Philippine Financial Reporting Standard 16 Leases (PFRS 16) sets out the principles

for the recognition, measurement, presentation and disclosure of leases. The objective is to
ensure that lessees and lessors provide relevant information in a manner that faithfully
represents those transactions. This information gives a basis for users of financial statements to
assess the effect that leases have on the financial position, financial performance and cash
flows of the entity.

Overview:
● The new standard was issued on January 13, 2016.
● Effectivity: beginning on or after 1 January 2019.
● It replaces all previous PFRS provisions on lease accounting.
○ PAS 17 (Appropriate accounting policies and disclosure to apply in relation to
Leases)
○ SIC 15 (Operating Leases-Incentives)
○ SIC 27 (Evaluating the Substance of Transactions in the Legal Form of a Lease)
○ IFRIC 4 ( Determining Whether an Arrangement Contains a Lease)
● Earlier application is permitted for entities that apply PFRS 15 Revenue from Contracts
with Customers at or before the date of initial application of PFRS 16

Objective:
PFRS 16 defines principles for the recognition, measurement, presentation, and
disclosure of leases, with the objective of ensuring that lessees and lessors provide relevant
information that accurately represents those transactions.

Key Definitions:
Lessee
- According to PFRS 16, An entity that obtains the right to use an underlying asset for a
period of time in exchange for consideration.

Lessor
- According to PFRS 16, An entity that provides the right to use an underlying asset for a
period of time in exchange for consideration.

Lease
- 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.

Underlying Asset
- An asset that is the subject of a lease, for which the right to use that asset has been
provided by a lessor to a lessee.
Types of lease
Finance Lease
- A lease that transfers substantially all the risks and rewards incidental to ownership of an
underlying asset.

Operating Lease
- A lease that does not transfer substantially all the risks and rewards incidental to
ownership of an underlying asset.

How can you determine a lease contract:

ALL of the following criteria must be met for a contract to contain a lease.
a) There is an identified asset that the customer has the right to use.
b) The lessee obtains substantially all the economic benefits.
c) The lessee has the right to direct the use of the asset.
If one criteria is not complied, the contract does not contain a lease; apply other
applicable

Recognition
At the commencement date, a lessee is required to recognize assets and liabilities for all
leases with a term of more than 12 months, unless the underlying asset is of low value.

Initial Measurement
1. Right of Use Asset
- an asset that represents the reight of a lessee to use an underlying asset over the
lease term in a finance lease.
- PFRS 16, paragraph 23, provides that the lessee shall measure the right of use
aseet at cost at commencement date.
- Paragraph 24 provides that the cost of right of use asset comprises:
a. The present value of lease payment or the initial measurement of the lease
liability.
b. Lease payments made to lessor at or before commencement date, such as
lease bonus, less any lease incentives received.
c. Initial direct costs incurred by the lessee.
d. Estimate of cost of dismantling, removing and restoring the underlying asset
for which the lessee has a present obligation.

2. Lease Liability
- Present value of lease payments that are not paid at that date (using interest rate
implicit in the lease, or if not readily determinable, lessee’s incremental borrowing
rate)

Lease Payments that are not paid at the commencement date includes the
following:
 a. fixed payments
b. exercise price of a purchase option only if the lessee is reasonably certain
to exercise
c. amounts expected to be payable by the lessee under residual value
guarantees
d. variable lease payments that depend on an index or a rate; and
e. payments of penalties for terminating the lease, if the lease term reflects
the lessee exercising an option to terminate the lease.

Subsequent Measurement
1. Right-of-Use Asset
- After the commencement date, a lessee shall measure the right-of-use asset
applying a cost model, unless it applies either of the other measurement models.

Measurement Models
● Cost Model
- Measure the right-of-use asset at cost less any accumulated
depreciation and any accumulated impairment losses and
adjusted for any remeasurement of the lease liability.

● Fair Value Model

- If a lessee applies the fair value model in PAS 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 PAS 40.

● Revaluation Model
- If right-of-use assets relate to a class of property, plant and
equipment to which the lessee applies the revaluation model in
PAS 16, a lessee may elect to apply that revaluation model to all
of the right-of-use assets that relate to that class of property, plant
and equipment.

2. Lease Liability
- After the date of the commencement, a lessee shall measure the lease liability
by:
a. increasing the carrying amount to reflect interest on the lease liability
b. reducing 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.

Presentation
1. Right-of-Use Asset
 The Right-of-use asset can be presented in the Statement of Financial Position
or disclose in the notes separately from other assets or under the same line item where
it would be presented as if the asset is owned. Disclose in which line items in the
statement of financial position include those right-of-use assets or presented as
investment property if it meets the definition of an investment property

2. Lease Liability
The lease liability can be presented as a separate line item or disclose on which
line item in the liabilities section of the Statement of Financial Position it is included.

Disclosure Requirements
1. Lessee
- A lessee shall disclose information about its leases for which it is a lessee in a
single note or separate section in its financial statements.
- The lessee shall disclose the following:
1. Depreciation charge for right of use assets by class of underlying asset.
2. Interest expense on lease liability.
3. The expense relating to short term leases excluding the expense relating
to leases with a term of one month or less.
4. The expense relating to low value leases excluding the expense relating
to low value leases with term of one month or less.
5. The expense relating to variable lease payments not included in the
measurement of lease liability.
6. Income from subleasing right of use assets.
7. Total cash outflow for leases.
8. Addition to right of use assets
9. The carrying amount of right of use assets at the end of the reporting
period by class of underlying asset,
10. Short term leases or low value accounted for as operating lease.

2. Additional Disclosures
- A lessee shall disclose additional qualitative and quantitative information about
leasing activities necessary to help users of financial statements to assess the
effect of leases on financial position, financial performance and cash flows.
1. The nature of the lessee’s leasing activities.
2. Future cash outflows to which the lessee is potentially exposed that are
not reflected in the measurement of lease liability.
a. Variable lease payments
b. Extension option and termination option
c. Residual value guarantee
d. Leases not yet commenced to which the lessee is committed.
3. Restrictions or covenants imposed.

Impact on Financial Metrics

The most commonly used financial ratios and performance metrics will be impacted. The
following will be impacted by the standard:
● Increase in debt to equity ratio
● Current Ratio
● Asset Turnover
● Interest Cover
● Increase in Earnings Before Interest and Taxes (EBIT)
● Operating Profit
● Net Income

Which industries are most affected?

It is expected that IFRS 16 will significantly affect the following industries:
● Retailers
● Airlines
● Professional services
● Health care
● Wholesale
● Telecommunication
● Transport and logistics
● Entertainment
● Real estate and equipment lessors