Acctg For Leases Lessee

ACCOUNTING
FOR LEASES
(LESSEE)
LEASE – is a contract or part of a contract that conveys the right to use the underlying asset for a period of
time in exchange for consideration (Appendix A of IFRS 16).
Right to control the use of an identified asset – an essential requisite of a lease
a. Obtain substantially all of the ECONOMIC BENEFITS from the use of the IDENTIFIED ASSET
b. Direct USE of the identified asset
IFRS 16, paragraph 22, provides that at the commencement date, a lessee shall recognize a right of use asset
and a lease liability.
Note: All leases shall be accounted for by the lessee as a finance lease under the new lease standard
Finance lease model for lessee
At the commencement date, a lessee shall recognize a right of use asset and a lease liability (IFRS 16, paragraph
22). As a general rule, all leases shall be accounted for by the lessee as a finance lease under IFRS 16.
Definition of Terms:
Right of Use Asset (ROU) – right of a lessee to use the underlying asset over the lease term in a finance lease
Lease Liability (LL) – obligation of the lessee to make payments to the lessor over the lease term in a finance lease
Underlying Asset – the subject of a lease for which the right to use the same has been provided by the lessor to
the lessee
Lessee – the entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration
Lessor – the entity that provides the right to use an underlying asset for a period of time in exchange for
consideration
Operating lease model for lessee
Operating lease – a lease that does NOT transfer substantially all the risks and rewards incidental to ownership of an
underlying asset
A lessee is permitted to make an accounting policy election to apply the operating lease accounting and not
recognize an asset and lease liability in two optional exemptions (IFRS 16, par. 5):
1. Short-term lease
- lease term for a period of 12 months or less
- no purchase option provision in the lease contract
2. Low value lease

- no quantitative threshold (requires the use of professional judgment)
- considers the value of the asset when it was NEW regardless of its actual age as at commencement of the lease
- election of low value lease is done on a lease by lease basis
Under the Operating Lease (OL) arrangement, the periodic rental is recognized as rent expense using the straight
line basis over the lease term or another systematic basis.
FINANCE LEASE – Lessee
Finance lease – a lease that transfers substantially all of the risks and rewards incidental to ownership of an
underlying asset
*At the commencement date, the lessee shall recognize a right of use (ROU) and lease liability (LL).
Initial measurement of ROU – Asset

ROU asset is initially measured at COST (IFRS16, par. 23). The cost of the ROU asset is comprised of the
following (par. 24):
1. The present value of lease payments or the initial measurement of the lease liability
2. Lease payments made to lessor at or before commencement date, such as lease bonus, less any lease
incentives received
3. Initial direct costs incurred by the lessee
4. Estimate of cost of dismantling, removing and restoring the underlying asset for which the lessee has a
present obligation
Definition of Terms:
Lease incentives - payments by the lessor to the lessee associated with a lease or the reimbursement or
assumption by the lessor of the costs of the lessee (e.g. reimbursement by the lessor of the commission paid by
the lessee in obtaining a lease)
Initial direct costs - incremental costs of obtaining a lease that would not have been incurred if the lease had
not been obtained (e.g. broker’s commission)
Leasehold improvements - not included in the cost of the ROU asset and are separately accounted for as PPE
and depreciated over the shorter between the lease term and the life of the related improvements
Security deposit refundable – not included in the cost of the ROU asset and is accounted for as an asset by the
lessee since the same is refundable at the end of the lease term by the lessor
Subsequent measurement of ROU Asset

The lessee shall measure subsequently the ROU asset at COST less ACCUMULATED DEPRECIATION and
IMPAIRMENT LOSS (Cost Model as provided under IFRS 16, par. 29).
The carrying amount of the ROU asset is also ADJUSTED for any remeasurement of the lease liability.
Other measurement models:

1. Fair value model – if the ROU asset meets the definition of INVESTMENT PROPERTY and the lessee adopts the
fair value model in measuring investment properties
2. Revaluation model – if the ROU asset meets the qualifications of a class of PROPERTY, PLANT & EQUIPMENT
(PPE) and the lessee adopts the revaluation model in measuring that class of PPE
Presentation of ROU Asset

1. Separate line item in the Statement of Financial Position (IFRS 16, par. 47)
2. Alternative presentation:
ROU asset is presented in the appropriate line item within which the corresponding underlying asset would
be owned (e.g. part of PPE if the ROU asset is related to a PPE item or as part of Investment Properties if it
meets the definition of an investment property)
Presentation of ROU Asset

1. Separate line item in the Statement of Financial Position (IFRS 16, par. 47)
2. Alternative presentation:
ROU asset is presented in the appropriate line item within which the corresponding underlying asset would
be owned (e.g. part of PPE if the ROU asset is related to a PPE item or as part of Investment Properties if it
meets the definition of an investment property)
Depreciation of ROU Asset

Case 1:
The lease TRANSFERS OWNERSHIP of the underlying asset to the lessee at the end of the lease term or the
lessee is reasonably certain to exercise a PURCHASE OPTION = Depreciate the ROU asset over the useful life of
the underlying asset
Case 2:
There is NO provision on the TRANSFER OF OWNERSHIP over the underlying asset or the PURCHASE OPTION is
NOT reasonably certain to be exercised by the lessee = Depreciation the ROU asset over the shorter between
the useful life of the underlying asset and the lease term (whichever is shorter)
Measurement of lease liability

At the commencement date of the lease, the lessee shall MEASURE the lease liability at the PRESENT VALUE of
LEASE PAYMENTS (IFRS 16, par. 26).
Rate to be applied for PV computations:

1. Interest rate implicit in the lease
2. Lessee’s Incremental borrowing rate (in the absence of the implicit rate)
Components of lease payments

a. Fixed lease payments less any lease incentives receivable
b. Variable lease payments
c. Exercise price of a purchase option if the lessee is reasonably certain to exercise the option
d. Amount expected to be payable by the lessee under a residual value guarantee
e. Termination penalties if the lease term reflects the exercise of a termination option
Definition of terms:
RESIDUAL VALUE GUARANTEE – a guarantee made to the lessor by a party unrelated to the former that the
value of the underlying asset at the end of the lease term will be at least a SPECIFIED AMOUNT
UNGUARANTEED RESIDUAL VALUE – the portion of the residual value of the underlying asset, the realization
of which by the lessor is NOT ASSURED or is guaranteed by a party RELATED to the lessor
LEASE TERM – the noncancelable period for which the lessee has the right to use the underlying asset together
with both of the following:
a. Period covered by an OPTION TO EXTEND the lease if the lessee is reasonably certain to exercise the
extension option; and
b. Period covered by an OPTION TO TERMINATE the lease if the lessee is reasonably certain NOT to
exercise the termination option
Accounting for Leases - Lessee
Summary Rules
(Q1) SHORT TERM/ LOW VALUE LEASE?

YES
Option to use Operating Lease (recognize Rent
Expense)
NO
Finance Lease Model (recognize ROU and LL)
(Q2) TRANSFER OF OWNERSHIP/ CERTAIN

NONE PURCHASE OPTION?
Depreciate using the life of ROU asset or lease
term, whichever is shorter
YES
Depreciate using the life of ROU asset
Summary Rules

YES
Expense)
NO
(Q2) is RESIDUAL VALUE (RV) GUARANTEED?

NO
RV does not form part of ROU asset and LL; RV is
disregarded in computing for depreciation
YES
RV forms part of ROU asset and LL; RV is regarded
in computing for depreciation; Loss is recorded if
the FV of the asset is lower than the RVG upon
return of the ROU asset to the lessor
Summary Rules

YES
Expense)
NO
(Q2) INITIAL DIRECT COSTS?

NONE
Cost of ROU Asset = Lease liability
YES
Cost of ROU Asset = Lease liability + IDC - Lease
Incentives (if any)
Illustration-Certain purchase option
UMO-OPPA Company leased a machine on January 1, 2021 with the following pertinent information:
Fixed rental payment at the end of each year 1,000,000

Lease term 10 years
Useful life of machine 12 years
Incremental borrowing rate 14%
Implicit borrowing rate 12%
PV of an ordinary annuity of 1 for 10 periods at
14% 5.216
12% 5.65
PV of 1 for 10 periods at
14% 0.27
12% 0.322
UMO-OPPA Company has the option to purchase the machine upon the lease expiration on January 1, 2031
by paying P500,000. The lessee is reasonably certain to exercise the purchase option at the commencement
date of the lease.
The estimated residual value of the machine at the end of the 12-year life is P600,000.
Cost of ROU Asset

PV of lease payments (1,000,000 x 5.65) 5,650,000
PV of purchase option (500,000 x .322) 161,000
Total lease liability 5,811,000
Amortization Table
Date Payment Interest Principal Present value
1/1/2021 5,811,000
12/31/2021 1,000,000 697,320 302,680 5,508,320
12/31/2022 1,000,000 660,998 339,002 5,169,318
12/31/2023 1,000,000 620,318 379,682 4,789,636
12/31/2024 1,000,000 574,756 425,244 4,364,392
12/31/2025 1,000,000 523,727 476,273 3,888,119
12/31/2026 1,000,000 466,574 533,426 3,354,694
12/31/2027 1,000,000 402,563 597,437 2,757,257
12/31/2028 1,000,000 330,871 669,129 2,088,128
12/31/2029 1,000,000 250,575 749,425 1,338,703
12/31/2030 1,000,000 161,297 838,703 500,000
Journal entries for 2021
To record the acquisition of the machinery under a finance lease
Right of use asset 5,811,000
Lease liability 5,811,000
To record the first annual rental payment on Dec. 31, 2021:

Interest expense 697,320
Lease liability 302,680
Cash 1,000,000
Carrying Amount of LL as of Dec. 31, 2021: 5,508,320

Current Portion: 339,002
Non-current Portion: 5,169,318
To record the annual depreciation:

Depreciation 434,250
Accumulated depreciation 434,250
(5,811,000-600,000 RV/12 years*)
Note: 12 years useful life will be used as the basis for depreciating the ROU because the lessee is reasonably
certain to exercise the purchase option.
Journal entries (cont.)
Exercise of the purchase option (January 1, 2031)

Cash 500,000
Non-exercise of purchase option (January 1, 2031)
Accumulated depreciation 4,342,500

Loss on finance lease 968,500
Illustration-Residual value guarantee
UMO-OPPA Company leased an equipment on January 1, 2021 with the following information:
Fixed annual payment at the end of each lease year 1,000,000

Lease term 4 years
Useful life of equipment 5 years
Implicit interest rate 10%
PV of an ordinary annuity of 1 for 4 periods at 10% 3.16987
PV of 1 for 4 periods at 10% 0.683
UMO-OPPA Company has guaranteed a P 200,000 residual value on December 31, 2024 to the lessor.
Note: As long as there is a residual value guarantee, there is no more purchase option because the
equipment will revert to the lessor upon the expiration of the lease on Dec. 31, 2024.
PV of lease payments (1,000,000 x 3.16987) 3,169,870

PV of residual value guarantee (200,000 x 0.683) 136,600
Cost of ROU and LL 3,306,470
Amortization Table:
1/1/2021 3,306,470
12/31/2021 1,000,000 330,647 669,353 2,637,117
12/31/2022 1,000,000 263,711 736,289 1,900,828
12/31/2023 1,000,000 190,082 809,918 1,090,910
12/31/2024 1,000,000 109,090 890,910 200,000
Journal entries:
To record the acquisition of the equipment
To record the first annual rental payment on Dec. 31, 2021:

Cash 1,000,000
Carrying amount of LL as of Dec. 31, 2021: P 2,637,117;

Current Portion: 736,289
Non-current portion: P1,900,828
To record the annual depreciation:

(3,306,470 – 200,000)/ 4 years
Note: The asset is depreciated over the lease term of 4 years which is shorter than the useful life because there is
neither transfer of ownership or purchase option.
Journal entries:
Return of equipment to lessor on December 31, 2024
To record the final annual payment on December 31, 2024:
Cash 1,000,000
To record the return of the equipment to the lessor:

Accumulated depreciation *3,106,470
*Accumulated depreciation 3,106,468 (adjusted to 3,106,470)
If the FV of the underlying asset is less than the residual value guarantee, a loss is reported for the difference and the lessee must
make up for the difference with a cash payment.
Ex. FV is of the equipment on December 31, 2024 is only P150,000 which is P50,000 lower than the residual value guarantee
Loss on finance lease 50,000

Cash 50,000
Note: If the FV is higher than the RVG, no additional entry is necessary because there is no need for any cash settlement.
Illustration-Initial Direct Cost
UMU-OPPA Company leased an equipment on January 1, 2019 with the following information:
Annual fixed payment in advance at the beginning of each lease year 1,000,000
Initial direct cost paid on January 1, 2019 250,000
Lease incentive received 150,000
Residual value guarantee 300,000
Lease term 5 years
PV of an ordinary annuity of 1 in advance at 8% for 5 periods 4.3121
PV of 1 at 8% for 5 periods 0.6806
PV of rentals (1,000,000 x 4.3121) 4,312,100

PV of residual value guarantee (300,000 x .6806) 204,180
Lease liability-January 1, 2019 4,516,280
Initial direct cost 250,000
Lease incentive received (150,000)
Cost of ROU 4,616,280
Amortization Table:
1/1/2019 4,516,280
1/1/2019 1,000,000 1,000,000 3,516,280
1/1/2020 1,000,000 281,302 718,698 2,797,582
1/1/2021 1,000,000 223,807 776,193 2,021,389
1/1/2022 1,000,000 161,711 838,289 1,183,100
1/1/2023 1,000,000 94,648 905,352 277,748
1/1/2024 300,000 *22,252 277,748 -
Journal Entries
To record the acquisition of the equipment under a finance lease on 1/1/2019:
Cash (250,000-150,000) 100,000
To record the first annual payment on January 1, 2019:
Cash 1,000,000
To record the interest for 2019 (Dec 31, 2019)

Accrued interest payable 281,302
Journal Entries (cont.)
To record the depreciation for 2019:
Depreciation (4,316,280/5) 863,256
(4,616,280-300,000RV/5 years Lease Term)
To record the second payment on January 1, 2020:

Cash 1,000,000
To record the interest for 2020 (Dec 31, 2020)


Depreciation (4,316,280/5) 863,256
Return of the equipment by the lessee (January 1, 2024):
If the FV of the asset is P400,000 which is higher than the RVG of P300,000, the entry to record the
return of the equipment to the lessor is :
Accumulated depreciation (863,256 x 5) 4,316,280

Illustration-Unguaranteed residual value
UMO-OPPA Company leased a warehouse on January 1, 2019 with the following information:
Annual rental payable at the end of each year 600,000

Unguaranteed residual value 200,000
Payment to lessor to obtain a long-term lease(lease bonus) 224,000
Cost of restoring the asset as required by contract 400,000
Annual executory cost paid 50,000
Lease term 6 years
PV of an ordinary annuity of 1 at 10% for 6 periods 4.36
The lease provides for neither a transfer of title to the lessee nor a purchase option.
Lease liability (600,000 x 4.36) 2,616,000
Payment to lessor to obtain a long-term lease 224,000
Estimated restoration cost, at present value 400,000
Total cost of ROU 3,240,000
Note: Unguaranteed RV is not included in the computation of Lease Liability.

Annual executory cost is treated as outright expense.
Journal Entries (2019)

To record the acquisition of the warehouse under a finance lease:
Cash 224,000
Estimated liability for restoration 400,000
To record the payment of executory cost:
Executory cost 50,000
Cash 50,000
To record the first rental payment on Dec 31, 2019:
Interest expense (10% x 2,616,000) 261,600
Cash 600,000
Depreciation (3,240,000/6) 540,000
- the unguaranteed residual value is ignored in computing the depreciable amount.
Return of equipment to lessor (On January 1, 2025)
Accumulated depreciation (540,000 x 6) 3,240,000

*the lessee has no financial obligation but to return the asset to the lessor.
Illustration - Actual purchase of underlying asset
JHS Company purchased a building that it had been leasing under a finance lease for P4,000,000. The balances
of certain accounts on the date of actual purchase are as follows:
ROU 5,000,000
Accumulated depreciation 1,500,000
Journal Entry:
Building* 3,700,000
Accumulated Depreciation 1,500,000
ROU asset 5,000,000
Cash 4,000,000
*NOTE: The cost of the asset purchased is equal to the carrying amount of the leased asset plus cash payment
minus the balance of the lease liability.
Carrying amount of the ROU asset ( 5,000,000 – 1,500,000) 3,500,000
Cash payment 4,000,000
Carrying amount of the lease liability (3,800,000)
Cost of the building 3,700,000
Illustration-Extension option
UMU-OPPA Company entered into a lease of building on January 1, 2019 with the following Information:
Lease term 5 years
Useful life of building 20 years
The lease contained an option for the lessee to extend for a further 5 years. At the commencement date,
the exercise of the extension option is not reasonably certain.
After 3 years, the lessee decided to extend the lease for a further 5 years.
New annual rental payable at the end of each year 600,000

New implicit interest rate 8%
Amortization Table:
1/1/2019 1,895,500
12/31/2019 500,000 189,550 310,450 1,585,050
12/31/2020 500,000 158,505 341,495 1,243,555
12/31/2021 500,000 124,355 375,645 867,910
Journal Entries for 2019:

Jan. 1
Dec. 31
Interest expense (1,895,500 x 10%) 189,550
Cash 500,000
Depreciation expense (1,895,500 / 5yrs) 379,100
Remeasurement of lease liability
On January 1, 2022, the lease liability is remeasured using the new implicit interest rate of 8%.
Annual rental for remaining 2 years of old lease term 500,000
Multiply by PV of an OA of 1 at 8% for 2 periods 1.783
PV-January 1, 2022 891,500
Annual rental for 5 years starting January 1, 2024 600,000

Multiply by PV of an OA of 1 at 8% for 5 periods 3.993
PV-January 1, 2024 2,395,800
Multiply by PV of 1 at 8% for 2 periods 0.857
PV-January 1, 2022 2,053,200
The PV of the new rentals on January 1, 2024 is rediscounted for 2 periods on the date of extension
on January 1, 2022.
PV of remaining rentals of old lease term 891,500
PV of rentals of extended lease term 2,053,200
Total PV-January 1, 2022 2,944,700
PV- December 31, 2021 (867,910)
Increase in LL on January 1, 2022 2,076,790
ROU-January 1, 2019 1,895,500

Accu. Depn-December 31, 2021 (379,100x 3 yrs) (1,137,300)
Carrying amount-December 31, 2021 758,200
Increase in liability on January 1, 2022 2,076,790
New CA-January 1, 2022 2,834,990
Amortization Table:
1/1/2022 2,944,700
12/31/2022 500,000 235,576 264,424 2,680,276
12/31/2023 500,000 214,422 285,578 2,394,698
12/31/2024 600,000 191,576 408,424 1,986,274
12/31/2025 600,000 158,902 441,098 1,545,176
12/31/2026 600,000 123,614 476,386 1,068,790
12/31/2027 600,000 85,503 514,497 554,293
12/31/2028 600,000 45,707* 554,293
To record the remeasurement of the lease liability on January 1, 2022:

ROU Asset 2,076,790
Lease Liability 2,076,790
To record the annual rental on December 31, 2022:

Interest Expense 235,576
Lease Liability 264,424
Cash 500,000
To record the annual depreciation based on the new carrying amount
Accumulated Depreciation 404,999
(2,834,990 / 7 years)
Illustration-Variable payments
On January 1, 2019, UMO-OPPA Company entered into an 8-year lease of a floor of a building with the following
terms:
Annual rental for the first three years payable at the end of each year 300,000
Annual rental for the next five years payable at the end of each year 400,000
PV of an ordinary annuity of 1 at 10% for three periods 2.487
PV of an ordinary annuity of 1 at 10% for five periods 3.791
PV of 1 at 10% for three periods 0.751
The lease provides for neither a transfer of title to the lessee nor a purchase option.
Annual rental for first 3 years 300,000
Multiply by PV of an ordinary annuity of 1 at 10% for 3 periods 2.487
PV-January 1, 2019 746,100
Annual rental for next 5 periods 400,000

Multiply by PV of an ordinary annuity of 1 at 10% for 5 periods 3.791
PV-January 1, 2022 1,516,400
Multiply by PV of 1 at 10% for 3 periods 0.751
PV-January 1, 2019 1,138,816
Illustration-Variable payments
PV of annual rentals for 3 years 746,100
PV of annual rentals for the next 5 years 1,138,816
Lease liability - January 1, 2019 1,884,916
Amortization Table:
1/1/2019 1,884,916
12/31/2019 300,000 188,492 111,508 1,773,408
12/31/2020 300,000 177,341 122,659 1,650,749
12/31/2021 300,000 165,075 134,925 1,515,824
12/31/2022 400,000 151,582 248,418 1,267,406
12/31/2023 400,000 126,741 273,259 994,147
12/31/2024 400,000 99,415 300,585 693,562
12/31/2025 400,000 69,356 330,644 362,918
12/31/2026 400,000 37,082 * 362,918 -
Journal Entries:
ROU asset 1,884,916

Cash 300,000
Depreciation (1,884,916 / 8 years) 235,615

LEASE MODIFICATION
The lessee shall account for the lease modification (subsequent changes in the lease agreement) as a separate
lease under the following conditions (IFRS 16, par 44):
a) The modification increases the SCOPE of the lease by adding the RIGHT TO USE an ADDITIONAL UNDERLYING
ASSET (e.g. lease of an additional equipment or increase in the floor area of an existing lease agreement of
premises).
b) The rental for the lease modification increases by an amount commensurate with the increase in scope and
equivalent to the CURRENT MARKET RENTAL.
Illustration – Lease modification (accounted for as a separate lease)
On January 1, 2020, an entity entered into a lease agreement with the following information:
Floor space (original lease) 3,000 square meters
Implicit rate in the lease 10%
Lease term 8 years
PV of an ordinary annuity of 1 @ 10% for 8 periods 5.3349
On January 1, 2022, the entity and the lessor agreed to amend the original terms of the lease with the following
information:
Additional floor space 4,500 square meters
Increase in rental payable at the end of each year 200,000
Note: The increase in the rental for the additional 4,500 SQM is equivalent to the current market rent.
Illustration – Lease modification (accounted for as a separate lease)
2020 Journal Entries:
Jan 1 ROU asset (P100,000 x 5.3349) 533,490
Dec 31 Interest expense (P533,490 x 10%) 53,349

Lease liability (P100,000 – 53,349) 46,651
Cash 100,000
Depreciation (P533,490 / 8 years) 66,686

2022 Journal Entries (for the new lease only)

Jan 1 ROU asset (P200,000 x 4.6229) 924,580
Dec 31 Interest expense (P924,580 x 8%) 73,966

Lease liability (P200,000 – 73,966) 126,034
Cash 200,000

Illustration: Lease modification – extension of lease term
On January 1, 2020, the entity entered into a lease for office space with the following information:
Annual rental payable at the end of each year beginning 12/31/2020 200,000
Lease term 5 years
On January 1, 2022, the entity and the lessor agreed to amend the original lease by extending the lease term by 3
more years with the following information:
Annual rental payable at the end of each year beginning 12/31/2022 200,000
PV of the lease liability on 1/1/2020 (P200,000 x 3.89) 778,000
Amortization Table for 2020 & 2021:

1/1/2020 778,000
12/31/2020 200,000 70,020 129,980 648,020
12/31/2021 200,000 58,322 141,678 506,342
Amortization Table for 2020 & 2021:

1/1/2020 778,000
12/31/2020 200,000 70,020 129,980 648,020
12/31/2021 200,000 58,322 141,678 506,342
Journal entries for 2020: Journal entries for 2021:

Jan 1 ROU asset 778,000 Dec 31 Interest expense 58,322
Lease liability 778,000 Lease liability 141,678
Cash 200,000
Dec 31 Interest expense 70,020 Depreciation expense 155,600

Lease liability 129,980 Accumulated depreciation 155,600
Cash 200,000
Depreciation expense 155,600

(P778,000 divide by 5 years)
New lease liability after amendment:
Present value of lease payments 1/1/2022 (P200,000 x 4.231) 846,200
Carrying amount of lease liability as at 1/1/2022 (refer to the amortization table) (506,342)
Increase in lease liability 339,858
Date Payment Interest (11%) Principal Present value
1/1/2022 846,200
12/31/2022 200,000 93,082 106,918 739,282
12/31/2023 200,000 81,321 118,679 620,603
12/31/2024 200,000 68,266 131,734 488,869
12/31/2025 200,000 53,776 146,224 342,645
12/31/2026 200,000 37,691 162,309 180,336
12/31/2027 200,000 19,664 180,336 -
Journal entries for 2022:

Jan 1 ROU asset 339,858 *Cost of ROU asset before amendment 778,000
Lease liability 339,858 Increase in ROU/LL due to amendment 339,858
Total cost of ROU after amendment 1,117,858
Dec 31 Interest expense 93,082 Accum. Depn. as at 12/31/2021 (311,200)
Lease liability 106,918 Carrying amount after amendment 806,658
Cash 200,000 Remaining, extended life in years (5+3-2) 6
Annual depreciation after amendment 134,443
Depreciation expense* 134,443
Illustration: Lease modification – decrease in scope of the lease
On January 1, 2020, an entity entered into a lease of office space with the following information:
Floor space 800 SQM
Lease term 10 years
Implicit rate 8%
PV of lease payments 1/1/2020 (P40,000 x 6.7101) 268,404
On January 1, 2022, the lessee and lessor agreed to amend the original terms of the lease with the following
information:
Floor space 480 SQM
Implicit rate 10%
NOTE: A termination gain or loss should be recognized as a result of the partial termination (reduction in scope) of the
lease (IFRS 16, par 46).
a) Termination gain = if the decrease in the CA of the LL is higher than the decrease in CA of the ROU asset
b) Termination loss = if the decrease in the CA of the LL is lower than the decrease in CA of the ROU asset
Amortization Table for 2020 & 2021 (based on original terms):

1/1/2020 268,404
12/31/2020 40,000 21,472 18,528 249,876
12/31/2021 40,000 19,990 20,010 229,866

Jan 1 ROU asset (P100,000 x 5.3349) 268,404
Dec 31 Interest expense 21,472

Cash 40,000

Termination Gain (Loss)
Carrying amount (CA) of ROU asset, 12/31/21 (cost of P 268,404 less AD of P 53,680) 214,724
Carrying amount (CA) of lease liability, 12/31/2021 (refer to the original amortization table) 229,866
Decrease in the CA of the lease liability (P 229,866 x 40%) 91,946

Decrease in the CA of the ROU asset (P 214,724 x 40%) 85,890
Termination gain 6,056
PV of lease payments as at 1/1/2022 as a result of the amendment (P 30,000 x 5.3349) 160,047

CA of the remaining old lease liability (P 229,866 less P 91,946) (137,920)
Increase in lease liability resulting from the amendment (added to the cost of the ROU asset) 22,127
Analysis of the ROU Asset

Particulars Cost Accum. Depn Carrying Amount
ROU Asset, before amendment 268,404 53,680 214,724
Reduction of scope by 40% (107,362) (21,472) (85,890)
Balance after reduction in scope 161,042 32,208 128,834
Increase in lease liability - amendment 22,127 - 22,127
ROU Asset, after amendment 183,169 32,208 150,961
Amortization Table from 2022 to 2029:
Date Payment Interest (10%) Principal Present value
1/1/2022 160,047
12/31/2022 30,000 16,005 13,995 146,052
12/31/2023 30,000 14,605 15,395 130,657
12/31/2024 30,000 13,066 16,934 113,723
12/31/2025 30,000 11,372 18,628 95,095
12/31/2026 30,000 9,510 20,490 74,605
12/31/2027 30,000 7,461 22,539 52,066
12/31/2028 30,000 5,207 24,793 27,273
2022 Journal Entries: 12/31/2029 30,000 2,727 27,273 -
Jan 1 Lease liability 91,946

ROU asset 107,362
Termination gain 6,056
(To record the cancelation of the CA of the ROU asset and LL, along with the recognition of termination gain
ROU asset 22,127

(To record the increase in LL due to the amendment of the lease)
Dec 31 Interest expense 16,005

Cash 30,000

Illustration: Lease modification – change in rental
On January 1, 2020, an entity leased equipment with the following information:
Lease term 6 years
Implicit rate 7%
PV of lease payments 1/1/2020 (P 80,000 x 4.7665) 381,320
On January 1, 2023, the entity and the lessor agreed to amend the original terms of the lease by reducing the lease payment to P
70,000 and increasing the implicit rate to 9%. The PV of an ordinary annuity of 1 @ 9% for 3 periods is 2.5313.

Amortization Table for 2020 & 2021 (based on original terms):
Jan 1 ROU asset 381,320
Date Payment Interest Principal Present value Lease liability 381,320
1/1/2020 381,320
12/31/2020 80,000 26,692 53,308 328,012 Dec 31 Interest expense 26,692
12/31/2021 80,000 22,961 57,039 270,973 Cash 80,000
12/31/2021 80,000 18,968 61,032 209,941
Depreciation 63,553
(381,320 / 6 years)
Illustration: Lease modification – change in rental
Modified lease liability - 01/01/2023 (P70,000 x 2.5313) 177,191
Carrying amount of the lease liability - 12/31/2022 (209,941)
Decrease in lease liability (reduction in the CA of the ROU asset) (32,750)
Cost of the ROU asset (original) 381,320

Accumulated depreciation (P 63,553 x 3 years) (190,659)
Carrying amount of the ROU asset before amendment 190,661
Decrease in lease liability due to the amendment (32,750)
Adjusted carrying amount of the ROU asset 157,911
Amortization Table from 2023 to 2025: 2020 Journal Entries:

Jan 1 Lease liability 32,750
Date Payment Interest Principal Present value ROU asset 32,750
1/1/2023 177,191
12/31/2023 70,000 15,947 54,053 123,138 Dec 31 Interest expense 15,947
12/31/2024 70,000 11,082 58,918 64,220 Cash 70,000
12/31/2025 70,000 5,780 64,220 -
Depreciation 52,637
(157,911 / 3 years)

Acctg For Leases Lessee

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ACCOUNTING

Right to control the use of an identified asset – an essential requisite of a lease

b. Direct USE of the identified asset

2. Low value lease

Initial measurement of ROU – Asset

3. Initial direct costs incurred by the lessee

Subsequent measurement of ROU Asset

Other measurement models:

Presentation of ROU Asset

Presentation of ROU Asset

Depreciation of ROU Asset

Measurement of lease liability

Rate to be applied for PV computations:

Components of lease payments

b. Variable lease payments

d. Amount expected to be payable by the lessee under a residual value guarantee

(Q1) SHORT TERM/ LOW VALUE LEASE?

Finance Lease Model (recognize ROU and LL)

(Q2) TRANSFER OF OWNERSHIP/ CERTAIN

(Q1) SHORT TERM/ LOW VALUE LEASE?

Finance Lease Model (recognize ROU and LL)

(Q2) is RESIDUAL VALUE (RV) GUARANTEED?

(Q1) SHORT TERM/ LOW VALUE LEASE?

Finance Lease Model (recognize ROU and LL)

(Q2) INITIAL DIRECT COSTS?

Cost of ROU Asset = Lease liability

Fixed rental payment at the end of each year 1,000,000

Cost of ROU Asset

To record the first annual rental payment on Dec. 31, 2021:

Carrying Amount of LL as of Dec. 31, 2021: 5,508,320

To record the annual depreciation:

Exercise of the purchase option (January 1, 2031)

Lease liability 500,000

Non-exercise of purchase option (January 1, 2031)

Accumulated depreciation 4,342,500

Fixed annual payment at the end of each lease year 1,000,000

PV of lease payments (1,000,000 x 3.16987) 3,169,870

To record the first annual rental payment on Dec. 31, 2021:

Carrying amount of LL as of Dec. 31, 2021: P 2,637,117;

To record the annual depreciation:

To record the return of the equipment to the lessor:

*Accumulated depreciation 3,106,468 (adjusted to 3,106,470)

Loss on finance lease 50,000

PV of rentals (1,000,000 x 4.3121) 4,312,100

To record the interest for 2019 (Dec 31, 2019)

To record the second payment on January 1, 2020:

To record the interest for 2020 (Dec 31, 2020)

To record the depreciation for 2020:

Return of the equipment by the lessee (January 1, 2024):

Accumulated depreciation (863,256 x 5) 4,316,280

Annual rental payable at the end of each year 600,000

Note: Unguaranteed RV is not included in the computation of Lease Liability.

Journal Entries (2019)

Return of equipment to lessor (On January 1, 2025)

Accumulated depreciation (540,000 x 6) 3,240,000

New annual rental payable at the end of each year 600,000

Journal Entries for 2019:

Annual rental for 5 years starting January 1, 2024 600,000

ROU-January 1, 2019 1,895,500

To record the remeasurement of the lease liability on January 1, 2022:

To record the annual rental on December 31, 2022:

To record the annual depreciation based on the new carrying amount