
UNEARNED INTEREST INCOME
2,238,800
Dr. Lease Receivable
6,600,000
Cr. Equipment
4,361,200
Cr. Unearned Interest Income
2,238,800
DATE
Annual Rental
Interest Income
Lease
Receivable
Principal
01/01/2020
4,361,200
12/31/2021
800,000
436,120
363,880
3,997,320
12/31/2022
800,000
399,732
400,268
3,597,051
12/31/2023
800,000
359,705
440,295
3,156,756
12/31/2024
800,000
315,676
484,325
2,672,432
12/31/2025
800,000
267,243
532,757
2,139,675
12/31/2026
800,000
213,967
586,033
1,553,642
12/31/2027
800,000
155,364
644,636
909,006
12/31/2028
800,000
90,994
709,006
200,000
Entry to recognise the return of equipment upon lease expiration:
Dr. Machinery
200,000
Cr. Lease Receivable
200,000
Entry to recognise the return of equipment upon lease expiration (if cost is not equal with fair value)
If Fair Value = P 150,000
FV<GRV
FV<U-GRV
Dr. Machinery
150,000
Dr. Machinery
150,000
Dr. Cash
50,000
Dr. Loss on finance lease
50,000
Cr. Lease Receivable
200,000
Cr. Lease Receivable
200,000
If Fair Value = P 250,000
Page 6 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
FV>GRV
FV>U-GRV
Dr. Machinery
200,000
Dr. Machinery
Cr. Lease Receivable
200,000
Cr. Lease Receivable
200,000
200,000
PROBLEM 6
Suggested Answer:
GROSS INVESTMENT
Annual Rental
809,978
5
4,049,891
TOTAL
4,049,891
NET INVESTMENT
3,234,000
Annual Rental
809,978
3.9927
3,234,000
TOTAL
3,234,000
UNEARNED INTEREST INCOME
815,891
Interet Income - 2020
323,400
***
(3,234,000 x 10%)
PROBLEM 7
Suggested Answer:
1.
2.
3.
P 4,618,200
P 3,081,800
P 1,365,816
GROSS INVESTMENT
Annual Rental
3,000,000
5
15,000,000
UG-Residual Value
1,000,000
TOTAL
16,000,000
NET INVESTMENT
11,381,800
Annual Rental
3,000,000
3.6048
10,814,400
UG-Residual Value
1,000,000
0.5674
567,400
TOTAL
11,381,800
UNEARNED INTEREST INCOME
Sales
7,732,600
GP
3,081,800
Lease Receivable
16,000,000
Less: UII
4,618,200
Net Lease Rec
11,381,800
Interest Income
***
10,814,400
COGS
Multiply
4,618,200
***
12%
1,365,816
***
Page 7 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
UGRV
Dr. Lease Receivable
16,000,000
Dr. COGS
7,432,600
Cr. Sales
10,814,400
Cr. Unearned Interest Income
4,618,200
Cr. Inventory
8,000,000
Dr. COGS
300,000
Cr. Cash
GRV
300,000
Dr. Lease Receivable
16,000,000
Dr. COGS
8,000,000
Cr. Sales
11,381,800
Cr. Unearned Interest Income
4,618,200
Cr. Inventory
8,000,000
Dr. COGS
300,000
Cr. Cash
300,000
PROBLEM 8
Suggested Answer:
1.
2.
3.
P 17,445,000
P 4,555,000
P 1,326,600
GROSS INVESTMENT
Annual Rental
1,500,000
20
30,000,000
TOTAL
30,000,000
NET INVESTMENT
12,555,000
Annual Rental
1,500,000
8.37
12,555,000
TOTAL
12,555,000
UNEARNED INTEREST INCOME
17,445,000
Sales
12,555,000
COGS
8,000,000
GP
4,555,000
***
Net Lease Receivable 1/1/2020
12,555,000
Less: Advanced Payment
-1,500,000
Net Lease Receivable 1/1/2020
11,055,000
Multiply
Interest Income
***
12%
1,326,600
***
Page 8 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
PROBLEM 9
Suggested Answer:
1.
2.
3.
P 2,309,100
P 682,908
P 1,490,900
GROSS INVESTMENT
Annual Rental
1,500,000
5
UG-Residual Value
500,000
TOTAL
8,000,000
NET INVESTMENT
5,690,900
Annual Rental
1,500,000
3.6048
500,000
0.5674
UG-Residual Value
TOTAL
5,407,200
283,700
5,690,900
UNEARNED INTEREST INCOME
Net Lease Receivable
7,500,000
2,309,100
***
5,690,900
Multiply
12%
Interest Income
682,908
***
UGRV
GRV
Sales
5,407,200
Less: COGS
3,916,300
(4,000,000 + 200,000 - 283,700)
5,690,900
4,200,000
GP
1,490,900
***
1,490,900
(4,000,000 + 200,000)
UGRV
Dr. Lease Receivable
8,000,000
Dr. COGS
3,916,300
Cr. Sales
5,407,200
Cr. Unearned Interest Income
2,309,100
Cr. Cash (IDC)
200,000
Cr. Inventory
4,000,000
GRV
Dr. Lease Receivable
8,000,000
Dr. COGS
4,200,000
Cr. Sales
5,690,900
Cr. Unearned Interest Income
2,309,100
Cr. Cash (IDC)
200,000
Cr. Inventory
4,000,000
Page 9 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks
PROBLEM 10
Suggested Answer:
1.
2.
3.
P 5,875,000
P 10,125,000
P 1,732,500
GROSS INVESTMENT
Annual Rental
2,500,000
10
25,000,000
UG-Residual Value
0
TOTAL
25,000,000
NET INVESTMENT
14,875,000
Annual Rental
2,500,000
5.95
14,875,000
UG-Residual Value
TOTAL
14,875,000
UNEARNED INTEREST INCOME
Sales
14,875,000
COGS
-8,500,000
IDC
-500,000
GP
5,875,000
Net Lease Receivable
10,125,000
***
14,875,000
Less: Advanced Payment
-2,500,000
Net Lease Receivable, Beg
12,375,000
Multiply by
Interest Income
***
14%
1,732,500
***
Page 10 of 10
IFRS 16: LEASES
Aljon J. Roque, CPA, MBA
Source: IFRS and various testbanks