ACCO 20103

IFRS 16 - Leases
Notes Part I – Accounting by Lessees

Lease – is 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 create enforceable rights and
obligations.

At the inception of a contract, an entity shall assess whether the contract is—or contains—a
lease. A contract is—or contains—a lease if the contract conveys the right to control the use of
an identified asset for a period of time in exchange for consideration.

Lessee – an entity that obtains the right to use an underlying asset for a period of time in
exchange for consideration.

Lessor – an entity that provides the right to use an underlying asset for a period of time in
exchange for consideration.

Lease term – the non-cancellable period for which a lessee has the right to use an underlying
asset, together with both:
a. periods covered by an option to extend the lease if the lessee is reasonably certain to
exercise that option; and
b. periods covered by an option to terminate the lease if the lessee is reasonably certain not
to exercise that option.

Lease Accounting
- At the commencement date, a lessee shall recognize a right-of-use asset and a lease
liability.
- At the commencement date, a lessee shall measure the right-of-use asset at cost.
- At the commencement date, a lessee shall measure the lease liability at the present value
of the future lease payments that are not paid at that date.
- The lease payments shall be discounted using the interest rate implicit in the lease if that
rate can be readily determined. But if that rate cannot be readily determined, the lessee
shall use the lessee’s incremental borrowing rate.

Initial Recognition: Lease Liability

(Should be discounted):
a. PV of fixed payments (get the PV of fixed payments unpaid)
Fixed payments are payments made by a lessee to a lessor for the right to use an
underlying asset during the lease term;

b. PV of variable lease payments that depend on an index or a rate

Variable lease payments are the portion of payments made by a lessee to a lessor
for the right to use an underlying asset during the lease term that varies because of

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Alcera, Vincent Luigil C.
 changes in facts or circumstances occurring after the commencement date other
than the passage of time.

Variable lease payments that depend on an index or a rate include, for example,
payments linked to a consumer price index, payments linked to a benchmark
interest rate (such as LIBOR) or payments that vary to reflect changes in market
rental rates.
Both fixed and variable lease payments are calculated through an ordinary
annuity.

c. PV of amounts expected to be payable by the lessee under residual value guarantees

Residual value guarantee (guaranteed residual value) is a guarantee made to a
lessor by a party unrelated to the lessor that the value (or part of the value) of an
underlying asset at the end of a lease will be at least a specified amount.
If the asset is not returned at the guaranteed amount agreed, then there will
be extra charges. Unguaranteed residual values are not accounted here.

The payment of the residual value guarantee is only paid at the end of the
lease term. Therefore, the residual value is computed by calculating the
present value of a single payment.

d. PV of the exercise price of a purchase option if the lessee is reasonably certain to exercise
that option
Bargain purchase option (IAS 17, superseded) – a clause in the lease agreement
allowing the lessee to purchase the asset at the end of the lease for a preset
amount significantly less than the expected residual value at the end of the lease
term.

The lessor may give the lessee the option to buy the asset at the end of the lease
term at a price that is significantly lower than the residual value. For problem
solving, the certainty shall be indicated if it is so, because if there is no indication,
there would automatically be no purchase option added to the lease liability.

The purchase option is only paid at the end of the lease term. Therefore, the value
is computed by calculating the present value of a single payment.

Either a PV of amounts expected to be payable by the lessee under residual value

guarantees or a PV the exercise price of a purchase option if the lessee is reasonably
certain to exercise that option can exist in a lease contract. Both cannot coexist together.

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

Initial Recognition: Right of Use Asset (shall be recorded at cost)

a. Lease Liability

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Alcera, Vincent Luigil C.
 b. Lease payments made at or before the commencement date, less any lease incentives
received (which are not included in the lease liability since these are already paid).
c. Any initial direct costs incurred by the lessee (an addition to the right of use asset)
Initial direct costs are 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. (an example
would be legal fees).
d. An estimate of costs to be incurred by the lessee in dismantling and removing the
underlying asset, restoring the site on which it is located or restoring the underlying asset
to the condition required by the terms and conditions of the lease, unless those costs are
incurred to produce inventories. This cost is paid at the end of the lease term and should
be computed at present value of a single payment). If there is another rate related to the
dismantling (usual pv rates, etc.) then those should be used in computing the pv.

Pro-forma Entry at Initial Recognition:

Right-of-use asset xx
Cash* xx
Lease Liability xx
Provision for dismantling/restoration cost xx

*payment at or before the commencement of the lease + initial direct costs

The provision for dismantling/restoration cost is the pv of the said costs that is already included
in the right-of-use asset and shall be paid at the end of the lease term.

Subsequent Recognition: Lease Liability

After the commencement date, the lease liability should be measured by:
a.increasing the carrying amount to reflect interest on the lease liability;
b. reducing the carrying amount to reflect the lease payments made; and
c.remeasuring the carrying amount to reflect any reassessment or lease modifications, or to
reflect revised in-substance fixed lease payments.
Any interest computed shall be added to the lease liability. Any payments made shall reduce the
lease liability. Any lease modifications may either increase or decrease the lease liability.

Interest on the lease liability in each period during the lease term shall be the amount that
produces a constant periodic rate of interest on the remaining balance of the lease liability.
constant periodic rate is the rate used to compute for the pv the lease liability.

Financial statement presentation: Lease Liabilities are presented separately from other liabilities.
If the lessee does not present lease liabilities separately in the statement of financial position, the
lessee shall disclose which line items in the statement of financial position include those
liabilities.
But the separate presentation of the lease liability should be prioritized.

Subsequent Recognition: Right-of-use Asset

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Alcera, Vincent Luigil C.
 After the commencement date, a lessee shall measure the right-of-use asset applying a cost
model, unless it applies either of the measurement models in par. 34 or 35.

To apply a cost model, a lessee shall measure the right-of-use asset at cost:
(a) less any accumulated depreciation and any accumulated impairment losses; and
(b) adjusted for any remeasurement of the lease liability.

A lessee shall apply the depreciation requirements in IAS 16 Property, Plant and Equipment in
depreciating the right-of-use asset.

Useful life or Lease Term Treatment of Residual Value

Is there a transfer of Yes Useful life Deduct the residual value.
ownership? No Lease term Deduct the residual value if it is guaranteed.
Is there a reasonable Yes Useful life Deduct the residual value.
certainty that the lessee will
No Lease term Deduct the residual value if it is guaranteed.
exercise the purchase option?
Yes The earlier of the end of Deduct the residual value.
Is there a residual value
the useful life or lease
guarantee? No Do not deduct the residual value.
term.

A lessee shall apply IAS 36 Impairment of Assets to determine whether the right-of-use asset is
impaired and to account for any impairment loss identified. (IFRS 16 par. 33)

What if the cost model is not applied?

- If a lessee applies the fair value model in IAS 40 Investment Property to its investment
property, the lessee shall also apply that fair value model to right-of-use assets that meet
the definition of investment property in IAS 40. (IFRS 16 par. 34)
- If right-of-use assets relate to a class of property, plant and equipment to which the lessee
applies the revaluation model in IAS 16, a lessee may elect to apply that revaluation
model to all of the right-of-use assets that class of property, plant and equipment. (IFRS
16 par. 35)

Example 1: With guaranteed residual value

On January 1, 2020, Generous Inc. leased two automobiles for executive use. The lease requires
Generous to make five annual payments of P260,000 beginning January 1, 2020. At the end of
the lease term, December 31, 2024, Generous guarantees that the residual value of the
automobiles will total P200,000. The property reverts to the lessor at the end of the lease term.
The estimated useful life of the automobiles is 6 years and Generous uses straight-line method
for all its assets. Generous’ incremental borrowing rate is 10%. The interest rate implicit in the
lease which is known to Generous Inc. is 9%.

Number of payments: 5
First payment made: on the date of issuance
Number of payments remaining: 4
Prioritized rate: 9% (incremental rate)
Lease term: 5

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Alcera, Vincent Luigil C.
PV Factor of remaining payments: 3.2397 (based on four periods) (ordinary annuity)
PV Factor of guaranteed residual value: 0.6499 (based on five periods)

PV of remaining payments (260,000*3.2397) 842,322

PV of guaranteed residual value (200,000*.6499) 129,980
Lease Liability 972,302
Payment at the commencement of the lease 260,000
Right-of-use asset 1,232,302

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Alcera, Vincent Luigil C.
Example 2: With Bargain Purchase Option
On January 1, 2020, Shirley Corporation leased a machine from Joel Company a five-year lease
term at P150,000 annual rental payments, paid in advance. There is a bargain purchase option on
December 31, 2024 of P240,000. The economic life of the equipment is 15 years. The interest
rate implicit in this lease, which is known to Shirley, is 12%.
PV of future payments (150,000*3.0373) 455,595
PV of bargain purchase option (240,000*0.5674) 136,176
Lease Lability 591,771
Payment at commencement 150,000
Right-of-use machinery 741,771

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Alcera, Vincent Luigil C.
Example 3: With Unguaranteed Residual Value

On January 1, 2020, Diana Corporation signed a 5-year non-cancellable lease for a machine with
Calpol Company. The terms of the lease called for Diana to make annual payments of P86,680 at

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Alcera, Vincent Luigil C.
the beginning of each year starting January 1, 2020. The machine has an estimated useful life of
6 years and a P50,000 unguaranteed residual value at the end of the five-year lease term. The
machine reverts to the lessor at the end of the lease term. Diana uses the straight-line method of
depreciation for all of its plant assets. The rate implicit in the contract which is known to Diana
is 10%. The fair value of the machine on January 1, 2020 is P392,490. Diana incurred directly
attributable cost of P10,000 to install the machine. Diana has a constructive obligation to restore
the machine to condition still suitable for use at the end of the lease term Estimated cost of
restoration is P20,000. (Use a discount rate of 10% to measure the provision)

PV of remaining lease payments (86,680*3.1699) 274,767

Cash paid at commencement 86,680
Initial direct cost 10,000
PV of estimated restoration cost (20,000*0.6209) 12,418
Capitalized cost of right-of-use asset 383,865

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Alcera, Vincent Luigil C.
Recognition Exemptions

- A lessee may not elect the capitalization of right-of-use asset to

(a) short-term leases; and
(b) leases for which the underlying asset is of low value.

- The lessee shall recognize the lease payments associated with those leases as an expense
on either a straight-line basis over the lease term or another systematic basis. (treated as
rent expenses).

Short-term Lease
Short-term lease - A lease that, at the commencement date, has a lease term of 12 months or less.
Short-term leases only give rise to a recognition of expense on a systematic basis.

- A lease that contains a purchase option is not a short-term lease.

- The election for short-term leases shall be made by class of underlying asset to which the
right of use relates.
- A class of underlying assets is a grouping of underlying assets of a similar nature and use
in an entity’s operations. (IFRS 16 par. 8)

Low-value Assets

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Alcera, Vincent Luigil C.
An underlying asset can be of low value only if (IFRS 16 B5):

a. the lessee can benefit from use of the underlying asset on its own or together with other
resources that are readily available to the lessee; and
b. the underlying asset is not highly dependent on, or highly interrelated with, other assets.

The election for leases for which the underlying asset is of low value can be made on a lease-by-
lease basis. (IFRS 16 par. 8)

Example 1: Recognition Exemptions

Assume low value asset under a lease contract that commenced on July 1, 2019 for a three-year
period. Total rental for the three years is P2,232,000, payable as follows:

12 months at P50,000 per month P600,000

12 months at P61,000 per month 732,000
12 months at P75,000 per month 900,000

Annual rental is a straight-line amount of P744,000 (2,232,000 = 3 years), or P62,000 per month.

The amount paid for the year is based on the lease

that is applicable for the current period. If such amount is less than the required annual payment,
then the excess shall be accrued.

If the amount paid for the current lease year is greater than the required annual expense for the
lease, then a deferral or prepaid entry is made by debiting payables.

Example 2: Recognition Exemptions

Viva Company leased a new machine to Mabuhay Trading on January 1, 2019 for a period of
five years. Annual rental is P450,000. Additionally, on this date, Mabuhay Trading paid P50,000
to Viva Company as a lease bonus. Mabuhay Trading treats the leased machine as low value
asset.

The annual rent expense for Mabuhay is P460,000. This is the sum of the annual rental of
P450,000 and lease bonus of P10,000 (50,000/5 years).

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Alcera, Vincent Luigil C.
作成した: 05-05-2021 終わった: 05-08-2021
Alcera, Vincent Luigil C.