CH8 – LEASES PT.

2  In the case of a financial lease, the amounts to be

recognized at the commencement date are
 Accounting for Leases by Lessor determined
COMMENCEMENT DATE
CLASSIFICATION OF LEASE BY A LESSOR  Date on which a lessor makes an underlying asset
 Depends on the substance of the transaction rather available for use by a lessee
than the form of the contract  Lessee becomes entitled to exercise its rights to the
1. Finance Lease (Capital Lease) use of the leased asset
It transfers substantially all the risks and rewards  Date of initial recognition for the lease and journal
incidental to ownership of an underlying asset entries are recorded

2. Operating Lease 8.2 FINANCE LEASE

 It does not transfer substantially all risks and
rewards incidental to ownership of an underlying
asset
RISK
 The possibilities of losses from idle capacity or technological
obsolescence
REWARDS
 The expectation of profitable operation over the asset's
economic life end of gain from a appreciation in value or
realization of a residual value
INITIAL MEASUREMENT
 Lessor recognize it as a receivable measured at an
amount equal to the net investment in the lease
 Lessor derecognizes the leased asset and
recognize as a finance lease receivable
 The receivable is treated as repayment of principal
and finance income to reimburse and reward the
lessor for its investment and services

GROSS INVESTMENT IN THE LEASE

INDICATORS OF A FINANCE LEASE
1. Transfer of Ownership  Gross Lease Receivable
2. Bargain Purchase Option (BPO). Lessee has the option  Sum of:
to purchase the underlying asset at a price that is expected a. Lease payments receivable by the lessor under
to be sufficiently lower than the fair value a finance lease
3. Lease term is at least (major part) 75% of the useful b. Any unguaranteed residual value accruing to the
life of the leased asset lessor
4. Present value of the lease payment is at least
(substantially all) 90% of the fair value of the leased NET INVESTMENT IN THE LEASE
asset at the inception date  Net Lease Receivable
5. Leased asset is of specialized nature  Gross investment in the lease discounted at the
interest rate implicit in the lease
ECONOMIC LIFE
 The period an asset is expected to be economically usable UNEARNED FINANCE INCOME
by one or more users  Unearned Interest Income
 The number of production or similar units expected to be
 Difference between:
obtained from the asset by one or more users
a. Gross investment in the lease
b. Net investment in the lease
OTHER INDICATORS OF FINANCE LEASE
1. Transfer of Risk. If the lessee can cancel the lease, the
lessor’s losses associated with the cancellation are borne LEASE PAYMENTS
by the lessee 1. Fixed Payments . In-substance fixed payments less any
2. Transfer of Risks and Reward. Gains or losses from the lease incentives payable
fluctuations in the fair value of the residual accrue to the 2. Variable lease payments that depend on an index or a
lessee rate at commencement date
3. Transfer of Rewards. Lessee has the ability to continue 3. Guaranteed residual value
the lease for a secondary period at a rent that is 4. Exercise price of a purchase option if the lesser is
substantially lower than market rent reasonably certain to exercise that option
5. Payments of penalties for terminating the lease
8.1 LEASE CLASSIFICATION
DISCOUNT RATE
 Made at the inception date  Net investment is measured using the Interest Rate
 Reassessed only if there is a lease modification Implicit in the lease
 Changes in estimates/circumstances, do not give
rise to a new classification of a lease SUBSEQUENT MEASRUREMENT
 Net Investment in the lease is subsequently
INCEPTION DATE measured similar to an amortized cost financial
 The earlier of: asset
1. Date of the lease agreement  Finance income (interest income) is computed
2. Date of commitment by the parties to the using effective interest method and recognized in
principle provisions of the lease profit or loss
 A lease is classified as either an operating or finance  Interest in each period reflect a constant periodic
lease rate of return on the lessor’s net investment in the
lease
 Lease payments are applied against the gross DIRECT FINANCING SALES TYPE
investment in the lease to reduce the principal and Lessor recognizes interest
unearned finance income Lessor recognizes income over the lease term
interest income over the and sales revenue, cost of
lease term sales, and selling profit or loss
at the commencement date
Initial direct cost is Initial direct costs are
included automatically expensed
8.3 INDIRECT COSTS
8.5 RESIDUAL VALUE
 Incremental costs of obtaining a lease that would not
have been incurred if the lease had not been  Lessors of count for both guaranteed and
obtained unguaranteed residual values, provided the leased
 Include commissions, legal fees, and internal costs asset reverts back to the lessor at the end of the
that are incremental and directly attributable to the lease term
lease contract  If the leased asset does not revert back to the
 Excludes general overheads lessor, the lessor does not account for any residual
 Included in the initial measurement of the net value
investment in the lease  Amounts in gross investment, net investment, and
 Reduces the amount of income recognized over the unearned interest income are the same whether the
lease term residual value is guaranteed or not
 Included automatically in the net investment of the
LESSOR RESIDUAL VALUE IS GUARANTEED IF
lease when it comes to interest rate implicit
1. Guaranteed by the lessee
 Capitalized as adjustment to the implicit interest rate
2. Guaranteed by a party related to the lessee
3. Guaranteed by a third party unrelated to the lessor
that is financially capable of discharging the
obligations under the guarantee
INTEREST RATE IMPLICIT IN THE LEASE
 The rate of interest that causes the present value of the
GUARANTEED RV UNGUARANTEED RV
lease payments and the unguaranteed residual value to Present value of RV is Present value of RV is
equal the sum of the fair value of the underlying asset and added to sales because deducted from cost of
any initial direct costs of the lessor in effect this portion is sales because in effect
sold this portion is unsold
DIRECT COST
 Incurred by a manufacturer or dealer lessor are 8.6 LEASE MODIFICATION (FL)
expensed immediately
Depending on its nature, it is accounted for as a
1. Separate Lease
8.4 CLASSIFICATION OF FINANCE LEASE BY 2. Remeasurement or derecognition of the net
THE LESSOR investment
1. DIRECT FINANCING LEASE
SEPARATE LEASE
 A lessor acquires assets and leases with the
intention of generating income through interest  Lease modification is accounted for us a separate
lease if both the scope and consideration in the
 Lessor is neither the manufacturer nor the dealer
lease are increased due to the addition of a right
use one or more underlying assets and increase in
2. SALES TYPE LEASE
the consideration reflects the standalone price for
 Lessor is the manufacturer or a dealer of the asset
the increase in scope
being leased
 Uses leasing as a means of marketing its products
NOT A SEPARATE LEASE
 Costs incurred in connection with obtaining a sales 1. If lease would have been classified as an operating
type finance lease are recognized as expense lease had the modification been in effect at the
 Accounted for like a direct financing lease, except inception date, the lessor shall:
that the manufacturer or dealer lessor recognizes a. Account lease modification as a new lease from
the following at the commencement date: the date of modification
a. Sales Revenue b. Measure the underlying asset equal to the net
 The lower of i) present value of lease payments, investment in the lease immediately before the
discounted using a market rate of interest and date of modification
the ii) fair value of the asset
2. Otherwise, the lessor shall apply the requirements of
b. Cost of Sales PFRS 9 Financial Instruments
 Equal to the cost or carrying amount all of the
underlying asset less the present value of the
8.7 OPERATING LEASE
unguaranteed residual value
 The lessor recognizes the lease payments as
c. Gross Profit income on a straight-line basis over the lease
 The difference between revenue and cost of term
sales
 The accounting is the same as the recognition  To account for the land and building components
exemption available to a lessee for “short term” and separately, alissar allocates the lease payments to
“low values“ leases the elements based on the relative fair values at
 A manufacturer or dealer lessor does not recognize the inception date
any selling profit on entering into an operating list  Finance Lease if:
because it is not the equivalent of a sale a. Lease extends to a relatively very long period of
 Presented in the statement of financial position time, even if the lease does not transfer title over
according to their nature the land
b. No reliable allocation basis exists, unless it is
clear that both elements are operating leases
8.8 INITIAL DIRECT COSTS
8.10 SUBLEASES
 Lessor capitalizes the initial direct costs to the
carrying amount  A transaction for which an underlying asset is
 Lessor recognize those costs as expense over the released by a lessee (intermediate lessor) to a third
lease term on the same basis as the lease income part and the lease (head lease) between the head
 Other costs incurred in the earning of the lease lessor and lessee remains in effect
income, including depreciation are recognized as  If the least asset is subleased, the head lease does
expensed in the period incurred not qualify as a lease of a low value asset
 If interest rate implicit is not determinable,
DEPRECIATION intermediate lesser may use discount rate used for
 Lessor continues to depreciate it the head lease
 Lessor does not recognize any finance lease
receivable under an operating lease INTERMEDIATE LESSOR CLASSIFICATION IF
SUBLEASE IS A FINANCE OR OPERATING LEASE
LEASE BONUS 1. Operating Lease if the head lease is a short-term
 Lessor accounts it as unearned income lease that the entity has accounted for applying the
 Lessor recognizes it as income over the lease term recognition exemption
2. Subleases classified by reference to the right of use
ADVANCE RENTALS asset arising from the head lease rather than the
 Lessor accounts it as unearned income underlying asset
 Lessor recognizes it as income only when they are
ACCOUNTING FOR SUBLEASE THAT IS FINANCE
earned
LEASE
1. Derecognize the right of use asset relating to the
SECURITY DEPOSITS
head lease that is transferred to the sublease
 Lessor recognizes security deposits received from
2. Recognize net investment in the sublease
lessee as payable, measured at amortized cost
3. Recognize gain or loss or any differences between
the right of this asset and net investment in the
8.9 LEASE MODIFICATIONS (OL) sublease
4. Retain the lease liability relating to the head lease
 Accounted for as a new lease from the modification
5. Recognize both interest income on the sublease
date
and interest expense on the head lease during the
 Prepaid or accrued lease payments relating to the
term of the sublease
original lease are treated as payments for the new
lease
ACCOUNTING FOR SUBLEASE THAT IS FINANCE
LEASE
ACCOUNTING FOR LEASES BY A LESSOR
1. Continue the existing accounting for the head lease
FINANCE LEASE OPERATING LEASE
2. Recognize rent lease income on the sublease
Statement of FP Statement of FP
- Derecognize the - Continues to
leased asset recognize (and 8.11 SALE AND LEASEBACK TRANSACTIONS
- Recognize Net depreciate) the leased
Investment in the asset  Occurs when a party sells an asset and immediately
lease - Does not recognize leases it back from the buyer
Net Investment in the  The seller becomes the lessee while the buyer
lease becomes the lessor
Statement of P/L & OCI Statement of P/L & OCI  Both the seller/lessee and the buyer/lessor account
- Recognize interest - Recognize rent/lease the transaction to determine whether the transfer
income (plus selling income using straight- qualifies as a sale
profit/loss, in case of a line basis (or another
sales type lease) appropriate basis) TRANSFER OF ASSET IS A SALE (under PFRS 15)
1. Seller/Lessee shall:
8.10 LEASE OF LAND AND BUILDING a. Measure the right of use asset arising from the
lease back at the proportion of the previous
 If lease includes land and buildings elements, lessor
carrying amount of the asset that relates to the
should assess the classification of each element as
right of use retained by the seller-lessee
a finance lease or an operating lease separately
 b. Recognize only the amount of any gain or loss
that relates to the rights transferred to the buyer-
lessor

2. Buyer/Lessor shall:
a. Account for the purchase of the asset applying
applicable standards and for the lease applying
the lessor accounting under PFRS 16

ADJUSTMENTS
 Adjustments are made if:
a. The sale price is not equal to the fair value of the
asset
b. The lease payments are not at market rates
 Adjustments are made to measure the sale
proceeds at fair value:
a. Any below market terms shall be accounted for
as sweet payment of lease payments
b. Any above market terms shall be accounted for
as additional financing provided by the buyer-
lessor to the seller-lessee
 Adjustment is measured based on the more readily
determinable of:
a. Difference between the fair value of the
consideration for the sale and the fair value of
the asset
b. Difference between the present value of the
contractual payments for the lease and the
present value of payments for the lease at
market rates

8.12 TRANSFER OF THE ASSET IS NOT A SALE

 If the transfer does not qualify as a sale, the parties
shall account for it as a financing transaction
a. Seller/lessee continues to recognize the asset
and accounts for the amounts received as a
financial liability
b. Buyer/lessor does not recognize the transferred
assets and accounts for the amounts paid as a
financial asset