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Selected Summary of PFRS 16

(Lessee’s Point of View Only)

Objective

PFRS 16 establishes principles for the recognition, measurement, presentation and disclosure of
leases

Scope
PFRS 16 Leases applies to all leases, including leases of right-of-use assets in a sublease, except for:
 Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources
 Leases of biological assets held by a lessee
 Service concession arrangements
 Licenses of intellectual property granted by a lessor
 Rights held by a lessee under licensing agreements for items such as films, videos, plays,
manuscripts, patents and copyrights within the scope of IAS 38 Intangible Assets
 PFRS 16 is optional with the leases of intangible assets

Key Definitions

Lease - a 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.

Contract - An agreement between two or more parties that creates enforceable rights and obligations.

Interest rate implicit in the lease - The interest rate that yields a present value of (a) the lease payments
and (b) the unguaranteed residual value equal to the sum of (i) the fair value of the underlying asset and (ii)
any initial direct costs of the lessor.

Lease term - The non-cancellable period for which a lessee has the right to use an underlying asset, plus:

a) Periods covered by an extension option if exercise of that option by the lessee is reasonably
certain; and
b) Periods covered by a termination option if the lessee is reasonably certain not to exercise
that option

Lessee’s incremental borrowing rate - The rate of interest that a lessee would have to pay to borrow over
a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the
right-of-use asset in a similar economic environment.

Inception date of the lease - 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 of the lease - The date on which a lessor makes an underlying asset available for
use by a lessee.

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.

Lease payments - Payments made by a lessee to a lessor relating to the right to use an underlying asset
during the lease term, comprising the following:
a) Fixed payments, less any lease incentives;
b) Variable lease payments that depend on an index or a rate;
c) The exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
d) Residual value guarantees; and

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e) Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.

Lease incentives - Payments made by a lessor to a lessee associated with a lease, or the reimbursement
or assumption by a lessor of costs of a lessee.

Initial direct costs - Incremental costs of obtaining a lease that would not have been incurred if the lease
had not been obtained, except for such costs incurred by a manufacturer or dealer lessor in connection
with a finance lease.

Economic life - Either the period over which an asset is expected to be economically usable by one or
more users or the number of production or similar units expected to be obtained from an asset by one or
more users.

Short term leases - A lease that, at the commencement date, has a lease term of 12 months or less. A
lease that contains a purchase option is not a short-term lease.

Unguaranteed residual value - That portion of the residual value of the underlying asset, the realization
of which by a lessor is not assured or is guaranteed solely by a party related to the lessor.

Identifying a Lease

At inception of a contract, an entity shall assess whether the contract is, or contains, a lease

 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.

 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 of 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

 If the 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.

Lessee

 Lessees now have a single accounting model for all leases except for

(a) Short-term leases (those having a term of 12 months or less, including the effect of extension
options); and
(b) Leases for which the underlying asset is of low value (telephones, laptop computers, and small
office furniture).

 Initial Recognition – Capitalize the (a) Right-of-Use Asset and measure a (b) Lease Liability at
the present value of lease payments.

(a) The cost of the right-of-use asset is the total of:

 The amount of the lease liability recognized;

 Any lease payments made at or before the commencement date, less any lease incentives;
 Any initial direct costs incurred; and
 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.

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(b) The lease liability at the commencement date of the lease shall be the discounted unpaid
portion lease payments computed using the implicit rate in the lease or if not determinable, the
lessee’s incremental borrowing rate. Lease payments include

 Fixed payments, less any lease incentives receivable;

 Variable lease payments dependent on an index or rate;
 Residual value guarantees;
 The exercise price of a reasonably certain purchase options; and
 Lease termination penalties, if a lessee termination option was considered in setting the
lease term.

Subsequent Measurement

(a) The Right-of-Use Asset shall be presented as a line item in the statement of financial position
as part of non-current assets separately from other assets or within the same line item as the
underlying asset and accounted for using any of the following:

 Apply PAS 16, Property, Plant and Equipment under the Cost Model and depreciate the
Right-of-Use asset using its economic life if there is a transfer of ownership or a purchase
option that is reasonably certain to be exercise. However, if there is none, the Right-of-Use
Asset is depreciated using economic life or the lease term whichever is shorter.
 Revaluation Model also under PAS 16.
 Apply PAS 40, Investment property if the Right-of-Use asset meets the definition of an
investment property. The lessee shall apply the Fair Value Model if it applies that model to
its investment property.

(b) The Lease Liability after commencement shall be remeasured for:

 Increases in the carrying amount due to the interest on the liability using the effective interest
method.
 A reduction in the carrying amount as a result of the lease payments made.
 The carrying amount is remeasured to reflect any reassessment, lease modifications or
revised in-substance fixed lease payments.
 Lease payments to be applied to the lease liability that are due within 12 months after the
reporting period shall be classified as a current liability in the statement of financial position.
 Remeasurements of lease liability and the Right-of-Use Asset shall be necessary to
reflect the following changes:

(a) The lease term

(b) An assessment of a purchase option
(c) The amounts expected to be payable under residual value guarantees
(d) Future lease payments resulting from a change in an index or a rate used to determine
those payments

 Variable lease payments that have not been included in the initial measurement of the lease
liability are recognized in profit or loss in the period in which the event or condition that
triggers the payments occurs.

Statement of Cash Flows

 Principal payments on the lease liability as financing activities.

 Payments of interest in accordance with guidance for interest paid in PAS 7 Statement of Cash
Flow.
 Short-term and low-value asset leases and variable lease payments that are not included in the
measurement of lease liabilities are classified within operating activities.

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CLASSROOM NOTES

 The lessee shall always treat the lease as a finance lease unless the underlying asset is
low value or the lease term is a short-term period.

 The lease liability is the Present Value of lease payments whether fixed or variable less
lease incentive receivable plus the present value of any reasonable certain purchase
option or present value of the residual value guarantee.

 If the lease payments are in advanced use the PV of an annuity due if the it’s at the end of
the period use the PV of an ordinary annuity. Meanwhile the PV of 1 is used for the
purchase option that is reasonably certain and residual value guarantees.

 The cost of the right of use asset is the net sum of the Lease Liability + Lease
prepayment or bonus + Initial Direct Cost + PV of removal, dismantling and restoration cost
minus lease incentive received.

 “RIGHT OF USE ASSET” is the account used for leased assets by the lessee. The
different classes of noncurrent assets shall not anymore be used. The right of use asset
shall be presented separately among the noncurrent assets of the entity.

 Take note that the lease incentive receivable has not yet been received and is simply
deducted from the future lease payments in computing for the present value of the lease
liability.

 The discount (difference of total payments and PV) is amortized using the effective interest
method and recognized as interest expense. While the difference of the interest expense
recognized and lease payment shall be a reduction of the lease liability.

 The amount to be recognized as a reduction of the lease liability within 12 months shall be
classified as a current lease liability while the balance that will also represent the total
lease liability at the end of the following accounting period shall be the noncurrent portion
of the total lease liability at the end of the current year.

 The right of use asset shall be depreciated using the useful life if there is a transfer of
ownership or reasonable certain purchase option. If not, the useful life or lease term
whichever is shorter is used.

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