INTERMEDIATE ACCOUNTING
CHAPTER 10 – LESSEE ACCOUNTING (BASIC PRINCIPLES)
LEASE
IFRS 16 – a contract or part of contract that
conveys the RIGHT to use the underlying asset
for a period in exchange for consideration
Appx. B9 provides that to be a lease, a contract
must convey the right to control the use of an
identified asset
Appx. B13 states that an asset is typically
identified by being explicitly specified in a
contract or implicitly specified when made
available
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RIGHT TO CONTROL THE USE OF AN ASSET
Conveys the right to control the use of an asset if
the customer has the right to:
A. Obtain substantially all the economic benefits
from the use of the asset
• having exclusive use of the asset
• a customer can obtain economic benefits in
many ways, such as using, holding or
subleasing the asset
B. Direct use of the identified asset
• when the customer has the right to direct
how and for what purpose the asset is used
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FINANCE LEASE MODEL FOR LESSEE
IFRS 16, par. 22 – a lessee shall recognize a
right of use asset and a lease liability
LESSEE is required to initially recognize a right
of use asset for the right of use the underlying
asset over the lease term and a lease liability to
make payments
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ALL leases shall be accounted for by the lessee
as a FINANCE LEASE under the new standard
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UNDERLYING ASSET: the subject of a lease
LESSEE: the entity that obtains the right to use
an underlying asset
LESSOR: provides the right to use an
underlying asset
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OPERATING LEASE MODEL FOR LESSEE
• IFRS 16, par 5: Provides that a lessee is
permitted to make an accounting policy election
to apply the operating lease accounting and not
recognize an asset and lease liability in two
optional exemptions.
a. SHORT-TERM LEASE
b. LOW VALUE LEASE
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A lessee may or may not apply for the operating
lease accounting if the lease is short-term or the
underlying asset has a low value.
Par 6: If the lessee elects to apply the operating
lease accounting under the two exemptions,
the lessee shall recognize the lease
payments as an expense in either a
straight-line basis over the lease term or
another systematic basis.
The lessee shall apply another systematic basis
if this is more representative of the pattern of
the lessee’s benefit
Under the operating lease, the periodic rental
is simply recognized as rent expense on the
part of the lessee.
SHORT-TERM LEASE
Has a term of 12 months or less at the
commencement date of the lease.
a lease that contains a PURCHASE OPTION is
NOT A SHORT-TERM LEASE.
The election for short-term lease shall be made
by the class of underlying asset.
CLASS OF UNDERLYING ASSET: grouping
of underlying assets of similar nature and use
in an entity’s operations.
LOW VALUE LEASE
The new lease standard provide for a
quantitative threshold for does not low value
asset.
LOW VALUE ASSET: is a matter of
professional judgement.
Appendix B3: A lessee shall assess the value of
an underlying asset based on the value of the
asset when it is NEW regardless of the age of
the asset being leased.
A lease of an underlying asset does not qualify
as a low value lease if the nature of the asset is
such that the asset is typically not of low value
when new.
IFRS 16, par 8: Provides that the election for
low value lease is made on a LEASE-BYLEASE BASIS.
FINANCE LEASE – LESSEE
Defined as a lease that transfers
substantially all the risks and rewards
incidental to ownership of an underlying asset.
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INTERMEDIATE ACCOUNTING
CHAPTER 10 – LESSEE ACCOUNTING (BASIC PRINCIPLES)
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At the commencement date, the lessee shall
recognize a right of use asset and lease liability.
INITIAL MEASUREMENT OF RIGHT OF USE
ASSET
• RIGHT OF USE ASSET: an asset that
represents the right of a lessee to use an
underlying asset over the lease term in a
finance lease.
• The lessee shall measure the right of use asset
AT COST at commencement date.
• Provides that the cost of right of use asset
comprises:
o Present value of lease payments or the
initial measurement of the lease liability.
o Lease payments made to lessor at or
before commencement date, such as
lease bonus, less any lease incentives
received.
o Initial direct costs incurred by the lessee
o Estimate of cost of dismantling,
removing and restoring the underlying
asset for which the lessee has a present
obligation.
• LEASE INCENTIVES: payments by the lessor
to the lessee associated with a lease or the
reimbursement or assumption by the lessor of
the costs of the lessee.
o A lease incentive is an inducement for a
lessee to sign a lease.
o the lease incentives should be deducted
from the cost of the right of use asset.
• INITIAL DIRECT COSTS: incremental costs
of obtaining a lease that would not have been
incurred if the lease had not been obtained.
• LEASEHOLD IMPROVEMENTS: not initial
direct costs and not included in the cost of the
right of use asset. (PPE)
• Any SECURITY DEPOSIT REFUNDABLE
upon the lease expiration is accounted for as an
asset by the lessee.
SUBSEQUENT MEASUREMENT OF THE RIGHT
OF USE ASSET
• Provides that a lessee shall measure the right
of use asset applying the cost model.
• To apply the cost model, the lessee shall
measure the right of use asset at cost less
any accumulated depreciation and
impairment loss.
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Moreover, the carrying amount of the right of
use asset is adjusted for any remeasurement of
the lease liability.
PRESENTATION OF RIGHT OF USE ASSET
The lessee shall present the right of use asset
as a separate line item in the statement of
financial position. (NONCURRENT ASSET)
• As an alternative, the lessee may include the
right of use asset in the appropriate line
item within which the corresponding
underlying asset world be presented if
owned.
o Ex: the right of the use asset related to
equipment may be included within
property, plant and equipment
o However, disclosure required that the
PPE include right of use asset.
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OTHER MEASUREMENT MODELS
Provides that if a lessee applies the fair value
model in measuring investment property, the
lessee shall also apply the FAIR VALUE
MODEL to the right of use asset that meets the
definition of investment property.
Provides that if the right of use asset relates to
a class of PPE to which the lessee applies the
REVALUATION MODEL, a lessee may elect to
apply the revaluation model to all the right of
use assets that relate to that class of PPE.
DEPRECIATION OF RIGHT OF USE ASSET
The lessee shall apply normal depreciation
policy for right of use asset.
• Provides that the lessee shall depreciate the
right of use asset over the USEFUL LIFE of the
underlying asset under the following conditions:
a. Lease transfers ownership of the
underlying asset to the lessee at the
end of lease term
b. Lessee is reasonably certain to
exercise a purchase option
• Otherwise, the lessee shall depreciate the right
of use asset over the SHORTER BETWEEN
the USEFUL LIFE of the asset and the LEASE
TERM.
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INTERMEDIATE ACCOUNTING
CHAPTER 10 – LESSEE ACCOUNTING (BASIC PRINCIPLES)
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MEASUREMENT OF LEASE LIABILITY
Provides that at the commencement date, the
lessee shall measure the lease liability at the
PRESENT VALUE of lease payments.
The lessee payments shall be discounted using
the INTEREST RATE IMPLICIT in the lease.
If the implicit (indirectly) interest rate cannot be
readily determined, the INCREMENTAL
BORROWING RATE of the lessee is used.
INTEREST RATE IMPLICIT: interest rate
that causes the present value of the lease
payments and the unguaranteed residual value
to equal the fair value of the underlying asset
and initial direct costs of the lessor.
INCREMENTAL BORROWING RATE: rate of
interest that the lessee would have to pay to
borrow funds necessary to obtain a similar
asset over a similar term and similar security.
COMPONENTS OF LEASE PAYMENTS
The lease payments comprise the following
payments for the right to use the underlying
asset during the lease term:
o Fixed lease payments
o Variable lease payments
o Exercise price of a purchase option
if the lessee is reasonably certain to
exercise the option
o Amount expected to be payable by
the lessee under a residual value
guarantee
o Termination penalties if the lease
term reflects the exercise of a
termination option
FIXED PAYMENTS
are payments made by the lessee to the
lessor for the right to use an underlying asset
during the lease term.
The following are examples of lease payments
that are variable (not consistent) in legal form
but should be treated as fixed in substance:
o Payments that must be made only if an
asset is proven to be capable of
operating during the lease
o Payments that must be made only if an
event occurs with no genuine
possibility of not occurring
o Payments that are initially variable but
for which the variability will be
resolved at some point and the
payments become in substance fixed when
resolved.
o When there is more than one set of
payments, only the realistic set of
payments should be considered.
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VARIABLE PAYMENTS
Are payments made by the lessee for the right
to use the underlying asset during the lease
term that vary because of changes in facts or
circumstances
occurring
after
the
commencement date other than passage of
time.
Accounting for variable payment depends on
the nature of variability.
Payments that are based on an index or interest
rate, for example, payments linked to consumer
price index or benchmark interest rate are
included in the lease payments.
The lease liability is remeasured when the index
or interest rate changes and the lease
payments are revised.
Payments that are based on passage of time or
future usage of the underlying asset are not
included in the lease payments.
OTHER DEFINITIONS
RESIDUAL VALUE GUARANTEE: guarantee
made to the lessor by a party unrelated to the
lessor that the value of an underlying asset at
the end of the lease term will be at least a
specified amount.
UNGUARANTEED
RESIDUAL
VALUE:
portion of the residual value of the underlying
asset, the realization of which by the lessor is
not assured or is guaranteed solely by a partly
related to the lessor.
EXECUTORY COSTS: are ownership expenses
such as maintenance, taxes and insurance for
the underlying asset.
o Such executory costs are expensed
immediately when incurred.
LEASE TERM
Defines as the noncancelable period for
which the lessee has the right to use the
underlying asset together with both of the
following:
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INTERMEDIATE ACCOUNTING
CHAPTER 10 – LESSEE ACCOUNTING (BASIC PRINCIPLES)
o Period covered by an option to extend
the lease if the lessee is reasonably certain
to exercise the extension option.
o Period covered by an option to
terminate the lease if the lessee is
reasonably certain not to exercise the
termination option.
DISCLOSURE – LESSEE
1. Depreciation charge for right of use assets by
class of underlying asset
2. Interest expense on lease liability
3. The expense relating to short term leases
excluding the expense relating to leases with a
term of one month or less
4. The expense relating to variable lease low value
leases excluding the expense relating to low
value leases with term of one month or less
5. The expense relating to variable lease
payments not included in the measurement of
lease liability.
6. Income from subleasing right of use assets
7. Total cash outflow for leases
8. Addition to right of use assets
9. The carrying amount of right of use assets at
the end of the reporting period by class of
underlying asset.
10. Short term leases or low value leases accounted
for as operating lease.
ADDITIONAL DISCLOSURES
1. The nature of lessee’s leasing activities
2. Future cash outflows to which the lessee is
potentially exposed that are not reflected in the
measurement of lease liability.
a. Variable lease payments
b. Extension option and termination option
c. Residual value guarantee
d. Leases not yet commenced to which the
lessee is committed
3. Restrictions or covenants imposed
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