LEASES

Right to obtain economic benefits from use

“Economic benefits”
• Potential inflows from the asset’s output
• Can be obtained directly or indirectly (from using, holding, sub-leasing)

Stipulation that requires the customer to pay additional consideration based on a portion of the cash
flows derived from use of an asset does not prevent the customer from having the right to obtain
substantially all of the economic benefits from use of the asset.

Right to direct the use

Either or of the 2 conditions must be met:
1) Customer has the right to direct how and for what purpose the asset is used throughout the period of
use; or
2) The asset’s use is predetermined and the supplier is precluded from changing that predetermined
use.

Examples for #1:

a. Right to change the type of output to be produced by the asset
b. Right to change when output is produced
c. Right to change where output is produced
d. Right to change whether the output is produced and the quantity of that output

They must have the two rights to be considered a lease

Protective rights
- To protect supplier’s interest in the asset or its personnel or to ensure compliance with laws &
regulations

Lease Term
- non-cancellable
- has both:
o periods covered by an option to extend and an option to terminate
- non-cancellable period
o when contract is enforceable

Accounting for leases by LESSEE

I. Recognition
o Recognition @ commencement date

II. Initial Measurement of Lease Liability

o @ PV of lease payments not yet paid at the commencement date
o This includes:
 Fixed payments less any lease incentives receivable;
 Variable lease payments dependent on an index or a rate
 You measure this initially using the index/rate @ commencement date
  Amounts expected to be payable by the lessee under residual value guarantee
 Exercise price of a purchase option if the lessee is reasonably certain to exercise
that option; and
 Payments of penalties for terminating the lease, if the lease term reflects the
lessee exercising an option to terminate the lease.
o This does not include:
 Payments for non-lease elements
 Payments in optional extension periods (only when reasonably certain)
 Future changes in variable paymnets (dependent on an index/rate)
 Variable payments linked to future sales
o Discount rate
 Lease payments are discounted using the interest rate implicit in the lease.
 If rate not readily determinable -> use incremental borrowing rate
 Incremental borrowing rate: “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.”

III. Initial measurement of Right of Use Asset

o Measured at cost
o Cost includes:
 Amount of initial measurement of lease liability
 Any lease payments made at or before the commencement date, less any lease
incentives received;
 Any initial direct costs incurred by the lessee
 PV of any decommissioning and restoration costs for which the entity has
incurred an obligation (unless costs are incurred to produce inventories).

IV. Subsequent measurement of Lease Liability

o Similar to an amortized cost financial liability (remeasured to reflect any reassessments
or lease modifications).
o Interest on the lease liability
 Computed using the Effective Interest Method
 Recognized in profit or loss
 Exception: forms part of the CA of another asset
 Lease payments are apportioned between the interest and a reduction of the
lease liability

V. Subsequent measurement of the Right of Use Asset

o Under the cost model
o Exceptions:
 It relates to a Class of PPE (measured under revaluation model)
 It meets the definition of an investment property and entity uses the fair value
model (measured under fair value model)
o Cost Model
 Asset measured at:
 COST
  Less: Accumulated Depreciation/Accumulated Impairment Losses and
 Adjusted for any remeasurement of the lease liability
o Depreciation
 Asset depreciated over its useful life if:
 Contract provides for transfer of ownership to lessee by end of the lease
term; or
 Reasonable certainty that lessee will exercise a purchase option
 Asset depreciated over:
 Asset’s useful life
 Lease term
 WHICHEVER IS SHORTER

VI. Recognition Exemptions

o Option not to apply recognition methods stated previously for:
 Short-term leases
 Lease term of 12 months or less
 Leases for which the underlying asset is of low value
 Based on value of asset when it is new, regardless of age when being
leased

VII. Etc.
a. In-substance fixed lease payments
 Variable in legal form but in substance, unavoidable
b. Lease incentives
 Payments made by lessor to lessee associated with a lease or reimbursement or
assumption by a lessor or costs of a lease
c. Variable Lease Payemnts
i. Based on index or rate
 Initial Accounting: include in lease liability and right-of-use asset based
on the level of index or rate @ commencement date
 Subsequent Accounting: adjust lease liability and right-of-use asset
when the revised index or rate changes the lease payments (using
original discount rate)
 Others (Ex. Based on sales/usage)
 Initial Accounting: Exclude from lease liability & right-of-use asset
 Subsequent Accounting: Recognized as expense when event/condition
that triggers payment occurs
 In-substance Fixed Payments
 Initial Accounting: Treat as fixed lease payments
 Subsequent Accounting: Treat as fixed lease payments
 General Accounting Reqs for Short-term EB
EMPLOYEE BENEFITS - Expense
- Accrued liability if benefits are unpaid
Standards - Prepaid asset if excess payment
- PAS 19 Employee Benefits
- PAS 26 Accounting & Reporting
Retment Benefit Plans Short-term paid absences
- Include vacation, holiday, maternity,
Employee Benefits paternity, and isck leaves
- All forms of consideration given by an - Entitlement to paid absences either:
entity ine exchange for service rendered o Accumulating – can be carried
by employees or for the termination of forward and used in future
employment periods if not used in current
- Any form: cash, goods, services (to period. May be either:
employees or dependents)  Vesting – unused
- Include all employees regardless of entitlement converted
position to cash when employee
leaves the entity
Recognition  Non-vesting – not
- Expense: when service has been monetized
rendered (except when it forms part of o Non-accumulating – expire
the cost of another asset like salaries of
when not used in current
factory workers included in cost of
period, not paid in cash when
inventories)
entity leaves
- Liabilities: earned by employees, not
- Compensated absences:
yet paid
o Accumulating & Vesting
- From contractual agreements,
 Accrued & measured @
legislation, or informal practices
expected settlement
account
4 Categories of Employee Benefits:
o Accumulating & Non-vesting
- Short-term
 Takes into account
- Post-employment
possibility that
- Other long-term
employees may leave
- Termination
before entitlements are
used
Short-term
o Non-Accumulating
- Due to be setlted w/in 12 months after
 Unused entitlements
end of period in which employees
are not accrued but
rendered the related services.
recognized only when
- Ex. Salaries, wages, SSS
absences occur
- Paid vacation leaves/sick leaves
- Profit-sharing & bonuses
- Free goods/services
POST-EMPLOYMENT BENEFITS
Can be:
- Formal or informal
(explicitly stated in contract or implied
from employer’s practice and min. req.
of law)
- Contributory or non-contributory
(Both employer & employee contribute
vs. only employer contributes)
- Funded or unfunded
(trustee handles the fund vs. employer
manages the fund)
- Defined contribution plans or defined
benefit plans

Defined Contribution Plans

- Employer makes fixed contributions to
fund
- If fund bal. is less than expected,
employer has no obligation to make
good the deficiency.

Defined Benefit Plans

- Employer makes a definite amount of
retirement benefits (to be determiend
by a plan formula).
- Employer is required to make good the
deficiency.

Hybrid Plans
- Also considered as defined benefit plans
- Multi-employer plans
- State plans

Compulsory retirement age

- Accdg. To RA 7641, it is the age of sixty
(60) years or more, but not beyond
sixty-five (65) years.

Accounting for defined contribution plan

- Expense and liability if unpaid when
employees have given the service
- If amount contributed exceeds fixed
amount of contribution, excess is a
prepaid asset
- Measured @ undiscounted amount if
due w/in 12 mos. But beyond, it is
discounted.

Employee Benefits (Part 2)
Accounting for defined benefit plan
- Employer bears risk that promised
benefits will cost more than expected
- Related obligation may need to be
increased
- Actuarial assumptions are necessary to
measure the obligation on a discounted
basis which results to actuarial gains or
losses
- Retirement benefit cost not necessarily
equal to contribution due for the period
Steps to Accounting for Defined Benefit Plan
Step 1: Determine the deficit or surplus
Step 2: Determine the Net defined benefit
liability/asset
Step 3: Determine the defined benefit cost
Service Cost Breakdown:
- Current Service Cost
o Increase in the PV of DBO
resulting from employee service
in current period
- Past Service Cost
o Change in PV of DBO for
employee service in prior
periods resulting from a plan
amendment or curtailment
o Whether vested or unvested is
recognized immediately as
expense when:
 Plan amendment or
curtailment occurs
 When entity recognizes
related restructuring
costs/termination
benefits
 WHICHEVER COMES
EARLIER
Plan Amendment
- When entity:
o Introduces/withdraws a defined
benefit plan or
o Changes the benefits payable
under an existing defined
benefit plan
Curtailment
- When entity significantly reduces the
number of employees covered by a plan
Past service cost
- Positive: when PV of DBO increases
- Negative: when PV of DBO decreases
Net Interest on the Net Defined Benefit
Liability (asset)
- Same discount rate is used for the 3
items
- The discount rate is based on high
quality corporate bonds or in the
absence thereof, determine at the start
of the annual reporting period
Remeasurements on the net defined benefit
liability (asset):
Actuarial Gains and Losses
- Changes in the PV of DBO resulting from
changes in actuarial assumptions
Return on plan assets
- Respresents the investment income
earned by the plan asests during the
year after deducting the costs of
managing the fund and taxes
Fair Value of Plan Assets T-Account
Plan assets compromise:
- Assets held by long-term employee
benefit fund; and
- Qualifying insurance policies
Assets held by a long-term employee benefit
fund
- Assets held by an entity (a fund) that is
legally separate from the employer
Qualifying insurance policy
- Insurance policy issued by an insurer
that is not related to the employer
Both are not available to the employer’s
creditors even in bankruptcy

Plan assets exclude unpaid contributions due

from the employers as well as any non-
transferable financial instruments .

Actuarial Valuation Method – Projected Unit

Credit Method
- Measured based on future salary levels
of employees (projected salaries)

Reimbursements
- Needs to be virtually certain
- Treated as a separate asset (@ FV)
- Any gain or loss on changes is
recognized as an addition to or
deduction from the defined benefit cost

Overfunding/Underfunding
- Overfunded: Net defined benefit asset
- Underfunded: Net defined benefit
liability