ORIENTATION
Objective
 Scope
 Definition
 Classification of Leases
 Finance Lease
 Operating Lease
 Finance Leases and Operating Leases Calculations
 Sale and lease back
 Disclosures

OBJECTIVE
The objective of this
Standard
is to prescribe, for lessees
and lessors, the appropriate
accounting policies and
disclosure to apply in
relation to leases.
Where
can this stand
apply?
Where
shall not be
applied?
DEFINITION OF A
LEASE
A lease is an agreement whereby the
lessor conveys to the lessee in return for
a payment or series of payments the
right to use an asset for an agreed period
Finance lease
Operating lease
FINANCE LEASES V OPERATING LEASES
Finance Lease
Operating Lease
A lease is a finance
lease if it transfers
substantially all the
risks and rewards
incident to
ownership
A lease is an
operating lease if it
does not transfer
substantially all the
risks and rewards
incident to
ownership
Substance over Form
RISKS AND REWARDS INCIDENT TO
OWNERSHIP
Risks



Losses from idle
capacity
Technological
obsolescence
Changes in value due
to changing economic
conditions etc.
Rewards



Expectation of service
potential or profitable
operation over the
asset’s economic life
Gain from
appreciation in value
Realisation of a
residual value etc.
FINANCE LEASE OR OPERATING LEASE?
Renewal options
(4) Conclude on whether
substantially all the risks and
rewards have been
transferred from the lessor to
the lessee
(3) Determine the net present
value (NPV) of the minimum
lease payments
Cancellation
provisions
(2) Determine the lease term
(1) Identify the business
purpose behind the lease and
its economic impact together
with the economic issues at the
end of the lease term
Rights and
obligations at end
of lease
FINANCE LEASE OR OPERATING
LEASE?
Examples of situations which would normally lead
to a lease being classified as a finance lease:


The lessor transfers ownership of the asset to the
lessee at 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
the fair value at the date the option becomes
exercisable such that, at the inception of the lease, it
is reasonably certain that the option will be exercised
FINANCE LEASE OR OPERATING
LEASE?
Examples of situations which would normally lead
to a lease being classified as a finance lease (cont’d):




The lease term is for the major part of the economic
life of the asset even if title is not transferred
The leased assets are of a specialised nature such that
only the lessee can use them without major
modifications being made
The leased assets cannot be easily replaced
At the inception of the lease, the present value of the
minimum lease payments (MLP) amounts to at least
substantially all of the fair value of the leased asset
FINANCE LEASE OR OPERATING
LEASE?
Other indicators which individually or in
combination could also lead to a lease being
classified as a finance lease:



If the lessee can cancel the lease, the lessor’s losses
associated with the cancellation are borne by the lessee
The lessee bears gains/losses from changes in the fair
value of the residual
The lessee has the ability to continue the lease for a
secondary period at a rate which is substantially lower
than market rate
ACCOUNTING FOR
FINANCE LEASE
FINANCE LEASE – ACCOUNTING BY
LESSEE
Substance of the transaction should be considered.
 At the beginning of the lease term, the lessee
recognizes,
 The leased asset and
 The obligation to make lease payments as a
liability
 The asset and liability are measured at the lower of
 The fair value of the asset
 The present value of the minimum lease payments
FINANCE LEASE – ACCOUNTING BY
LESSEE CONT..


Lease payments are split between finance charge
and the repayment of the outstanding liability.
The depreciation policy for assets held under finance
leases should be consistent with that for owned assets.
 If the lessee will obtain ownership of the asset at the
end of the lease, depreciation is made over the
useful life of the asset.
 Otherwise the asset should be depreciated over the
shorter of the lease term or the life of the
asset.
DOUBLE ENTRIES IN THE BOOKS OF
THE LESSEE – FINANCE LEASE



Recognize the asset
Non-Current asset
Lessor
Lease rental repayment
Lessor
Cash/ Bank
Annual Interest
Interest Expense (P&L)
Lessor
Dr
Cr
Dr
Cr
Dr
Cr
DOUBLE ENTRIES IN THE BOOKS OF
THE LESSOR – FINANCE LEASE



Asset transferred
Receivable
Non-current asset
For the lease installment received
Cash/Bank
Lessee
For the interest
Lessee
Interest income
Dr
Cr
Dr
Cr
Dr
Cr
OPERATING
LEASE
DEFINITION
An operating lease is a lease other than finance
lease
 Lease that does not transfer substantially all of
the risks and rewards to the lessee.

Lessee
Lessor
Asset
Right to
use asset
OPERATING LEASE – ACCOUNTING
LESSEE / LESSOR
Lessee
Statement of
financial
position
BY
Lessor
Prepaid/accrued Leased asset
lease rental
Accrued/deferre
payable
Lease rental
Statement of
comprehensive expense
income
d lease rental
receivable
Depreciation
expense
Lease rental
income
ACCOUNTING BY LESSEE
An asset is not recognized
 Rental under operating lease are charged to the
income statement on a straight line basis over
the term of lease, unless another systematic and
rational basis is more appropriate.
 Any difference between amount charged and
amounts paid will be prepayments or accruals.

ACCOUNTING BY LESSOR
Lease income from operating leases shall be
recognized in income on straight line basis over
the lease term, Unless another systematic basis
is more representative of the time pattern in
which use benefit derived from the leased asset
diminished.
 The depreciation policy for depreciable leased
assets shall be consistent with the lessor’s
normal depreciation policy for similar assets and
depreciation shall be calculated in accordance
with LKAS 16.

DOUBLE ENTRIES IN THE BOOKS OF
THE LESSEE – OPERATING LEASE

Lease rental repayment
Rental expense
Dr
Cash or accrued lease rental payable Cr
DOUBLE ENTRIES IN THE BOOKS OF
THE LESSOR – OPERATING LEASE

At the Beginning
Leased asset
Cash or creditor

Dr
Cr
At the end of the year
Depreciation expense
Leased asset
Dr
Cr
Cash or accrued lease rental
Lease rental income
Dr
Cr
OPERATING LEASE - EXAMPLE

Example





On 1 January 2014, X signs a 5-year lease for equipment
The cost of the equipment was 30,000
Total lease payments are 20,000 (4,000/year)
Unguaranteed residual value is 15,000
Economic life of equipment is 10 years
Questions

What are the journal entries to be recorded at 1 January
2014 and 31 December 2014?
26

OPERATING LEASE - SOLUTION (LESSEE)
27
No entry at 1 January 2014
At 31 December 2014:
Dr Rental expense
4,000
Cr Cash or accrued lease rental payable
4,000
OPERATING LEASE - SOLUTION (LESSOR)
At 1 January 2014:
28
Dr Leased asset
30,000
Cr Cash or creditor
30,000
At 31 December 2014:
Dr Depreciation expense
3,000
Cr Leased asset
Dr Cash or accrued lease rental
Cr Lease rental income
3,000
4,000
4,000
EXERCISE
Samson PLC has purchased a machine on 01st of
April 2014 under the terms of lease for 5 million for
the period of 5 years at the rate of 12%. First
payment coming at the end of the first year. The
lease agreement specifies that Samson PLC gets to
keep the machine at the end of the lease.
Question
Indicate the amortization schedule & calculate the
appropriate amounts to be included in the financial
statements of the lessee for the year ended 31st
March 2015.
AMORTISATION SCHEDULE
Year
Opening
Balance
Installment
Interest
Closing
Balance
Capital
0
-
-
-
- 5,000,000.00
1
5,000,000.00
1,387,115.00
600,000.00
787,115.00 4,212,885.00
2
4,212,885.00
1,387,115.00
505,546.20
881,568.80 3,331,316.20
3
3,331,316.20
1,387,115.00
399,757.94
987,357.06 2,343,959.14
4
2,343,959.14
1,387,115.00
281,275.10 1,105,839.90 1,238,119.24
5
1,238,119.24
1,387,115.00
148,574.31 1,238,119.24
6,935,575.00
1,935,153.55 5,000,000.00
-
LEASE SCHEDULE
Gross Lease liability
Opening balance as at 01st April 2014
Add : Lease obtained during the year
Less : Settlements during the period
Balance as at 31st March 2015
6,935,575
-1,387,115
5,548,460
Interests in Suspense
Opening balance as at 01st April 2014
Add : Interest in suspense charge during the year
Less : Charged to Income Statement
Balance as at 31st March 2015
1,935,154
-600,000
1,335,154
LEASE OBLIGATION AS AT 31ST MARCH 20154,212,885
BALANCE SHEET CLASSIFICATION
CURRENT PORTION
Gross Lease liability
INTERESTS IN SUSPENSE
LEASE OBLIGATION ( Net Lease liability )
1,387,115
-505,546
881,569
LONG TERM PORTION
Gross Lease liability
INTERESTS IN SUSPENSE
LEASE OBLIGATION ( Net Lease Liability )
4,161,345
-829,607
3,331, 316
TOTAL LEASE OBLIGATION AS AT 31ST MARCH
2015
4,212,885
SALE AND
LEASEBACK
TRANSACTIONS
DEFINITION
Sale and leaseback transaction is
an arrangement in which one
party sells a property to a buyer
and the buyer immediately leases
the property back to the seller.
Advantages of sale and leaseback
Releases cash tied up in assets already
owned
 Cheaper than borrowing money
 All the risks & rewards of the asset are
transferred to the buyer
 The lessee can still use the asset
 No extra time required for re-training on
new equipment

Disadvantages of sale and leaseback
Loss control over the asset
 In the long term it is more expensive

Accounting Treatment for Sales
& Leaseback Transactions
 Sale
& Leaseback Under Finance
Lease
If a sale and leaseback transaction
results in a finance lease, any excess of
sales proceeds over the carrying amount
shall not be immediately recognized as
income by a seller-lessee. Instead, it shall
be deferred and amortized over the lease
term.
 Sale
& Leaseback Under Operating
Lease
Any profit or loss arising is accounted for as follows
If the transaction is;
At fair value
Recognize immediately
Below fair value
Future lease rentals
Recognize
at market rate
immediately
Future lease rentals
below market rate
Above fair value
Deferred &
amortized over
the lease period
Excess over fair value
should be deferred &
amortized over the lease
period
DISCLOSURES
KEY DISCLOSURES – FINANCE
LEASES (LESSEES)






Requirements of SLFRS 7
Net carrying amount at the end of the reporting
period
A reconciliation between the total of future minimum
lease payments
Contingent rents recognized as an expense in the
period
General description of the lessee’s material leasing
arrangements
Requirements for disclosure in accordance with
LKAS 16, LKAS 36, LKAS 38, LKAS 40 and LKAS 41
apply to lessees for assets leased under finance leases
KEY DISCLOSURES – OPERATING
LEASES (LESSEES)



Total of future minimum lease payments
Lease and sublease payments recognized as an
expense in the period
General description of the lessee’s significant
leasing arrangements
KEY DISCLOSURES – FINANCE
LEASES (LESSORS)




Requirements in SLFRS 7
Reconciliation between the gross investment in
the lease at the end of the reporting period
Unearned finance income
Unguaranteed residual values accruing to the
benefit of the lessor
KEY DISCLOSURES – FINANCE
LEASES (LESSORS)



Accumulated allowance for uncollectible
minimum lease payments receivable
Contingent rents recognized as income in the
period
General description of the lessor’s material
leasing arrangements.
KEY DISCLOSURES – OPERATING
LEASES (LESSORS)
Requirements of SLFRS 7
 Future minimum lease payments under noncancellable operating leases
 Total contingent rents recognized as income
in the period
 General description of the lessor’s leasing
arrangements
 disclosure requirements in LKAS 16, LKAS
36, LKAS 38, LKAS 40 and LKAS 41 apply to
lessors for assets provided under operating
leases

SUMMARY
THANK YOU!