SLFRS : 16 - LEASES

Lease
a lease is a contract that conveys the right to use an asset for a
period of time in exchange for consideration.

Recognition
At the commencement date, a lessee recognises a right-of-use asset and a lease liability.

Measurement
Initial measurement
At the commencement date, a lessee shall measure the right-of-use asset at cost.

The cost of the right-of-use asset shall comprise:

(a) any lease payments made at or before the commencement date, less any lease incentives
received;
(b) any initial direct costs incurred by the lessee; and
(c) 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

Rs.
Down payment xxx
(-) Lease intensive (x x x)
Initial direct cost xxx
Present value of minimum lease payment xxx
Estimated cost of dismantling and removing the asset xxx
Cost of right-of-use asset xxx

Initial measurement of the lease liability

At the commencement date, a lessee should measure the lease liability at
the present value of the lease payments that are not paid at that date. The
lease payments shall be discounted using the interest rate implicit in the
lease,
Subsequent measurement
After the commencement date, a lessee measures
the right-of-use asset applying a cost model

Cost model
To apply a cost model, a lessee shall measure the right-of-use asset at cost:
Rs.
Cost xxx
(-) Accumulated depreciation (x x x)
(-) Accumulated impairment losses (x x x)
Carrying amount xxx

A lessee applies the depreciation requirements in LKAS 16 Property, Plant and Equipment in
depreciating the right-of-use asset, subject to the requirements in paragraph 32.

Paragraph 32
If the lease transfers ownership of the underlying asset to the lessee by the end of the lease
term, the lessee shall depreciate the right-of-use asset from the commencement date to the
end of the useful life of the underlying asset. Otherwise, the lessee shall depreciate the right-
of-use asset from the commencement date to the earlier of the end of the useful life of the
right-of-use asset or the end of the lease term.

Subsequent measurement of the lease liability

After the commencement date, a lessee shall measure the lease liability by:
(a) increasing the carrying amount to reflect interest on the lease liability;
(b) reducing the carrying amount to reflect the lease payments made

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Presentation
A lessee shall either present in the statement of financial position, or disclose in the notes:
(a) right-of-use assets separately from other assets.
(b) lease liabilities separately from other liabilities.

In the statement of profit or loss and other comprehensive income, a lessee shall present
interest expense on the lease liability separately from the depreciation charge for the right-
of-use asset. Interest expense on the lease liability is a component of finance costs, which
paragraph 82(b) of LKAS 1 Presentation of Financial Statements requires to be presented
separately in the statement of profit or loss and other comprehensive income.

Disclosures
A lessee shall disclose the following amounts for the reporting period:
(a) depreciation charge for right-of-use assets by class of underlying asset
(b) interest expense on lease liabilities
(c) total cash outflow for leases
(d) additions to right-of-use assets
(e) the carrying amount of right-of-use assets at the end of the reporting period by class
of underlying asset

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Accounting for lease in Lessee’s books
• Present value of minimum lease payment (Initial Lease Liability) of lease

Right of use asset account Debit xxx

Lease liability account Credit xxx

• Down payment and Initial direct cost for arranging the lease

Right of use asset account Debit xxx

Cash control account Credit xxx

• Adjustment of lease interest end of the year

Lease interest account Debit xxx

Lease liability account Credit xxx

• Payment of annual lease installment at the end of the year

Lease liability account Debit xxx

Cash control account Credit xxx

 Accounting for depreciation

Depreciation account Debit xxx

Provision for depreciation account Credit xxx

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Presentation of lease liability in the statement of financial position
Current liabilities - Annual lease installment xxx
(-) Next year lease interest (xx)
Current portion of lease liability xxx

Non-current liabilities - Closing lease liability balance xxx

(-) Current portion of lease liability (xx)
Non-current portion of lease liability xxx

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1 Asiri Ltd. acquired a motor vehicle on finance lease on 01.04.2021. The following details are provided.
Cost of Right of use asset (Rs.) 3,600,000
Down payment (Rs.) 600,000
Initial lease liability (Rs.) 3,000,000
Lease installment (payable at the end of each year Rs.) 946,000
Lease period (Years) 4
Annual lease interest 10%
Useful life (Years) 6
Asiri Ltd. receives the ownership of the asset at the end of lease period.
Lease interest for each year is as follows.
Year Rs.’000
2021/22 300
2022/23 235
2023/24 164
2024/25 086

Required:
1. Relevant journal entries including accounting for depreciation for the first year ending
31.03.2022
2. Relevant ledger accounts including accounting for depreciation for the first year ending
31.03.2022
3. Extracts of financial statements for the year ending 31.03.2022

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 General Journal
Debit Credit
Date Description
(Rs.’000) (Rs.’000)

Lease Liability Account

Right of Use Asset Account

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 Cash Control Account (Extracts)

Lease Interest Account

Right of Use Asset Depreciation Account

Provision for Depreciation of Right to Use Asset Account

Statement profit or loss and other comprehensive income (Extracts)

Rs.’000 Rs.’000
Administration cost Items considered when calculating profit
before tax
________________ ________
________________ ________
Finance cost ________________ ________
________________ ________

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 Statement of financial position (Extracts)

Rs.’000 Rs.’000
Non-current assets Right of Use Assets

________________ ________ Cost at initial recognition ________

(-) Accumulated depreciation ________
Non-current liabilities Carrying amount ________
________________ ________

Current liabilities

________________ ________

2 Kelani Ltd. acquired a machine on finance lease on 01.04.2021. The following details are given in
relation to this transaction.
Cost of machine (Rs.) 3,500,000
Down payment (Rs.) 500,000
Lease installment (payable at the end of each year Rs.) 1,050,000
Lease period (Years) 4
Annual lease interest is 15%. The lease interest of the 4 year period is as follows.
Year Rs.’000
2021/22 450
2022/23 360
2023/24 256
2024/25 137
The ownership of the asset is passed to the company at the end of the lease term. The company
depreciates distribution vehicles at 10% per annum on straight line basis.

Required:
1. Relevant journal entries including accounting for depreciation for the first year ending
31.03.2022
2. Relevant ledger accounts including accounting for depreciation for the first year ending
31.03.2022
3. Extracts of financial statements for the year ending 31.03.2022

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 General Journal
Debit Credit
Date Description
(Rs.’000) (Rs.’000)

Lease Liability Account

Right of Use Asset Account

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 Cash Control Account (Extracts)

Lease Interest Account

Right of Use Asset Depreciation Account

Provision for Depreciation of Right to Use Asset Account

Statement profit or loss and other comprehensive income (Extracts)

Rs.’000 Rs.’000
Administration cost Items considered when calculating profit
before tax
________________ ________
________________ ________
Finance cost ________________ ________
________________ ________

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 Statement of financial position (Extracts)

Rs.’000 Rs.’000
Non-current assets Right of Use Assets

________________ ________ Cost at initial recognition ________

(-) Accumulated depreciation ________
Non-current liabilities Carrying amount ________
________________ ________

Current liabilities

________________ ________

3 Nuvin PLC acquired a distribution vehicle on finance lease on 01.04.2021. The following details related
to the transaction is provided.
Cost (Rs.) 4,500,000
Initial lease liability (Rs.) 4,200,000
Annual lease installment (Rs.) 1,165,000
Lease period (Years) 5
Useful life (Years) 10
Lease interest (per annum) 12%
The ownership of the motor vehicle is passed to the company at the end of the lease term.
The lease interest of the 5 year period is as follows.
Year Rs.’000
2021/22 504
2022/23 425
2023/24 336
2024/25 236
2025/26 124

Required:
1. Relevant journal entries including accounting for depreciation for the first year ending
31.03.2022
2. Relevant ledger accounts including accounting for depreciation for the first year ending
31.03.2022
3. Extracts of financial statements for the year ending 31.03.2022

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4 Nadeesh PLC acquired a distribution vehicle on finance lease on 01.04.2021. The related details are as
follows.
Cost of distribution vehicle (Rs.) 3,000,000
Present value of minimum lease payment (Rs.) 2,400,000
Annual lease installment (Rs.) 757,000
Lease period (Years) 5
Lease interest (per annum) 10%

The company depreciates its distribution vehicle at 10% per annum on straight line method

Required:
1. Relevant journal entries including accounting for depreciation for the first year ending
31.03.2022
2. Relevant ledger accounts including accounting for depreciation for the first year ending
31.03.2022
3. Extracts of financial statements for the year ending 31.03.2022

5 Akila PLC is a manufacturing company. The company acquired a machine on finance lease on
01.04.2021. The related details are as follows.
Initial lease liability (Rs.) 2,500,000
Down payment (Rs.) 700,000
Lease period (Years) 4
Annual lease installment (Rs.) 876,000
Annual interest rate 15%

The useful life of the asset is 6 years. The ownership of the asset is not passed to the company at the
end of the lease period.

Required:
1. Relevant journal entries including accounting for depreciation for the first year ending
31.03.2022
2. Relevant ledger accounts including accounting for depreciation for the first year ending
31.03.2022
3. Extracts of financial statements for the year ending 31.03.2022

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6 Daham Ltd. acquired a motor vehicle on finance lease on 01.04.2021. The following details related to
the transaction is given.
Cost of motor vehicle (Rs.) 4,200,000
Annual lease installment (Rs.) 1,325,000
Lease period (Years) 4
Useful life (Years) 10
The ownership of the motor vehicle is not passed to the company at the end of the lease period.
The lease interest of the 4 year period is as follows.
Year Rs.’000
2021/22 420
2022/23 329
2023/24 230
2024/25 121

Required:
1. Relevant journal entries including accounting for depreciation for the first year ending
31.03.2022
2. Relevant ledger accounts including accounting for depreciation for the first year ending
31.03.2022
3. Extracts of financial statements for the year ending 31.03.2022

7 Mohan PLC acquired a motor vehicle on finance lease on 01.04.2021. The following details are related.
Cost (Rs.) 5,000,000
Down payment (Rs.) 1,000,000
Annual lease installment (Rs.) 1,082,000
The lease term of the motor vehicle is 5 years and its expected useful life is 8 years. The ownership of
the motor vehicle is not transferred to the company at the end of the lease term.
The lease interest relevant for the first year and the second year are Rs. 440,000 and Rs. 369,000
respectively.

Required:
1. Relevant journal entries including accounting for depreciation for the first year ending
31.03.2022
2. Relevant ledger accounts including accounting for depreciation for the first year ending
31.03.2022
3. Extracts of financial statements for the year ending 31.03.2022

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8 Pearl PLC acquired a motor vehicle on 01.04.2021 under a finance lease for use in the distribution of
goods. On this date, the cost of motor vehicle was Rs. 2,500,000 and it was equal to the present value
of minimum lease payments. The following information is also available.
Lease period - 5 years
Useful life of the motor vehicle - 5 years
Annual lease installment (payable at the year end) - Rs. 600,000 (of which Rs. 100,000 is
interest).
Installment paid to lease liability during the year ending 31.03.2022 has been debited to trade
creditors account. No other entries have been made in this respect. It is the policy of the company to
depreciate motor vehicles at 20% on cost per annum on straight line method.

Required:
1. Lease liability account
2. Extracts of financial statements for the year ending 31.03.2022

9 The following balances were extracted from the trial balance of Pubudu PLC as at 31.03.2022
Dr. (Rs.’000) Cr. (Rs.’000)
Right-of-use-asset (acquired on 01.04.2021) 2,400
Lease liability 2,400
Lease installment 930

The lease term of the motor vehicle is 4 years and its expected useful life is 5 years. The ownership of
the motor vehicle is passed to the company at the end of the lease term. The annual lease installment
is Rs. 930,000. The installment paid during the year has been debited to a lease installment account.
The lease interest for the four year period is as follows:
Year Interest (Rs.’000)
2021/22 480
2022/23 390
2023/24 290
2024/25 160
Required:
1. Lease liability account
2. Extracts of financial statements for the year ending 31.03.2022

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10 The following balances were extracted from the trial balance of Aloka PLC as at 31.03.2022
Dr. (Rs.’000) Cr. (Rs.’000)
Lease interest 960
Lease liability 3,040
Right-of-use-asset (acquired on 01.04.2021) 4,000

The Right-of-use-asset (motor vehicle) was acquired on 01.04.2021 under a finance lease for a period
of 4 years. The useful life of this asset is 6 years. The ownership of the asset is not passed to the lessee
at the end of the lease period. Under the lease agreement, a down payment of Rs. 960,000 has to be
paid. Further, an annual lease installment of Rs. 960,000 is to be paid at the end of every year starting
from 31.03.2022. The lease interest of the 4 year period is as follows:
Year Interest (Rs.'000)
2021/22 304
2022/23 238
2023/24 166
2024/25 92
The initial lease liability and the down payment have been accounted for correctly. Further, the
installment for the current year has been paid and recorded as lease interest for the year.
The motor vehicle is used for distribution of goods
Required:
1. Lease liability account
2. Extracts of financial statements for the year ending 31.03.2022

11 The following balances were extracted from the trial balance of Saranga PLC as at 31.03.2022
Dr. (Rs.’000) Cr. (Rs.’000)
Right-of-use-asset 3,000
Provision for depreciation on right-of-use-asset as at 01.04.2021 600
Lease liability 1,788
Lease interest 720

All depreciable property, plant and equipment are depreciated on straight line method at 20% per
annum.
The right-of-use-asset (motor vehicle) was acquired on 01.04.2020 for a 4 year period for delivery of
goods. The annual lease instalment payable is Rs. 720,000. The current year's lease instalment has
been paid and debited to the lease interest account. The lease interest applicable for the current year
and the next two years is as follows:
Year Interest (Rs.'000)
2021/22 179
2022/23 125
2023/24 68

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 Required:
1. Lease liability account
2. Extracts of financial statements for the year ending 31.03.2022

12 The following balances were extracted from the trial balance of Sumeda PLC as at 31.03.2022
Dr. (Rs.’000) Cr. (Rs.’000)
Right-of-use-asset - at cost 6,000
Provision for depreciation on right-of-use-asset as at 01.04.2021 2,400
Lease liability 2,353

All assets (including assets on lease) have been acquired on 01.04.2019 and on this date, their useful
life was estimated as 5 years. They are depreciated on straight-line method.
Motor vehicles are used for the delivery of goods and their lease term is 5 years. The annual lease
instalment is Rs. 1,583,000. The current year lease instalment has been paid and debited fully to the
Lease liability' account. No other entry has been made in this respect. The lease interest is as follows:
Year Interest (Rs.'000)
2019/20 600
2020/21 502
2021/22 394
2022/23 275
2023/24 144
Required:
1. Lease liability account
2. Extracts of financial statements for the year ending 31.03.2022

13 An extract of the trial balance of Hiruka PLC as at 31.03.2022 is given below.

Dr. (Rs.’000) Cr. (Rs.’000)

Lease payments 3,750

The company entered into a lease agreement on 01.04.2021 and obtained the right-of-use of a motor
vehicle for a period of 5 years. As at 01.04.2021, the cost of right to use the motor vehicle and its
useful life were estimated as Rs. 5,960,000 and 5 years respectively. According to the lease agreement,
Rs. 2,500,000 was paid as the down payment on 01.04.2021 and the first annual instalment of Rs.
1,250,000 was paid on 31.03.2022. The initial measurement of the lease liability was Rs. 3,460,000.
The lease interest for the years ending 31.03.2022 and 31.03.2023 are Rs. 346,000 and Rs. 256,000
respectively. Only the down payment and first lease installment paid by the company have been
recorded in the lease payments account. No other entry has been made in this respect.

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 Required:
1. Lease liability account
2. Extracts of financial statements for the year ending 31.03.2022

14 Hiruka PLC obtained a bank loan of Rs. 12,000,000 on 31.03.2022 and it is payable in 5 annual
instalments of Rs. 3,580,000 each commencing from 31.03.2023. The interest rate for the loan is 15%
per annum.
Required:
Show extracts of statement of financial position as at 31.03.2022 in relation to this bank loan

15 Rumesh PLC obtained a bank loan of Rs. 5,000,000 on 31.03.2022 and it is payable in 5 annual
instalments of Rs. 1,387,000 each commencing from 31.03.2023. The interest rate for the loan is 12%
per annum.
Required:
Show extracts of statement of financial position as at 31.03.2022 in relation to this bank loan

16 Deshan PLC obtained a bank loan of Rs. 6,000,000 on 31.03.2022 and it is payable in 4 annual
instalments of Rs. 2,100,000 each commencing from 31.03.2023. The interest rate for the loan is 15%
per annum.
Required:
Show extracts of statement of financial position as at 31.03.2022 in relation to this bank loan

17 Nalin PLC obtained a bank loan of Rs. 7,500,000 on 01.04.2021 and it is payable in 5 annual instalments
of Rs. 1,980,000 each commencing from 31.03.2022. The interest rate for the loan is 10% per annum.
The installment due on 31.03.2022 has been paid in cash.
Required:
Show extracts of financial statements for the year ending 31.03.2022 in relation to this bank loan

18 Suboda PLC obtained a bank loan of Rs. 4,000,000 on 01.04.2021 and it is payable in 5 annual
instalments of Rs. 1,110,000 each commencing from 31.03.2022. The interest rate for the loan is 12%
per annum. The installment due on 31.03.2022 has not been paid in cash.
Required:
Show extracts of financial statements for the year ending 31.03.2022 in relation to this bank loan

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19 Sanka PLC obtained a bank loan of Rs. 6,000,000 on 01.04.2021. The loan interest relevant for the first
year and the second year are Rs. 660,000 and Rs. 554,000 respectively. Annual loan instalment is Rs.
1,620,000 and It has been paid on 31.03.2022.
Required:
Show extracts of financial statements for the year ending 31.03.2022 in relation to this bank loan

20 Heshan PLC obtained a bank loan of Rs. 7,000,000 on 01.04.2021. The loan interest relevant for the
first year and the second year are Rs. 560,000 and Rs. 465,000 respectively. Annual loan instalment is
Rs. 1,750,000 and It has not been paid as at 31.03.2022.
Required:
Show extracts of financial statements for the year ending 31.03.2022 in relation to this bank loan

***

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