Lease
- Is a contract, or a part of a contract, that
conveys the right to use an asset.
Parties to a Lease Contract
Lessee
o Entity that obtains the right to use an
asset.
Lessor
o Entity that provides the right to use an
asset.
Identifying a Lease
- If the contract conveys the right to control the
use of an identified asset for a period of time.
An entity has the right to control the use of an identified
asset if it has both:
- Right to obtain substantially all of the economic
benefits from the use of the identified asset.
- Right to direct the use of the identified asset.
Portions of Assets
Portion identified as asset if: physically distinct
(specifically identifies the said asset).
Not identified as asset if: not physically distinct, unless it
represents substantially all of the capacity of the asset.
Substantive Substitution Rights (SSR)
Asset, not identified asset if supplier has the SSR
throughout the use.
Suppliers right to substitute an asset – substantive if
both conditions exist:
- Supplier has the practical ability to substitute
alternative assets.
- Supplier would benefit economically from the
exercise of its right to substitute the asset.
Supplier’s right to substitute an asset is not substantive
if it cannot be exercised throughout the period of use,
such as:
- Only on a particular date or upon the occurrence
of a specified event.
- During repairs, maintenance, upgrading.
*Supplier’s SSR not substantive when not readily
determinable.
Right to obtain economic benefits from use
Customer controls the use of an identified asset if it has
the right to obtain substantially all of the economic
benefits from the asset throughout the period of use
(exclusive use of an asset).
Economic Benefits: potential inflows from the asset’s
output.
When assessing the right to obtain the economic
benefits from use of an asset, entity considers only
economic benefits within the defined scope of its right to
use the asset.
*A stipulation in a contract requiring the customer to
pay additional consideration does not prevent the
customer from having the right to obtain the economic
benefits from the use of the asset.
Right to direct the use
Customer has the right to direct the use of an asset if:
- He has the right to direct how and for what
purpose asset is used.
- Asset’s use is predetermined, supplier is
precluded from changing the predetermined
use.
Decision-making rights:
1. Rights to change the type of output that is
produced by the asset.
2. Rights to change when the output is produced.
3. Rights to change where the output is produced.
4. Rights to change whether the output is
produced, and quantity of output.
*rights to operate or maintain the asset do not
necessarily grant the right to direct how and for what
purpose the asset is used.
Protective rights
Include: contractual restrictions designed to protect the
supplier’s interest in the asset or its personnel or ensure
compliance with laws or regulations.
Contract may:
- Specify the maximum amount of use an asset
- Require a customer to follow particular
operating procedures
- Require a customer to inform the supplier of
changes on how an asset will be used.
Is there an identified lease?
Yes -> next question No -> contract has no lease
Does customer have the right to obtain economic
benefits?
Yes -> next question No -> contract has no lease
Does customer have the right to direct the use of
the asset?
Yes -> contract has lease No -> contract has no lease
Lease Term
- non-cancellable period for a lease, together with
both:
o periods covered by an option to extend.
o periods covered by an option to
terminate.
*must be reasonably certain which option.
Non-cancellable period is the period in which the
contract is enforceable.
No longer enforceable when each of the lessor and
lessee can terminate the lease without permission,
subject only to insignificant penalty.
 If only lessee has the right to terminate the
lease, lessee considers this right when
determining the lease term.
 If only lessor has the right to terminate the
lease, non-cancellable period of the lease
includes the period covered by option to
terminate the lease.
In assessing whether lease is reasonably certain to
exercise an option, an entity considers all relevant facts
and circumstances that create an economic incentive for
the lessee whether or not to exercise the option to
extend or just terminate the lease.
e.g.
Lessee may be reasonably certain to opt for an extend
if:
 - Lease payments on extended period are
expected to be below market rate.
- Lessee made significant improvements, useful
life longer than original lease term.
Lessee may be reasonably certain not to opt for
termination if:
- Costs of terminating the lease are significant.
- Leased asset is important to lessee’s operations.
*the shorter non-cancellable period = more likely
lessee will exercise to extend
^more likely the costs associated with obtaining
replacement asset will be higher.
Accounting for leases by Lessee
Recognition
Lessee recognizes lease liability (LL) and right-of-use
asset (RUA) at commencement date.
Initial Measurement (LL)
Initially measured at PV of lease payments not yet paid
at commencement date.
Lease payments include the ff:
- Fixed payments – incentives received
- Variable payments (depends on index/rate)
- Amounts expected to be payable by lessee
under residual value guarantees
- Exercise price of purchase opt (reasonably
certain)
- Payments of penalties for terminating the lease
Lease payments do not include the ff:
- Payments for non-lease elements (except when
practical expedient)
- Payments in optional extension periods (unless
reasonably certain)
- Future changes in variable payments (depend on
index/rate)
- Variable payments linked to the lessee’s future
sales or usage of asset
Subsequent Measurement (LL)
Subsequently measured similar to amortized cost, but
remeasured to reflect any reassessments or lease
modifications.
Accordingly:
- Interest is computed using effective interest
method, recognized in P/L
- Lease payments are apportioned between the
interest and a reduction to LL.
Discount Rate
Lease payments are discounted using interest rate
implicit in the lease.
Not readily determinable = lessee’s incremental
borrowing rate.
Initial Measurement (RUA)
Initially measured at cost.
Comprises of the ff:
- Amount of the initial measurement of the LL
- Any lease payments made at or before
commencement date – incentives received
- Any initial direct costs incurred by lessee
- PV of any decommissioning and restoration
costs which entity incurred an obligation, unless
incurred to produce inventories.
Subsequent Measurement (RUA)
Subsequently measured similar to purchased asset,
under Cost Model except when:
- Relates to a class of PPE measured under
revaluation model -> revaluation model
- Meets the definition of investment property, fair
value model -> fair value model
Cost Model
RUA is measured at cost:
- Less acc. dep. and any acc. impairment losses
- Adjusted for any remeasurement of the lease
liability.
Depreciation
Lessee depreciates asset over useful life if:
- Contract provides transfer of ownership to
lessee by end of lease term
- Reasonably certain that lessee will exercise
purchase option
*Other cases, lessee depreciates asset over shorter
of asset’s useful life and lease term.
*Depreciate starts from commencement date.
Recognition Exemptions
Lessee may elect not to apply recognition requirements
from above for:
- Short-term leases
- Leases which asset has low value
Short-term Lease
Lease, at commencement date, has a lease term of 12
mos or less.
*A lease that contains a purchase opt is not a short-term
lease.
*Election for short-term leases is made based on class of
asset to which the right of use relates.
Low Valued Asset
Assessment of value is based on the value of the asset
when it is new.
Assessment is performed on an absolute basis, meaning,
not affected by materiality or the lessee’s size, nature, or
circumstances.
*If leased asset is sub-leased, head lease does not
qualify as lease of low valued asset.
*Election for leases of low valued assets = lease-by-
lease basis.
Accounting
Lessee may elect to recognize the lease payments
associated with
a. Short-term lease, or
b. Lease w/low valued asset
as an expense on straight line basis over lease term.
Separating the components of a contract
Entity accounts for each lease component of a contract
separately from non-lease components.
Lessee allocated the consideration based on relative
stand-alone price of the lease component, then
aggregate stand-alone price of the non-lease
components.