PFRS 16- Leases,

from PAS 17

Operating Lease vs Finance Lease

To be an Operating Lease, It must follow the Criteria

a.) Low Value Lease

b.) Short Term Lease

if the lease contract follows the criteria, it shall be classified as an Operating Lease

Rules

Revenue(Lessor)/Expense(Lessee) = Must be recorded in Regular Amounts regardless of cash payment

Example:

A Lease term of 100,000php per month for 15yrs it has been noted that this lease is a low value lease

How much should be the Lease Revenue/Expense to be recorded under the following scenarios

A.) Fixed Payment

B.) The Lease Will Increase by 20,000php per year until the lease Expires
C.) There is a Lease Bonus given by the Lessee to obtain the Lease worth 300,000php
D.) There is a Lease Bonus given by the Lessor of 3 years Free Rent
E.) There is a deposit to be paid by the Lessee 1,000,000php to be paid after the lease term with an
implicit rate of 12% and an incremental borrowing rate of 15%
F.) There is a contingent rent of 1% of sales above 5,000,000php not over 10,000,000php and 2%
there after, the sales recorded was 15,000,000php
G.) Audit, Put scenario A to F all together

Finance Lease

On January 1, 2019, Panelo Company entered into a 10 year non-cancelable Lease, Commencing on that
date, for office space. The office space has a useful life of 50 Years and the lease specifies a rent of
120,000php per year. The interest implicit on the lease is 5% while the incremental borrowing rate is 4%

Assume the following Independent Cases, Prepare the necessary journal entries at the commencement
date on the books of lessee:

1.) Assume that the lease payment shall be made every January 1 and the first payment was paid
on January 1 2019.
2.) Assume the lease payment shall be made every January 1 and that the first lease payment was
made on January 1 2019. Also assume that the lessee made the following additional payments:
Payment to a former tenant occupying the floor building 15,000php
Commission paid to real estate agent 5000php
Leasehold improvement (5 years useful life) 14,000php
As an incentive to the lessee, the lessor made the following reimbursements:
Lessee’s lease hold improvement 7000php
Commission paid to real estate agent 5000php
 PFRS 16- Leases,
from PAS 17

3.) Assume that the lease payment shall be made every January 1 and that the first lease payment
was made on January 1 2019 also assume that lessee paid 60,000php lease bonus to obtain the
lease, security deposit of 40,000 php to be refunded upon expiration of the lease and 10,000
php real property tax on the underlying asset
4.) Assume that the lease payment shall be made every December 31 and that the first payment is
to be made on December 31 2019 also assume that the lessee has a purchase option of
50,000php and it is certain that the company will exercise this option
5.) Assume that the Lease payment to be made from every December 31 and the first payment was
made on December 31 2019 also assume that rent for the first 4 years will be 120,000php while
the remaining 6 years will be 140,000php

Depreciation of the right of use asset(ROUA):

General Rule: Depreciate the ROUA based on the lower of the Lease Term or the Useful Life of the asset

Exception: if the lessee is expected to exercise the Purchase Option, the Lessee shall depreciate the
underlying asset base on the useful life of the Asset

Illustration: On December 31 2019 Tinga Co. Signed a 4-year noncancelable lease for the right to use a
new machine. The company appropriately recorded the cost of the right of use asset for 267,845
appropriately. The Machine has a useful life of 10 years.

Tinga Co uses the straight line method in depreciating its assets.

Case #1 Assume the cost of the machine includes 20,000php gross bargain purchase option. At the end
of the lease, Tinga Expects to use the bargain Purchase

Case #2 Assume instead that the cost of the machine includes 20,000php gross guaranteed residual
value.

Lease-Lessee

On December 31, 2019 Mindoro Company signed a four year noncancelable lease for the right of use of
a new machine requiring 150,000php annual payments beginning December 31 2019. The machine has
a useful life of 10 years with no Salvage Value. The Rate Implicit on the lease is unknown, but base on
your inquiry , found out that the lessee’s incremental borrowing rate as 12% (4 decimal places round off
for present value)

Mindoro has a bargain Purchase option amounting to 30,000php and it is reasonably certain that the
company will exercise this option

Required:

1.) Amount capitalized as right of use asset

2.) Depreciation of the lease December 31 2020
3.) The amount to be shown in the current liability section of the financial statement Dec 31 2020
4.) The Amount to be shown in the Non-Current Liability section of the financial statement Dec 31
2020
 PFRS 16- Leases,
from PAS 17

Reassessment of the Lease Liability

Present Value of Lease Liability before remeasurement 650,000php
Carrying Amount of the right-of-use asset 370,000php

Case #1 Assume the P.V of the lease liability is remeasured as 700,000

Case #2 Assume that the P.V of lease liability is remeasured at P70,000

ACCOUNTED FOR AS A SEPRATE LEASE:

A. Increase in scope
B. The consideration for the lease increases by an amount commensurate with the stand-alone
price
“No gain or loss on separate lease”

Lease Modification
On January 1 2019 Leslie Company enters into a 10 year lease for 5000 square meters of office space
for annual lease payment of 150,000php every December 31. The lessee’s incremental borrowing
rate at the commencement date is 10%. On January 2023, when the present value of the lease
liability is 653,289php and the carrying amount of the right of use asset is 553,011php, Lessee and
Lessor agree to amend the original lease for the remaining six years to include an additional 3000
square meters of office space in the same building for additional payment of 90,000php per year.
The increase in total consideration for the lease is commensurate with the current market rate for
3000 square meters of office space, Adjusted for the discount that lessee receives reflecting that
lessor does not incur costs that it would otherwise have incurred if leasing the same space to a new
tenant. Assume the lessee’s incremental borrowing rate did not change
Required:
a.) Lease Liability
b.) Right of Use Asset

Extending the Term of the Lease

In relation to last problem, assume instead of increasing the square meters of the office space, Leslie
and the Lessor instead agreed to increase the lease term on January 2023 by 5 years, Annual Lease
term is unchanged, But the incremental Borrowing Rate changed to 7%

Not Accounted for as Separate Lease

a.) Decrease in Scope
b.) Other Lease Modifications
 PFRS 16- Leases,
from PAS 17

Illustration: On January 1 2019 Liezel Company enters into a 10 year lease contract of 5000 Square
meters of Office Space for an annual payment of 150,000php every December 31. The lessee’s
incremental borrowing rate at the commencement date is 10%. On January 1 2020 when the
present value of the lease liability is 653,289php and the carrying amount of the right of use asset is
553,011, Lessee and Lessor agree to amend the original space starting from the end of the first
quarter of 2020. The annual fixed lease payments from January 1 2023 to December 2028 are
90,000php. Liezel’s incremental borrowing rate beginning 2023 is 12% per annum

a.) ROUA
b.) Lease Liability

Case #2 assume instead of the change in the commensurate, the lease payment instead decreased from
150,000 per annum to 100,000 per annum beginning 2023 the auditor then reviewed the incremental
borrowing rate of Liezel and has stated that it has increased from 10% to 12%

a.) ROUA
b.) Lease Liability

Sublease

On January 1 2019 Leslie Company Enters into a 10 year Lease for 5,000 square meters of office space
for annual lease payment of 150,000php every December 31. The rate implicit in the lease at the
commencement date is December 31. The Rate implicit in the lease at the commencement date is 10%.
On January 1 2020 , when the present value of the lease liability is 653,289 and the cost of the right of
use asset is 921,685php and accumulated depreciation of 368,674, the Lessee subleases the 5000square
meters of office space for the remaining terms of 6 years to the sublessee for 180,000php when the
implicit rate was 9%

Case #1 : Assume the intermediate lessor treats the sublease as a finance lease

Case #2 Assume the Intermediate Lessor treats the sublease as an Operating Lease

Sale and Lease Back

ABC Company sells a building to DEF Company. At the same time, ABC company enters into a contract
with DEF company for the right to use the building. Data relating to the sale and leaseback are as
follows:

Selling Price 2,000,000

Carrying Amount 1,000,000

Annual Lease Payment 120,000

Implicit Rate 4.5

Lease Term 18yrs

 PFRS 16- Leases,
from PAS 17

Assume the following independent cases:

Fair Values are:

Case No. 1 2,000,000

Case No.2 1,800,000

Case No.3 2,100,000

Required: Prepare all the necessary entries