IFRS 16 Complete Chapter FAR II CAF-5 by Sir Nasir Abbass

LEASES (IFRS-16) (1)
LEASES (IFRS-16)
1. Definitions
The following terms are used in this Standard with the meanings specified:
1.1 A 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.
1.2 A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an
underlying asset.
1.3 An operating lease is a lease that does not transfer substantially all the risks and rewards
incidental to ownership of an underlying asset.
1.4 The inception of the lease is the earlier of the date of a lease agreement and the date of
commitment by the parties to the principal terms and conditions of the lease.
1.5 The commencement date of lease is the date on which a lessor makes an underlying asset available
for use by a lessee.
1.6 The fixed payments are the payments made by a lessee to a lessor for the right to use an underlying
asset during the lease term, excluding variable lease payments.
1.7 The lease term is 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.
1.8 Fair value, for the purpose of applying the lessor accounting requirements in this Standard, is the
amount for which an asset could be exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction.
1.9 Economic life is either:

(a) The period over which an asset is expected to be economically usable by one or more users; or
(b) The number of production or similar units expected to be obtained from the asset by one or more users.
1.10 Useful life is the period over which an asset is expected to be available for use by an entity; or the
number of production or similar units expected to be obtained from an asset by an entity.
1.11 Lease payments [LP] are the payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
(b) variable lease payments that depend on an index or a rate;
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise
that option; and
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee
exercising an option to terminate the lease.
For the lessee, lease payments also include amounts expected to be payable by the lessee under
residual value guarantees. Lease payments do not include payments allocated to non-lease
components of a contract, unless the lessee elects to combine non-lease components with a
lease component and to account for them as a single lease component.
For the lessor, lease payments also include any residual value guarantees provided to the
lessor by the lessee, a party related to the lessee or a third party unrelated to the lessor that is
financially capable of discharging the obligations under the guarantee. Lease payments do not
include payments allocated to non-lease components.
1.12 Residual value guarantee [GRV] 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.
1.13 Unguaranteed residual value [UGRV] is that portion of the residual value of the underlying asset,
the realization of which by a lessor is not assured or is guaranteed solely by a party related
to the lessor.
Example
Paris Ltd. entered into a contract with Pakistan leasing company to acquire an asset. The lessee is required to
make the following payments:
Down payment Rs. 30,000
Semi-annual payment Rs. 50,000
Lease term 3 years
The lessee guaranteed the lessor an amount of at Rs. 10,000 whereas the estimated residual value at the end
of lease term is expected to be Rs. 8,000.
Calculate lease payments (LP)
Solution
LP (Lessee) = 30,000 + (50,000 x 6) + 2,000
= Rs. 332,000
LP (lessor) = 30,000 + (50,000 x 6) + 10,000
= Rs. 340,000
1.14 Initial direct costs [IDC] 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.
Exam note:
For better understanding, following types of lessors can be described in case of finance lease:
Financier lessor Dealer / manufacturer lessor
A lessor who technically provides finance as it A lessor who provides asset out of its stock because
purchases asset from market for leasing e.g. banks, it also sells such assets earning some selling profit.
leasing companies e.g. a car dealer who sells cars on cash as well as on
lease.
1.15 Gross investment in the lease [GIL] is the sum of:

(a) The lease payments receivable by the lessor under a finance lease, and
(b) Any unguaranteed residual value accruing to the lessor.
1.16 Net investment in the lease [NIL] is the gross investment in the lease discounted at the interest rate implicit
in the lease.
1.17 Unearned finance income [UFI] is the difference between:

(a) the gross investment in the lease, and
(b) the net investment in the lease.
1.18 The interest rate implicit in the lease is the rate of interest that causes the present value of:
(a) the lease payments; and
(b) the unguaranteed residual value to equal the sum of;
(i) the fair value of the underlying asset; and
(ii) any initial direct cost of the lessor.
Exam note
Based on above definitions, following can be derived for help in exam questions:
Net investment in lease
(for all lessors) = Present value of GIL discounted at implicit rate [preferred method]
OR
(for financier lessor) = Fair value of asset(i.e. cost) + Initial direct cost
(for dealer / manufacturer) = Fair value of asset(i.e. outright sale price)
Calculation of implicit rate:

GIL comprises of down payment and rentals: GIL comprises of down payment, rentals and BPO / RV:
Annuity factor = [NIL – Down payment] / Rental Assume any two discount rates of your choice and apply
Now look for this factor in annuity table against following formula:
relevant “n”. Implicit rate will be the rate under Implicit rate = LR + [PVL / (PVL – PVH)] x (HR – LR)
which this factor or closest to this factor is Here:
appearing in table. - LR = lower rate (say 10%)
- HR = higher rate (say 15%)
- PVL = “PV of GIL @ LR” – “NIL”
- PVH = “PV of GIL @ HR” – “NIL”
1.19 The lessee’s incremental borrowing rate of interest is the rate of interest that a lessee would have to
pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an
asset of a similar value to the right-of-use asset in a similar economic environment.
1.20 Variable lease payment is 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 changes in facts or
circumstances occurring after the commencement date, other than the passage of time.
1.21 Lease incentives are the payments made by a lessor to a lessee associated with a lease, or the
reimbursement or assumption by a lessor of costs of a lessee.
1.22 Lessee is an entity that obtains the right to use an underlying asset for a period of time in exchange
for consideration.
1.23 Lessor is an entity that provides the right to use an underlying asset for a period of time in
exchange for consideration.
1.24 Right-of-use asset is an asset that represents a lessee’s right to use an underlying asset for the
lease term.
1.25 Short term lease is a lease that, at the commencement date, has a lease term of 12 months or less.
A lease that contains a purchase option is not a short-term lease.
1.26 An underlying asset is 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.
2. Recognition exemption
2.1 A lessee may elect not to apply the requirements in paragraphs 5.1–5.3.2 to:
(a) short-term leases; and
(b) leases for which the underlying asset is of low value. [Para 5]
Low value assets
- A lessee shall assess the value of an underlying asset based on the value of the
asset when it is new, regardless of the age of the asset being leased.
- The assessment of whether an underlying asset is of low value is performed on an
absolute basis. Leases of low-value assets qualify for the accounting treatment in
paragraph 2.1 regardless of whether those leases are material to the lessee. The
assessment is not affected by the size, nature or circumstances of the lessee.
Accordingly, different lessees are expected to reach the same conclusions about
whether a particular underlying asset is of low value.
- An underlying asset can be of low value only if:
• 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
• the underlying asset is not highly dependent on, or highly interrelated with,
other assets.
- A lease of an underlying asset does not qualify as a lease of a low-value asset if the
nature of the asset is such that, when new, the asset is typically not of low value.
For example, leases of cars would not qualify as leases of low-value assets because
a new car would typically not be of low value.
- Examples of low-value underlying assets can include tablet and personal computers,
small items of office furniture and telephones.
2.2 If a lessee elects not to apply the requirements in paragraphs 5.1-5.3.2 to either short-term
leases or leases for which the underlying asset is of low value, the lessee shall recognise the
lease payments associated with those leases as an expense on either a straight-line basis over the
lease term or another systematic basis. The lessee shall apply another systematic basis if that basis
is morerepresentative of the pattern of the lessee’s benefit. [Para 6]
2.3 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 asset is a grouping of underlying assets of a similar nature
and use in an entity’s operations. The election for leases for which the underlying asset is of low
value can be made on a lease-by-lease basis. [Para 8]
3. Identifying a lease
3.1 At 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. [Para 9]
3.2 A period of time may be described in terms of the amount of use of an identified asset (for
example, the number of production units that an item of equipment will be used to produce).
[Para 10]
3.3 A contract conveys the right to control the use of an identified asset for a period of time if the customer has,
throughout the period, both of the following:
(a) The right to obtain substantially all of the economic benefits from use of the identified asset; and
(b) The right to direct the use of the identified asset
3.4 A customer does not have the right to use an identifiable asset if the supplier has the substantive right to
substitute the asset throughout the period of use.
4. Lease term
4.1 An entity shall determine the lease term as the non-cancellable period of a lease, 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. [Para 18]
4.2 In assessing whether a lessee is reasonably certain to exercise an option to extend a lease,
or not to exercise an option to terminate a lease, an entity shall consider all relevant facts and
circumstances that create an economic incentive for the lessee to exercise the option to extend
the lease, or not to exercise the option to terminate the lease. [Para 19]
5. Lessee
5.1 Recognition
5.1.1 At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.[Para
22]
5.2 Measurement
Initial measurement of right-of-use asset
5.2.1 At the commencement date, a lessee shall measure the right-of-use asset at cost. [Para 23]
5.2.2 The cost of the right-of-use asset shall comprise:
(a) the amount of the initial measurement of the lease liability, as
described in paragraph 5.2.4;
(b) any lease payments made at or before the commencement date, less any lease
incentives received;
(c) any initial direct costs incurred by the lessee; and
(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. The lessee incurs the
obligation for those costs either at the commencement date or as a consequence of
having used the underlying asset during a particular period. [Para 24]
5.2.3 A lessee shall recognise the costs described in paragraph 5.2.2 as part of the cost of the
right-of-use asset when it incurs an obligation for those costs. [Para 25]
Initial measurement of the lease liability

5.2.4 At the commencement date, a lessee shall 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, if that rate can be readily determined. If that rate cannot be
readily determined, the lessee shall use the lessee’s incremental borrowing rate. [Para 26]
At the commencement date, the lease payments included in the measurement ofthe
lease liability comprise the following payments for the right to use the underlying
asset during the lease term that are not paid at the commencement date:
(a) fixed payments less any lease incentives receivable;
(b) variable lease payments (it is not examinable in CAF 7)
(c) amounts expected to be payable by the lessee under residual value guarantees;
(d) the exercise price of a purchase option if the lessee is reasonably certain to
(e) payments of penalties for terminating the lease, if the lease term reflects the
lessee exercising an option to terminate the lease. [Para 27]
Subsequent measurement of right-of-use asset

5.2.5 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 described in paragraph 5.2.10.
[Para 29]
Cost model
5.2.6 To apply a cost model, a lessee shall measure the right-of-use asset at cost less any
accumulated depreciation and any accumulated impairment losses. [Para 30]
5.2.7 A lessee shall apply the depreciation requirements in IAS 16 Property, Plant and Equipment
in depreciating the right-of-use asset, subject to the requirements in paragraph 5.2.8.
[Para 31]
5.2.8 If the lease transfers ownership of the underlying asset to the lessee by the end of the
lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a
purchase option, 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.
[Para 32]
Exam note:
1) Asset will be retained after lease term:
Depreciable amount = Cost – RV
2) Asset will be returned to lessor:
Depreciable amount = Cost
5.2.9 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. [Para 33]
Other measurement model

5.2.10 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 relate to that class of property,
plant and equipment. [Para 35]
Subsequent measurement of the lease liability

5.2.11 After the commencement date, a lessee shall measure the lease liability by:
(a) increasing the carrying amount to reflect interest on the lease liability; and
(b) reducing the carrying amount to reflect the lease payments made. [Para 36]
5.2.12 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. The periodic rate of interest is the discount rate described in
paragraph 5.2.4. (It is done by the use of a tabular working called lease amortization
schedule) [Para 37]
5.2.13 After the commencement date, a lessee shall recognise in profit or loss, unless the
costs are included in the carrying amount of another asset applying other applicable
Standards, both:
(a) interest on the lease liability; and
(b) variable lease payments not included in the measurement of the lease liability in
the period in which the event or condition that triggers those payments occurs.
[Para 38]
Exam note:
Lease amortization schedule will be started by “Initial amount of lease liability” as taught in 3.1.1
exam note.
5.3 Presentation
5.3.1 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. If a lessee does not present right-
of-use assets separately in the statement of financial position, the lessee shall:
i. include right-of-use assets within the same line item as that within which the
corresponding underlying assets would be presented if they were owned; and
ii. disclose which line items in the statement of financial position include those
right-of-use assets.
(b) lease liabilities 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. [Para 47]
5.3.2 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 acomponent of finance costs, which IAS
1 Presentation of Financial Statements requires to be presented separately in the statement
of profit or loss and other comprehensive income. [Para 49]
5.3.3 In the statement of cash flows, a lessee shall classify:
(a) cash payments for the principal portion of the lease liability within financing
activities;
(b) cash payments for the interest portion of the lease liability applying the
requirements in IAS 7 Statement of Cash Flows for interest paid; and
(c) short-term lease payments, payments for leases of low-value assets and variable
lease payments not included in the measurement of the lease liability within
operating activities. [Para 50]
5.4 Disclosures
5.4.1 The objective of the disclosures is for lessees to disclose information in the notes that,
together with the information provided in the statement of financial position, statement of
profit or loss and statement of cash flows, 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 lessee. Paragraphs 5.4.2–5.4.8 specify requirements on how to meet this
objective. [Para 51]
5.4.2 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. However, a lessee need not
duplicate information that is already presented elsewhere in the financial statements,
provided that the information is incorporated by cross-reference in the single note or

separate section about leases. [Para 52]
5.4.3 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) the expense relating to short-term leases accounted for applying paragraph
2 . 2 . This expense need not include the expense relating to leases with a
lease term of one month or less;
(d) the expense relating to leases of low-value assets accounted for applying
paragraph 2.2. This expense shall not include the expense relating to short-
term leases of low-value assets included in paragraph 5.3.3(c);
(e) income from subleasing right-of-use assets;
(f) total cash outflow for leases;
(g) additions to right-of-use assets;
(h) gains or losses arising from sale and leaseback transactions; and
(i) the carrying amount of right-of-use assets at the end of the reporting period
by class of underlying asset. [Para 53]
5.4.4 A lessee shall provide the disclosures specified in paragraph 5.3.3 in a tabular format,
unless another format is more appropriate. The amounts disclosed shall include costs
that a lessee has included in the carrying amount of another asset during the reporting
period. [Para 54]
5.4.5 If a lessee measures right-of-use assets at revalued amounts applying IAS 16, the lessee
shall disclose the information required by paragraph 7 7 of IAS 16 for those right-of-
use assets. [Para 57]
5.4.6 A lessee shall disclose a maturity analysis of lease liabilities. [Para 58]
5.4.7 In addition to the disclosures required in paragraphs 53–58, a lessee shall disclose
additional qualitative and quantitative information about its leasing activities
necessary to meet the disclosure objective in paragraph 51 (as described in paragraph
B48). This additional information may include, but is not limited to, information that
helps users of financial statements to assess:
(a) the nature of the lessee’s leasing activities;
(b) future cash outflows to which the lessee is potentially exposed that are not
reflected in the measurement of lease liabilities. This includes exposure arising
from:
- variable lease payments;
- extension options and termination options;
- residual value guarantees; and
- leases not yet commenced to which the lessee is committed.
(c) restrictions or covenants imposed by leases; and
(d) sale and leaseback transactions. [Para 59]
5.4.8 A lessee that accounts for short-term leases or leases of low-value assets applying
paragraph 2.2 shall disclose that fact. [Para 60]
6. Lessor
6.1 Classification of leases
6.1.1 A lessor shall classify each of its leases as either an operating lease or a finance lease. [Para 61]
6.1.2 A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incidental to ownership of an underlying asset. A lease is classified as an operating lease if it
does not transfer substantially all the risks and rewards incidental to ownership of an underlying
asset. [Para 62]
6.1.3 Whether lease is a finance lease or an operating lease depends on the substance of the transaction
rather than form of the contract. Examples of situations that individually or in combination would
normally lead to a lease being classified as a finance lease are:
(a) The lease transfers ownership of the underlying asset to the lessee by the end of the lease
term;
(b) The lessee has the option to purchase the underlying asset at a price that is expected to be
sufficiently lower than fair value at the date the option becomes exercisable for it to be
reasonably certain, at inception date, that the option will be exercised [called Bargain Purchase
Option];
(c) The lease term is for the major part of the economic life of the underlying asset even if title is
not transferred. [Generally it is 75% of economic life or may be considered as 2/3 of economic
life]; or
(d) At the inception of the lease, the present value of the lease payments amounts to at least
substantially all of the fair value of the underlying asset. [Here substantially means 90 % or
more];
(e) The underlying asset is of such a specialized nature that only the lessee can use it without major
modifications. [Para 63]
Exam note
These are not the conditions rather examples of finance lease. Generally 2-3 of above situations
are present in a finance lease. However, (d) is more important than others.
6.1.4 Indicators of situations that individually or in combination could also lead to a lease being classified
as a finance lease are:
(a) If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne
by the lessee;
(b) Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for
example proceeds at the end of the lease); and
(c) The lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent. [Para 64]
6.2 Finance lease – Initial recognition and measurement

6.2.1 At the commencement date, a lessor shall recognise assets held under a finance lease in its
statement of financial position and present them as a receivable at an amount equal to the net
investmentinthe lease. [Para 67]
6.2.2 Initial direct costs, other than those incurred by manufacturer or dealer lessors, are
included in the initial measurement of the net investment in the lease and reduce
the amount of income recognised over the lease term. The interest rate implicit in the
lease is defined in such a way that the initial direct costs are included automatically
in the net investment in the lease; there is no need to add them separately. [Para
69]
6.2.3 At the commencement date, the lease payments included in the measurement ofthe net
investment in the lease comprise the following payments for the right to use the
underlying asset during the lease term that are not received at the commencement
date:
(a) fixed payments, less any lease incentives payable;
(b) variable lease payments (It is not examinable in CAF 7);
(c) any residual value guarantees provided to the lessor by the lessee, a party related
to the lessee or a third party unrelated to the lessor that is financially capable of
discharging the obligations under the guarantee;
(d) the exercise price of a purchase option if the lessee is reasonably certain to
(e) payments of penalties for terminating the lease, if the lease term reflects the
lessee exercising an option to terminate the lease. [Para 70]
Manufacturer or dealer lessors

6.2.4 At the commencement date, a manufacturer or dealer lessor shall recognise the
following for each of its finance leases:
(a) revenue being the fair value of the underlying asset, or, if lower, the present
value of the lease payments accruing to the lessor, discounted using a market
rate of interest;
(b) the cost of sale being the cost, or carrying amount if different, of the underlying
asset less the present value of the unguaranteed residual value; and
(c) selling profit or loss (being the difference between revenue and the cost of sale)
in accordance with its policy for outright sales to which IFRS 15 applies. A
manufacturer or dealer lessor shall recognise selling profit or loss on a finance

lease at the commencement date, regardless of whether the lessor transfers the
underlying asset as described in IFRS 15. [Para 71]
6.2.5 Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order
to attract customers. The use of such a rate would result in a lessor recognising an
excessive portion of the total income from the transaction at the commencement date.
If artificially low rates of interest are quoted, a manufacturer or dealer lessor shall
restrict selling profit to that which would apply if a market rate of interest were
charged. [Para 73]
6.2.6 A manufacturer or dealer lessor shall recognise as an expense costs incurred in
connection with obtaining a finance lease at the commencement date because they
are mainly related to earning the manufacturer or dealer’s selling profit. Costs incurred
by manufacturer or dealer lessors in connection with obtaining a finance lease are
excluded from the definition of initial direct costs and, thus, are excluded from the net
investment in the lease. [Para 74]
Journal entry for initial recognition:

Financier lessor: Dealer / Manufacturer lessor:
Dr. Lease receivable [NIL] Dr. Lease receivable [NIL] OR [PV of LP + PV of UGRV]
Cr. Bank Dr. Cost of sales [Cost – PV of UGRV]
(IDC is also included in NIL above) Cr. Sales [PV of LP] OR [Fair value]
Cr. Inventory [Cost]
6.3 Finance lease – Subsequent measurement

6.3.1 A lessor shall recognise finance income over the lease term, based on a pattern reflecting a
constant periodic rate of return on the lessor’s net investment in the lease. [Para 75]
6.3.2 A lessor aims to allocate finance income over the lease term on a systematic and rational
basis. A lessor shall apply the lease payments relating to the period against the gross
investment in the lease to reduce both the principal and the unearned finance income (It is
done by use of lease amortization schedule). [Para 76]
Exam notes:
- Lease amortization schedule will be started by “NIL” as taught in 1.18 exam note.
- Format and calculations in lease amortization schedule are same as in case of lessee.
Calculation of lease rental:

Asset will be retained by lessee after lease term:
Net investment in lease XXX
Less: Down payment (XXX)
Less: PV of BPO (if any) (XXX)
Amount to be recovered through rentals [A] XXX
Now find rental using “A” as PV of annuity in annuity discounting formula at implicit rate
Asset will be returned to lessor after lease term:
Net investment in lease XXX
Less: Down payment (XXX)
Less: PV of Total RV (XXX)
Amount to be recovered through rentals [A] XXX
Now find rental using “A” as PV of annuity in annuity discounting formula at implicit rate
Note – In case of dealer/manufacturer lessor, if implicit rate and market interest rate both are available then:
• Implicit rate will be used for rental calculation, if required
• For all other calculations and accounting, higher of the both rates will be used. As a result sale is
recorded at lower of fair value or present value of lease payments discounted at market rate.
Treatment of BPO in lease schedule [for both lessee and lessor]:

If rental is payable at end of period: If rental is payable at start of period:
BPO is added to the last lease payment in lease BPO is shown as a separate last payment in lease
schedule. schedule at end of lease term.
6.4 Operating lease – recognition and measurement

6.4.1 A lessor shall recognise lease payments from operating leases as income on either a straight-
line basis or another systematic basis. The lessor shall apply another systematic basis if that
basis is more representative of the pattern in which benefit from the use of the underlying
asset is diminished. [Para 81]
6.4.2 A lessor shall recognise costs, including depreciation, incurred in earning the lease
income as an expense. [Para 82]
6.4.3 A lessor shall add initial direct costs incurred in obtaining an operating lease to the
carrying amount of the underlying asset and recognise those costs as an expense
over the lease term on the same basis as the lease income. [Para 83]
6.4.4 The depreciation policy for depreciable underlying assets subject to operating leases
shall be consistent with the lessor’s normal depreciation policy for similar assets. A
lessor shall calculate depreciation in accordance with IAS 16 and IAS 38. [Para 84]
6.4.5 A lessor shall apply IAS 36 to determine whether an underlying asset subject to an
operating lease is impaired and to account for any impairment loss identified. [Para 85]
6.4.6 A manufacturer or dealer lessor does not recognise any selling profit on entering into
an operating lease because it is not the equivalent of a sale. [Para 86]
6.5 Presentation
6.5.1 A lessor shall present underlying assets subject to operating leases in its statement of
financial position according to the nature of the underlying asset. [Para 88]
6.6 Disclosure
6.6.1 The objective of the disclosures is for lessors to disclose information in the notes that,
together with the information provided in the statement of financial position, statement of
profit or loss and statement of cash flows, 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 lessor. Paragraphs 6.6.2-6.6.6 specify requirements on how to meet this
objective. [Para 89]
6.6.2 A lessor shall disclose the following amounts for the reporting period:
(a) for finance leases:
(i) selling profit or loss;
(ii) finance income on the net investment in the lease; and
(iii) income relating to variable lease payments not included in the
measurement of the net investment in the lease.
(b) for operating leases, lease income, separately disclosing income relatingto variable
lease payments that do not depend on an index or a rate. [Para 90]
6.6.3 A lessor shall provide the disclosures specified in paragraph 90 in a tabular format,
unless another format is more appropriate. [Para 91]
Finance lease
6.6.4 A lessor shall disclose a maturity analysis of the lease payments receivable, showing
the undiscounted lease payments to be received on an annual basis for a minimum of
each of the first five years and a total of the amounts for the remaining years. A
lessor shall reconcile the undiscounted lease payments to the net investment in the
lease. The reconciliation shall identify the unearned finance income relating to the
lease payments receivable and any discounted unguaranteed residual value. [Para
94]
Operating lease
6.6.5 For items of property, plant and equipment subject to an operating lease, a lessor
shall apply the disclosure requirements of IAS 16. In applying the disclosure
requirements in IAS 16, a lessor shall disaggregate each class of property, plant and
equipment into assets subject to operating leases and assets not subject to operating
leases. Accordingly, a lessor shall provide the disclosures required by IAS 16 for assets
subject to an operating lease (by class of underlying asset) separately from owned assets
held and used by the lessor. [Para 95]
6.6.6 A lessor shall disclose a maturity analysis of lease payments, showing the undiscounted
lease payments to be received on an annual basis for a minimum of each of the first five
years and a total of the amounts for the remaining years. [Para 97]
OBJECTIVE TYPE QUESTIONS

1. Which of the following is correct about interest rate implicit in the lease?
A It is the rate that causes the present value of lease payments to equal the fair value of underlying asset
B It is the rate that causes the present value of lease payments and the guaranteed residual value to equal
the sum of fair value of underlying asset and any initial direct cost of lessor
C It is the rate that causes the present value of lease payments and the unguaranteed residual value to equal
the sum of fair value of underlying asset and any initial direct cost of lessor
D None of the above
2. Askar Rental Services (ARS) provided a machine on operating lease of 4 years. Lease payment payable in first
year was Rs. 40,000. Rent will increase by 5% in year 2 and 10% in year 3. However in year 4 rent will decrease
by 20%. What will be extracts of financial statements for year 3?
A Lease income Rs. 39,500; Advance rent Rs. 7,500
B Lease income Rs. 39,500; Advance rent Rs. 4,500
C Lease income Rs. 41,290; Advance rent Rs. 4,330
D Lease income Rs. 41,290; Advance rent Rs. 4,910
3. Beta Leasing (BL) provided a machine on lease under following terms:

Contract period 7 years (can be terminated after 5 years)
Commencement date July 1, 2018
Implicit rate 12%
Lease rental Rs. 240,500 payable on every June 30th
Title transfer Title will not transfer lessee and machine will be returned to BL at end of lease
term
Termination Lessee has an option to terminate lease after 5 years paying a termination
penalty of Rs. 10,000
Assuming that lessee will exercise the termination option, which of the following is correct in respect of the
year ending June 30, 2019?
A Finance income Rs. 104,715; Current asset Rs. 152,079; Non-current asset Rs. 584,758
B Finance income Rs. 104,715; Current asset Rs. 135,785; Non-current asset Rs. 736,838
C Finance income Rs. 131,710; Current asset Rs. 121,845; Non-current asset Rs. 866,949
D Finance income Rs. 118,655; Current asset Rs. 136,466; Non-current asset Rs. 730,483
4. Data Enterprises (DE) is engaged in manufacturing and sale of industrial machines. On July 1, 2018 DE sold a
machine on finance lease of 4 years. Lease payments were agreed at Rs. 120,000 payable in advance on every
July 1st. The machine will be returned at end of lease term. Expected residual value at end of lease term is
estimated at Rs. 30,000 out of which Rs. 10,000 is guaranteed to DE by a 3 rd party. Implicit rate was 14%.
Manufacturing cost of this machine to DE was Rs. 350,000. Which of the following is correct regarding initial
recognition?
A Sales Rs. 416,358; Cost of sales Rs. 350,000
B Sales Rs. 404,517; Cost of sales Rs. 350,000
C Sales Rs. 416,358; Cost of sales Rs.338,158
D Sales Rs. 404,517; Cost of sales Rs. 338,158
5. Which of following is correct regarding lease accounting in books of lessee?

1. Right of use asset comprises of present value of lease payments
2. Right of use is always depreciated over shorter of lease term or useful life
3. Use of lessee’s incremental borrowing rate is preferred over implicit rate
4. Initial direct cost of lessee is charged to profit and loss immediately
A 1 and 2
B 2 and 4
C 1 only
D 1, 3 and 4
6. Which of the following should NOT be included in the initial cost of a right of use asset?
A Amount of initial measurement of the lease liability
B Present value of estimated cost of dismantling the asset at the end of lease period
C Payments made to the lessor before commencement of the lease
D Gross lease rentals payable under the lease agreement (01)
[Aut-19]
7. Wood Leasing Limited has leased certain equipment on July 1, 2018. In this respect, following information is
available:
Rs. in million
Fair value of equipment 67.00
Amount received on July 1, 2018 5.50
Four annual installments payable in arrears 20.00
Guaranteed residual value on expiry of the lease 10.00
Useful life of the equipment is estimated at 5 years. Implicit rate in the lease is 16%. What amount of net
investment in lease will be presented in non-current assets as at June 30, 2019?
A Rs. 57.72 million
B Rs. 46.96 million
C Rs. 51.34 million
D Rs. 39.55 million (02)
[Aut-19]
8. Zameer Ansari is a car dealer. Cars are sold both on cash and finance lease basis. He has been selling a car at
the following terms:
Fair value of equipment Rs. 5,000,000
Annual lease rental in arrears Rs. 1,646,199
Market rate 12% p.a.
Lease term 4 years
What would be the effect on sales revenue and finance income if annual lease rental is increased to Rs. 1.8
million and all other terms remain the same?
A Increase in sales revenue and increase in finance income
B Decrease in sales revenue and increase in finance income
C No change in sales revenue and increase in finance income
D Increase in sales revenue and no change in finance income (02)
[Spr-20]
9. An entity acquires property on lease for a non-cancellable period of 3 years. The lease payments are payable
semi-annually in arrears beginning from first year. What would be the impact of this transaction on lessee’s
current and gearing ratios upon commencement of lease?
A Decrease in current ratio as well as gearing ratio
B Decrease in current ratio and increase in gearing ratio
C Increase in current ratio and decrease in gearing ratio
D Increase in current ratio as well as gearing ratio (02)
[Aut-20]
10. Which of the following is one of the conditions set out in IFRS 16 for an arrangement to be classified as a lease?
A The lessee has the right to obtain substantially all of the economic benefits from use of the asset
B The lease term covers substantially all of the economic life of the asset
C The lessor has a substantive right of substitution
D The lessor has the right to direct the use of the asset (01)
[Aut-20]
SOLUTIONS TO OBJECTIVE TYPE QUESTIONS

1 C
2 C
[Lease income (40 + 42 + 46.2 + 36.96)/4] [Advance (0.58 + 41.29 – 46.2)]
3 A
4 D
[Sales (416,358 – 11,842); Cost of sales (350,000 – 11,842)]
5 C
6 D
7 D
Working PV @ 16%
2018 20.00 17.24
2019 20.00 14.86
2020 20.00 12.81
2021 30.00 16.57
61.49
5.50
NIL 66.99
Date b/f Installment Interest Principal c/f

1-Jul-18 66.99 5.50 - 5.50 61.49
30-Jun-19 61.49 20.00 9.84 10.16 51.33
30-Jun-20 51.32 20.00 8.22 11.78 39.55
8 C
Existing terms:
Implicit rate (calculated) 12.00%
Market rate 12.00%
Revised terms:
Implicit rate (calculated) 16.37%
Market rate 12.00%
Hence sale revenue would remain same at Rs. 5 million but interest income would increase
9 B
1 A
0
PRACTICE QUESTIONS
Question No. 1
Imran Limited (IL) entered into a lease agreement with Shakeel Leasing Company for a specialized machinery on July
1, 2012. Terms of the agreement were as follows:
Commencement of lease - July 1, 2012
Lease term - 3 years
Processing charges (Payable by lessee) - Rs. 5,000
Lease Payments - (i) Rs. 29,155 every six months on every 1st January
and 1st July. (1st payment due on January 1, 2013)
(ii) Lumpsum payment of Rs. 20,000 at end of lease term
Ownership - Ownership will be transferred to lessee at end of lease
Since asset is of specialized nature and is not ordinarily traded in local market, its fair value is not available. IL expects
to use this machinery for 2 more years after end of lease. Implicit rate is 15%.
Required:
(a) Journal entries for the year ending March 31, 2013.
(b) Extracts of Income statement and balance sheet for the year ending March 31, 2013
(Notes to financial statements are not required) (15)
Question No. 2
Deen Corporation (DC) is a dealer in electronics goods. It sells these goods at a profit margin of 20%. It also leases the
goods to the customers who cannot pay cash immediately. DC also paid 1% commission to sales staff on every sale or
lease.
Recently DC entered into a finance lease agreement for a multimedia system. It had purchased the system at a cost of
Rs. 550,000. As per lease agreement, system will be returned to DC at end of lease term of 3 years. DC expects its
residual value to be Rs. 45,000, however, lessee has not guaranteed any residual value.
Lease was commenced on January 1, 2012. Payment terms were as follows:

- Immediate payment of Rs. 50,000 at commencement
- Rs. 252,087 payable on every December 31st.
Implicit rate is 12%
Required:
(a) Journal entries for the year ending June 30, 2012
(b) Disclose "leases" as per IFRS 16 in the financial statements, including notes, for the year ending June 30, 2012
(15)
Question No. 3
Akbar Enterprises (AE) is a distributor of special vehicles. It also sells these vehicles on finance lease. On July 1, 2012
it sold a vehicle to Superior Traders (ST) on finance lease. Following were the payment terms:
- Down payment of Rs. 100,000
- Three equal annual installments of Rs. 86,989 each payable on every June 30th
- ST has guaranteed a residual value of Rs. 75,000
The vehicle will be returned to AE at end of lease term. Interest rate charged by AE is 18%.
AE purchases such vehicles for Rs. 275,000 and sells / leases at its invoice price of Rs. 350,000. It sells the used
vehicles, after lessees return them, in a market. This vehicle is expected to be sold for Rs. 100,000 after 3 years.
Required:
For both AE and ST:
(a) Journal entries for the year ending June 30, 2013
(b) Show the relevant extracts of Income statements and Balance sheets for the year ending June 30, 2013
(c) Disclose leases in accordance with IFRS 16
(24)
Question No. 4
Qaseem Ahmed & Company and Ebad Company signed a lease agreement dated January 1, 2001, that calls for Qaseem
Ahmad & Co to lease equipment to Ebad and Company beginning January 1, 2001. The terms and provisions of the lease
agreement and other pertinent data as follows:
(a) The term of the lease is 5 years, and the lease agreement is non-cancelable, requiring equal rental payments of Rs.
47,963 at the beginning of each year (annuity due basis).
(b) The equipment has fair value at the inception of the lease of Rs. 200,000, an estimated economic life of 5 years, and
no residual value.
(c) The lease contain no renewal options, and the equipment revert to Lessor Company at the termination of the lease.
(d) Ebad Company’s incremental borrowing rate is 11% per year.
(e) Ebad Company’s depreciates on a straight-line basis similar equipment that it owns.
(f) Qaseem Ahmad & Company sets the annual rental to earn a rate of return on its investment of 10% per year, this fact
is known to Edab & Company.
Required:
In light of IFRS-16, state with the reasons:
(i) Which would be the interest rate of lease, in the books of Ebad & Company in accordance with IFRS-16.
(ii) Calculate the amount to be capitalized in the books of lessee by using present value of annuity factor 4. 16986.
(iiii) Prepare a lease Amortization Schedule in the Book of Ebad & Company, showing amount of profit & loss account and
reduction in principal. (Round-off the figure in nearest)
{Spring 2003, Q # 7}
Question No. 5
Munir Niazi Corporation a lessor, purchased a new machine for Rs 1,200,000 on December 31, 2001, which was delivered
the same day (prior arrangement) to Ahmad Nadeem & Company, the lessee.
Following information relating to lease transaction is available:
(i) The Lease Asset has an estimated useful life of 5 years, which coincides with the Lease term.
(ii) At the end of lease term, Machine will revert to Munir Niazi Corporation, at which time it is expected to have a
residual value of Rs 100,000. (None of which is guaranteed by Ahmad Nadeem & Company).
(iii) Munir Niazi Corporation's implicit interest rate is 8% which is known to Ahmad Nadeem & Company.
(iv) Ahmad Nadeem & Company's incremental borrowing rate is 10% at December 31, 2001.
(v) Lease rentals consist of five equal annual payments, the first of which was paid on December 31, 2001.
(vi) Both the lessor and the lessee use calendar year as their accounts period and depreciate all fixed assets on straight
line basis.
Required:
(a) Compute the annual rental under the lease. (05)
(b) Compute the amounts of Gross Investment in Lease and Unearned Finance Income that Munir Niazi Corporation
should disclose at the inception of the lease December 31, 2001. (05)
(c) What expense should Ahmad Nadeem & Company record for the year ended December 31, 2002. (05)
{Autumn 2003, Q # 3}
Question No. 6
Copper Leasing Limited engaged in leasing of high cost sports equipment undertook following transactions on June 01,
2006.
(i) A speed boat of a famous brand ABC was given on 3 years lease to Mr. Carbon at an annual lease rental of
Rs.215,365 payable at the end of each year.
(ii) A motor boat of XYZ make was leased to Ms. Chlorine at an annual rent of Rs. 1,040,886 payable at the end of
each year for three years. The price charged in case of outright sale price of this boat is Rs. 2,500,000.
(iii) A water bike of XYZ make was leased to Mr. Sulphur at an annual rent of Rs. 98,763 payable at the end of each
year. The agreed lease term is three years. Outright sale price of this bike is Rs. 250,000
(iv) The following additional information is available:
- The company is also a sole dealer of XYZ make in the city and operates an outlet for that purpose.
- At the above outlet 25% area is used as company’s administrative office.
- Outlet’s rent and other maintenance expenditures are approximately Rs. 660,000 per month.
- Marketing staff is given a commission at 2% of price of goods whether they are leased or sold outright.
- The company paid Rs. 3,770 to a local authority, for inspection of each unit.
- Registration charges incurred by the company for each unit of speed boat, motor boat and water bike
were Rs. 3,500 Rs. 22,500 and Rs. 2,000, respectively.
- Cost of speed boat, motor boat and water bike were Rs. 500,000 Rs. 2,400,000 and Rs. 230,000,
respectively.
- The ownership is transferred to lessees at the end of the lease.
- The company charges 9% markup on leases of water bikes as against prevailing market rate of 11%.
Required:
(a) Compute ‘gross investment in lease’ and ‘unearned financial income’ in respect of each lease. (13)
(b) Prepare all necessary journal entries on June 01, 2006 and on receipt of first rental. (07)
Note: Present value of an annuity of Re. 1 received at the end of the year for three years are as follows:
Rate 8% 9% 10% 11% 12% 13% 14%
Present Value 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216
{Autumn 2006, Q # 4}
Question No. 7
Shoaib Leasing Limited (the lessor) has entered into a three year agreement with Sarfaraz Limited (the lessee) to lease a
machine with an expected useful life of 4 years.
The following information relating to lease transaction is available:
(i) Date of commencement of lease is July 1, 2007.
(ii) The lease contains a purchase bargain option at Rs. 100,000. At the end of the lease term, the market value of the
machine is expected to be Rs. 300,000.
(iii) Lease installments of Rs. 860,000 are payable annually, in arrears, on June 30.
(iv) The implicit interest rate is 12.9972%.
Required:
(a) Prepare the journal entries for the years ending June 30, 2008, 2009 and 2010 in the books of lessor. Ignore tax.
(b) Produce extracts from the balance sheet including relevant notes as at June 30, 2008 to show how the transactions
carried out in 2008 would be reflected in the financial statements of the lessor.
(Disclosure of accounting policy is not required.) (20)
{Spring 2008, Q # 5}
Question No. 8
Neptune Limited (NL) had established its business in December 2008 as a supplier of plant and machinery. During the year
ended December 31, 2009 the company sold two machines under lease arrangements. The details are as under:
A B
Date of commencement of lease January 1, 2009 January 1, 2009
Lease term 6 years 3 years
Lease installments payable annually in advance Rs. 2,000,000 Rs. 4,000,000
(to be reduced annually by 5%)
Cost of machine Rs. 6,963,448 Rs. 15,000,000
Economic life 6 years 6 years
NL sells machines on cash at cost plus 25%. It depreciates its assets under straight line method with no residual value. Fair
market annual interest rate is 15%.
Required:
(a) Prepare journal entries to record the above transactions.
(b) Prepare notes to the financial statements for the year ended December 31, 2009 in accordance with the
requirements of IFRS - 16 (Leases). (19)
(Ignore taxation and comparative figures) {Spring 2010, Q # 1}
Question No. 9
Quartz Auto Limited (QAL) is engaged in the business of manufacturing of trucks. Since a number of the prospective
customers do not have adequate funds to purchase the vehicles against full payment, QAL provides lease financing facility
to its customers. It expects to receive a return at the rate of 15% per annum on the amount of lease finance.
On 1 July 2010, QAL sold seven trucks to Emerald Goods Transport Company (EGTC) on lease. The terms of the lease and
related information are as follows:
(i) The lease period is 4 years, extendable up to the expected useful life of the trucks i.e. 5 years.
(ii) EGTC has guaranteed a residual value of Rs. 360,000 for each truck, till the end of the fourth year. However, the
guarantee would lapse if the lease term is extended to the fifth year. EGTC will return the truck at the end of the
lease term.
(iii) Lease rentals amount to Rs. 2,715,224 per annum and are payable in arrears i.e. on 30 June.
(iv) The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs. 1,350,000 per truck.
(v) The expected residual value of each truck at the end of the 4th and 5th year is Rs. 150,000 and Rs. 100,000
respectively.
Required:
Assuming that QAL and EGTC intend to extend the lease for a period of five years, prepare:
(a) Journal entries to record the transactions for the year ended 30 June 2011. (08)
(b) A note for inclusion in the financial statements, for the year ended 30 June 2011, in accordance with the
requirements of IFRS-16 ‘Leases’. (07)
{Autumn 2011, Q # 4}
Question No. 10
On 1 July 2010, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank. Details of the lease are as follows:
(i) Fair value of machine is Rs. 20 million. It is also equal to present value of lease payments.
(ii) The lease term and useful life is 4 years and 10 years respectively.
(iii) Installment of Rs. 5.80 million is to be paid annually in advance on 1 July.
(iv) The interest rate implicit in the lease is 15.725879%.
(v) At the end of lease term, MTL has an option to purchase the machine on payment of Rs. 2 million. The fair value
of the machine at the end of lease term is expected to be Rs. 3 million.
MTL depreciates the machine on the straight line method to a nil residual value.
Required:
Prepare relevant extracts of the statement of financial position and related notes to the financial statements for the year
ended 30 June 2012 along with comparative figures. Ignore taxation (16)
{Autumn 2012, Q # 2}
Question No. 11
Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on 1 July 2013. In this respect, the
following information is available:
Rs. in million
Fair value of equipment 28.69
Amount received on 1 July 2013 3.00
Four annual installments payable in arrears on 30 June, each year 7.80
Guaranteed residual value on expiry of the lease 5.00
Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
Required:
(a) Prepare accounting entries for the year ended 30 June 2014 in the books of GLL to record the transactions related
to the above lease arrangement in accordance with the requirements of International Financial Reporting
Standards. (07)
(b) Prepare a note for inclusion in GLL's financial statements for the year ended 30 June 2014, in accordance with
the requirements of International Financial Reporting Standards. (10)
{Autumn 2014, Q # 5}
Question No. 12
Shalimar Industries (SI) is engaged in the manufacturing of tractors. The tractors are sold both on cash and finance lease
basis. The cash selling price and cost of each tractor is Rs. 2.0 million and Rs. 1.6 million respectively.
On 1 January 2015, SI sold ten tractors to Caravan Transport (CT) on lease. The terms of the lease and related information
are as follows:
(i) The lease period is 4 years, whereas useful life of each tractor is 5 years.
(ii) The total unguaranteed residual value at the end of lease term is Rs. 1 million.
(iii) Lease rentals amounting to Rs. 6,375,454 per annum are payable in arrears.
The implicit interest rate is 12%.
Required:
In accordance with the requirements of International Financial Reporting Standards, prepare:
(a) Journal entries in the books of SI to record the transactions for the year ended 31 December 2015. (08)
(b) A note for inclusion in SI’s financial statements, for the year ended 31 December 2015. (07)
{Spring 2016, Q # 6}
Question No. 13
Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on the following terms:
(i) The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment of Rs. 48 million is receivable in
arrears.
(ii) The useful life of machine is 6 years.
(iii) The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease instalment in the
extended period will be of Rs. 15 million, receivable in arrears. It is reasonably certain that HL will exercise this
option.
(iv) The rate implicit in the lease is 10% p.a.
(v) The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million.
GLL incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete the transaction.
Required:
Prepare note(s) for inclusion in GLL’s financial statements, for the year ended 30 June 2018. (09)
{Autumn 2018, Q # 6(a)}
Question No. 14
Square Limited (SL) is a dealer of electronic items. SL acquires refrigerators of a particular model from a manufacturer at
a discount of 15% on the retail price of Rs. 300,000 per unit.
On 1 January 2018, SL sold 12 refrigerators to Cube Hotel at retail price on lease. The rate of interest implicit in the lease
was 10% per annum. The payment is to be made in three equal annual instalments payable in advance. Residual value at
the end of 3 years is nil.
The market rate of interest is 14% per annum.
Required:
Prepare journal entries in the books of SL in respect of above transaction for the year ended 31 December 2018. (07)
{Spring 2019, Q # 1(b)}
Question No. 15
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing Rs. 200 million having useful life of
8 years. Residual value of the machine at end of its useful life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with Cotton Candy Limited (CCL) for a non-
cancellable period of 2.5 years with effect from 1 March 2019. Under the agreement, eight instalments of Rs. 12 million
are to be paid quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL. Incremental borrowing rate of CCL
is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of FVLL and CCL to record the above
transactions. (15)
[Q-5, Spr-20]
Question No. 16
Capri Ice, a notable ice cream parlour, enters into a contract with Yardley Limited (YL) to use a space in a shopping mall
owned by YL for a period of five years. The contract specifies the dimensions of space and location. However, YL has
discretion to relocate the space to any other floor to accommodate other customers who would be conducting
promotional events and activities in the mall.
Required:
Discuss whether the contract between Capri Ice and Yardley Limited constitute lease or not. (03)
[Q-4, Spr-21]
Question No. 17
(a)
On 1 January 2020, Dettol Limited (DL) acquired a machine on lease from Lifebuoy Leasing Limited (LLL) for 3 years. The
first annual instalment amounting to Rs. 35 million was paid on 1 January 2020 and all subsequent annual instalments are
payable on 1 January subject to increase of 10% each year.
DL incurred initial direct cost of Rs. 5 million. As an incentive to DL for entering into the lease, LLL reimbursed Rs. 2 million.
LLL has incorporated an implicit rate of 11% per annum which is not known to DL.
The residual value of the machine at the end of 3 years is estimated at Rs. 30 million, out of which DL has guaranteed Rs.
20 million.
DL is also obliged to incur decommissioning cost of Rs. 4 million at the end of the lease term.
Discount rate of 12% may be assumed wherever required but not given.
Required:
Prepare relevant extracts from DL’s statement of profit or loss for the year ended 31 December 2020 and statement of
financial position as on that date. (09)
(b)
Using the information given in part (a) above, prepare note(s) for inclusion in the financial statements of Lifebuoy Leasing
Limited (LLL) for the year ended 31 December 2020. (08)
[Q-5, Spr-21]
SOLUTIONS TO PRACTICE QUESTIONS

Solution No. 1
(a)
Date Particulars Dr. Cr.
01-Jul-12 Right of use (W - 1) 149,808
Lease liability 149,808
[Initial recognition of lease]
01-Jul-12 Right of use 5,000
Bank 5,000
[Initial direct cost]
01-Jan-13 Lease liability (W-2) 17,919
Finance charge (W-2) 11,236
Bank 29,155
[Payment of 1st rental]
31-Mar-13 Finance charge (W-3) 4,946
[Finance charge accrued]
31-Mar-13 Depreciation (W-4) 23,221
Accumulated depreciation 23,221
[Depreciation charge for the year]
(b)
Income statement – Extracts

Rs.
Depreciation 23,221
Finance charge 16,181
Balance sheet – Extracts
Non-Current assets
Right of use [149.808 + 5] 154,808
Less: Accumulated depreciation (23,221)
131,587
Non-current liabilities
Current liabilities
W–1
PV of LP = 29,155 x Annuity factor + 20,000 x Discount factor

= 149,808
W – 2 Lease schedule
Date Open. Bal. Interest Rental Clos. Bal.
01-Jan-13 149,808 11,236 29,155 131,889
01-Jul-13 131,889 9,892 29,155 112,626
01-Jan-14 112,626 8,447 29,155 91,918
01-Jul-14 91,918 6,894 29,155 69,656
01-Jan-15 69,656 5,224 29,155 45,726
01-Jul-15 45,726 3,429 49,155 (0)
W–3 Accrued finance charge

(9,892 x 3/6) 4,946
W–4 Depreciation
(154,808 / 5 x 9/12) 23,221
Solution No. 2
(a) -------------------- Rs. -------------------
01-Jan-12 Lease receivable (550,000 x 100 / 80) 687,500
Cost of sales [550,000 - 32,030 (W-1)] 517,970
Sales [687,500 - 32,030] 655,470
Inventory 550,000
01-Jan-12 Selling commission [687,500 x 1%] 6,875
Bank 6,875
[Commission paid]
01-Jan-12 Bank 50,000
Lease receivable 50,000
[Receipt of down payment]
30-Jun-12 Lease receivable 38,250
Finance income [76,500 (W-2) x 6/12] 38,250
[Finance income for the year accrued]
W–1 Residual value 45,000

Less: GRV -
UGRV 45,000
PV of UGRV 32,030
W - 2 Lease schedule
Date Open. Bal. Interest Payment Clos. Bal.
01-Jan-12 687,500 - 50,000 637,500
31-Dec-12 637,500 76,500 252,087 461,913
31-Dec-13 461,913 55,430 252,087 265,256
31-Dec-14 265,256 31,831 252,087 45,000
(b)
INCOME STATEMENT – Extracts
Rs.
Sales 655,470
Cost of sales (517,970)
Commission (6,875)
Finance income 38,250
BALANC SHEET – Extracts

Non-Current assets
Current assets
NOTES TO THE ACCOUNTS

2 - Net investment in lease
Lease term is 3 years and instalment is receivable at every December 31st. Implicit rate is 12%.
Maturity analysis: Rs.
Lease payments receivable:
1 year 252,087
2 years 252,087
3 years 252,087
756,261
Reconciliation:
Total lease payments receivable 756,261
Unguaranteed residual value 45,000
Gross investment in lease 801,261
Less: Unearned finance income 125,511
Net investment in lease 675,750
Solution No. 3
(a)
Akbar Enterprises
01-Jul-12 Lease receivable 350,000
Cost of sales [275,000 - 15,216 (W-1)] 259,784
Sales [350,000 - 15,216] 334,784
Inventory 275,000
01-Jul-12 Bank 100,000
30-Jun-13 Bank 86,989
Lease receivable [W-2] 41,989
Finance income [W-2] 45,000
[Receipt of rental]
Rs.
W–1 Residual value 100,000
Less: GRV (75,000)
UGRV 25,000
PV of UGRV 15,216
01-Jul-12 350,000 - 100,000 250,000
30-Jun-13 250,000 45,000 86,989 208,011
30-Jun-14 208,011 37,442 86,989 158,465
30-Jun-15 158,465 28,524 86,989 100,000
(b)
Rs.
Sales 334,784
Cost of sales (259,784)
BALANC SHEET – Extracts
Non-Current assets
Current assets
(c)
Lease term is 3 years. Residual value of Rs. 75,000 is guaranteed. Implicit rate is 18%.
Maturity analysis: Rs.
1 year 86,989
2 years 161,989
248,977
Reconciliation:
Rs.
(a)
Superior Traders --------- Rs. ---------
01-Jul-12 Right of use (W-1) 289,137
01-Jul-12 Lease liability 100,000
Bank 100,000
[Payment of down payment]
30-Jun-13 Depreciation [289,137 / 3] 96,379
30-Jun-13 Lease liability (W-2) 52,944
Bank 86,989
[Payment of rental]
W–1 PV of LP [discounted at 18%]

PV of rentals 189,137
Down payment 100,000
PV of expected payment for GRV -
PV of LP 289,137
01-Jul-12 289,137 - 100,000 189,137
30-Jun-13 189,137 34,045 86,989 136,193
30-Jun-14 136,193 24,515 86,989 73,719
30-Jun-15 73,719 13,269 86,989 0
(b)
Rs.
Depreciation 96,379
BALANC SHEET - Extracts
Non-Current assets
Right of use [289,137 - 96,379] 192,758
Non-Current liabilities
Current liabilities
(c)

5 - Lease
Lease term is 3 years. Residual value of Rs. 75,000 is guaranteed. Implicit rate is 18%.
For the year: Rs.

Depreciation 96,379
Total cash outflow for leases 186,989
Lease assets:
Carrying amount 192,758
Addition to right of use 289,137
Maturity analysis:
Rs.
Undiscounted lease payments are as follows:
1 year 86,989
2 years 86,989
173,977
Solution No. 4
i) Rate to be used
Ebad Company should use 10% as implicit rate. This rate is being charged by lessor and is known to the lessee.
Incremental borrowing rate is used only when implicit rate is not known to lessee.
ii) Amount to be capitalized

Present value of LP = Rental x Annuity Factor
= 47,963 x 4.16986
= 200,000 Approximately
iii) Lease Amortization Schedule

------------------------------------------ Rs. ------------------------------------------
Opening Finance Closing
Date Rental
balance Charge balance
1-Jan-01 200,000 - 47,963 152,037
1-Jan-02 152,037 15,204 47,963 119,278
1-Jan-03 119,278 11,928 47,963 83,242
1-Jan-04 83,242 8,324 47,963 43,604
1-Jan-05 43,604 4,359 47,963 -
Note: Annuity due means payment in advance i.e at start.

Solution No. 5
(a) Computation of Annual Rentals:
Fair value of machine (P) = 1,200,000
Interest (implicit) rate (i) = 8% or 0.08
No. of rentals (n) = 5
Rental value (R) = ?
According to IFRS-16, by using interest rate implicit in the lease, “Fair Value of Asset = Present Value of LP +
Present Value of Un-Guaranteed Residual Value”
 1 − ( 1 + i ) − n + 1  U.R.V.
Fair Value = R+R  + n
 i  (1 + i)
  1 − (1+ 0.08 ) − 4  100,000
1,200,000 = R 1 +   +

  0.08  (1+ 0.08)
5
1,200,000 = R  4.31212  + 68,058

1,131,942 = R  4.31212 
1,131,942
R =
4.31212
R = 262,502
So the required annual rental value is Rs. 262,502
(b) Computation of Gross Investment in Lease:

Gross Investment in Lease = (262,502 x 5) + 100,000
= 1,312,510 + 100,000
= 1,412,510
Computation of Unearned Finance Income

As we know that;
Unearned Finance Income = Gross Investment in the Lease - Net Investment in Lease
= 1,412,510 – 1,200,000
= 212,510
Note: By using the lease rental of 262,502 and implicit rate of 8%, the Net Investment in Lease is 1,200,000.
(c) Books of Ahmad Nadeem & Co.

Profit & Loss Account (Extract)
For the Year ended December 31, 2002
Expenses Rupees
1,131,940 (𝑾−𝟏)
Depreciation on right of use 226,388
5
295,943
Note: Lessee records the asset at Present Value of LP i.e. Rs. 1,131,940 (W-1)
{Working notes}
(W-1)
1 − ( 1 + i ) − n + 1 
Present Value of LP = R+R  
 i 
  1 − (1+ 0.08 ) − 4 
= 262,502 1 +  

  0.08 
= 262,502  4.31212 
= 1,131,940
(W-2)
Finance charge = (1,131,941 – 262,502) x 8%
= 869,439 x 8%
= 69,555
Solution No. 6
(a)
Copper Leasing is:
- dealer lessor of XYZ motor boat and water bike
- financier lessor of ABC speed boat
ABC speed boat Rs. Rs.

Gross investment in lease
LP [215,365 x 3] 646,095
Fair value [i.e. cost] 500,000
Initial direct cost 17,270 517,270
[500,000 x 2% + 3,770 + 3,500]
Unearned finance income [GIL - NIL] 128,825

XYZ motor boat
LP [1,040,886 x 3] 3,122,658

Fair value [i.e. outright sale price] 2,500,000
XYZ water bike

LP [98,763 x 3] 296,289
PV of LP at market rate [98,763 x 2.4437] 241,347

(b)
---------------- Rs. -------------
LEASE - ABC speed boat
01-Jun-06 Lease receivable [NIL] 517,270
Bank 517,270
31-May-07 Bank 215,365
Lease receivable (balancing) 153,293
Finance income [517,270 x 12% (W-1)] 62,072
[Receipt of 1st rental]
LEASE - XYZ motor boat

01-Jun-06 Lease receivable [NIL] 2,500,000
Cost of sales 2,400,000
Sales 2,500,000
Inventory 2,400,000
01-Jun-06 Selling expense [2,500,000 x 2% + 3,770 + 22,500] 76,270
Cash 76,270
31-May-07 Bank 1,040,886
Finance income [2,500,000 x 12% (W-2)] 300,000
[receipt of 1st rental]
LEASE - XYZ water bike

01-Jun-06 Lease receivable [NIL] 241,347
Cost of sales 230,000
Sales 241,347
Inventory 230,000
01-Jun-06 Selling expense [250,000 x 2% + 3,770 + 2,000] 10,770
Cash 10,770
31-May-07 Bank 98,763
Finance income [241,347 x 11% (W-3)] 26,548
W–1
Implicit rate is a rate discounted at which PV of GIL is equal to NIL
Relevant 3 year A.F. = 517,270 / 215,365
= 2.4018
Looking for this factor in given annuity table, implicit rate is thus 12%.
W–2
Implicit rate is a rate discounted at which PV of GIL is equal to NIL
Relevant 3 year A.F. = 2,500,000 / 1,040,886
= 2.4018
Looking for this factor in given annuity table, implicit rate is thus 12%.
W–3
In case of dealer lessor, rate actually charged by lessor is the Implicit rate i.e. 9% but we will use market
interest rate because it is higher and using this rate will cause present value of lease payments to be less
than fair value.
Solution No. 7
(a)
01-Jul-07 Lease receivable (W-1) 2,100,000
Bank 2,100,000
30-Jun-08 Bank 860,000
Lease receivable (W-2) 587,059
Finance income (W-2) 272,941
[Receipt of 1st rental]
30-Jun-09 Bank 860,000
[Receipt of 2nd rental]
30-Jun-10 Bank 960,000
[Receipt of 3rd rental and BPO]
W–1 NIL = 860,000 x Annuity factor + 100,000 x discount factor

= 2,100,000
30-Jun-08 2,100,000 272,941 860,000 1,512,941
30-Jun-09 1,512,941 196,640 860,000 849,581
30-Jun-10 849,581 110,419 960,000 -
(b)
BALANC SHEET - Extracts Rs.
Non-Current assets
Current assets

Lease term is 3 years and instalment is receivable at end of every year. Implicit rate is 12.9972%. Lease contains
a bargain purchase option at Rs. 100,000.
Maturity analysis:
Rs.
1 year 860,000
2 years 960,000
1,820,000
Reconciliation:
Total lease payments receivable 1,820,000
Unguaranteed residual value -
Gross investment in lease 1,820,000
Net investment in lease 1,512,941
Solution No. 8
(a)
------------ Rs. '000 ----------
LEASE - A [FINANCE LEASE]
01-Jan-09 Lease receivable [W-1] 8,704
Cost of sales 6,963
Sales 8,704
Inventory 6,963
01-Jan-09 Bank 2,000
31-Dec-09 Lease receivable 1,006
[accrual of interest income for the year]
LEASE - B [OPERATING LEASE]

01-Jan-09 Bank 4,000
Rent income 4,000
[Rent received for 2009]
31-Dec-09 Rent income [W-2] 197
Advance rent 197
[Recording unearned income]
31-Dec-09 Depreciation [15,000 / 6] 2,500
W–1 PV of LP = 2,000 x Annuity factor

= 8,704
Sale value / FV = 6,963.448 x (1 + 25%)

= 8,704
Since PV of LP is equal to FV and lease term covers whole life, therefore, lease A is a finance lease
W–2
Rent as per agreement: Rs,'000’
year 1 4,000
year 2 (95%) 3,800
year 3 (95%) 3,610

11,410
Income for the year 3,803
Receipt in 2009 4,000
Unearned income 197
Since LP is much lower than cost and lease term covers 50% life, therefore, lease B is an operating lease.
01-Jan-09 8,704 - 2,000 6,704
01-Jan-10 6,704 1,006 2,000 5,710
01-Jan-11 5,710 856 2,000 4,566
01-Jan-12 4,566 685 2,000 3,251
01-Jan-13 3,251 488 2,000 1,739
01-Jan-14 1,739 261 2,000 -
(b)
Lease term is 6 years. Rental is receivable at start of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
1 year 2,000
2 years 2,000
3 years 2,000
4 years 2,000
5 years 2,000
10,000
Reconciliation: Rs.'000’
2 - Operating lease
Maturity analysis:
1 year 3,800
2 years 3,610
7,410
Solution No. 9
(a)
------------ Rs. '000’ ----------
01-Jul-10 Lease receivable [1,350 x 7] 9,450
Cost of sales [900 x 7 – 348 (W-1)] 5,952
Sales [9,450 – 348 (W-1)] 9,102
Inventory [900 x 7] 6,300
30-Jun-11 Bank 2,715
(b)
Lease term is 4 years extendable upto 5 years. Rental is receivable at end of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
1 year 2,715
2 years 2,715
3 years 2,715
4 years 2,715
10,861
Reconciliation:
Unguaranteed residual value 700
W–1 Residual value 700

Less: GRV -
UGRV 700
PV of UGRV 348
W–2 NIL = FV = 2,715.224 x Annuity factor + 700 x Discount factor

= 9,450
30-Jun-11 9,450 1,418 2,715 8,152
30-Jun-12 8,152 1,223 2,715 6,660
30-Jun-13 6,660 999 2,715 4,944
30-Jun-14 4,944 742 2,715 2,970
30-Jun-15 2,970 445 2,715 700
Solution No. 10
Miracle Textile Limited
Balance sheet - Extracts 2012 2011
-------------- Rs.'000’ ----------
Non-Current assets
Right of use [Note - 1] 16,000 18,000
Non-Current liabilities
Lease liability [Note - 2] 6,505 10,633
Current liabilities
Lease liability [Note - 2] 5,800 5,800
Miracle Textile Limited

Notes - Extracts
1 - Property, plant and equipment
Cost
As at July 1 20,000 -
Additions - 20,000
Disposal - -
As at June 30 20,000 20,000
Depreciation
As at July 1 2,000 -
For the year 2,000 2,000
Disposal - -
As at June 30 4,000 2,000
NBV as at June 30 16,000 18,000
2 - Lease Liability
The Company has entered into a finance lease agreement with a bank in respect of a machine. The finance lease liability
bears interest at the rate of 15.725879% per annum. The company has the option to purchase the machine by paying
an amount of Rs. 2 million at the end of the lease term. The lease rentals are payable annually in advance
2012 2011
For the year: ---------- Rs.'000’ ----------
Depreciation 2,000 2,000
Finance charge 1,672 2,233
Total cash outflow for leases 5,800 5,800
Lease assets:
Carrying amount 16,000 18,000
Addition to right of use - 20,000
2012 2011
Maturity analysis: ---------- Rs.'000’ ----------
Undiscounted lease payments are as follows:
1 year 5,800 5,800
2 years 7,800 5,800
3 years - 7,800
13,600 19,400
01-Jul-10 20,000 - 5,800 14,200
01-Jul-11 14,200 2,233 5,800 10,633
01-Jul-12 10,633 1,672 5,800 6,505
01-Jul-13 6,505 1,023 5,800 1,728
30-Jun-14 1,728 272 2,000 -
Solution No. 11
(a)
------------ Rs. '000’ ----------
01-Jul-13 Lease receivable 28,690
Bank 28,690
01-Jul-13 Bank 3,000
30-Jun-14 Bank 7,800
(b)
Lease term is 4 years and instalment is receivable at end of every year. Implicit rate is 14%.
Maturity analysis: Rs.'000’
1 year 7,800
2 years 7,800
3 years 12,800
28,400
Reconciliation: Rs.'000’
01-Jul-13 28,690 - 3,000 25,690
30-Jun-14 25,690 3,597 7,800 21,487
30-Jun-15 21,487 3,008 7,800 16,695
30-Jun-16 16,695 2,337 7,800 11,232
30-Jun-17 11,232 1,568 7,800 5,000
Solution No. 12
(a)
------------ Rs. '000’ ----------
01-Jan-15 Lease receivable 20,000
Cost of sales [16,000 - 636 (W-1)] 15,364
Sales [20,000 - 636 (W-1)] 19,364
Inventory 16,000
31-Dec-15 Bank 6,375
(b)
Lease term is 4 years and installment is receivable at end of every year. Implicit rate is 12%.
Maturity analysis: Rs.'000’
1 year 6,375
2 years 6,375
3 years 6,375
19,126
Reconciliation:
W–1
PV of UGRV [1,000 x 1.12-4] 636
31-Dec-15 20,000 2,400 6,375 16,025
31-Dec-16 16,025 1,923 6,375 11,572
31-Dec-17 11,572 1,389 6,375 6,585
31-Dec-18 6,585 790 6,375 1,000
Solution No. 13
Guava Leasing Limited
Notes to financial statements
for the year ended June 30, 2018

Lease term is 3.5 years, extendable upto 5 years. Installment is receivable at end of every six months.
Implicit rate is 10%.
Maturity analysis: Rs. million

Lease payments receivable as follows:
1 year 96.00
2 years 96.00
3 years 63.00
4 years 30.00
285.00
Reconciliation: Rs. million

Total lease payments receivable 285.00
Unguaranteed residual value 20.00
Gross investment in lease 305.00
Less: Unearned finance income 51.64
Net investment in lease 253.36
W-1 Initial recognition

= Rs. 48 million x A.F. + Rs. 15 million x A.F. + Rs. 20 million x D.F.
= 319.05
W-2
Date Op. bal Interest Payment Cl. Bal
31-Dec-17 319.05 15.95 48.00 287.01
30-Jun-18 287.01 14.35 48.00 253.36
31-Dec-18 253.36 12.67 48.00 218.03
30-Jun-19 218.03 10.90 48.00 180.93
Solution No. 14
----- Rs. million ----
01-01-18 Lease receivable (W-2) 3.483
Cost of sales [3.60 x 85%] 3.060
Sales [W-2] 3.483
Inventory 3.060
01-01-18 Cash (W-1) 1.316

Lease receivable 1.316
[1st rental received]
31-12-18 Lease receivable [(3.483 - 1.316) x 14%] 0.303

Finance income 0.303
[Finance income for 2018]
W-1
Rental = [0.30m x 12] / (1 + annuity factor at 10%)
= 1.316
W-2
NIL = Sales = Lease receivable = 1.316 + 1.316 x annuity factor at 14%
= 3.483
Solution No. 15
Books of FVLL
--------- Rs. million --------
01-01-19 Machine 200.00
Cash 200.00
[Purchase of machine]
30-11-19 Cash 12.00

Lease income 12.00
[1st rental received]
31-12-19 Rent receivable [38.40(W-1) x 10/12 - 12] 20.00

Lease income 20.00
[Accrual adjustment at year-end]
31-12-19 Depreciation [(200 - 16)/8] 23.00

Accumulated depreciation 23.00
[Depreciation for 2019]
W-1 Rs. million

Total lease payments [12 x 8] 96.00
Lease income per year [96 / 2.5] 38.40
Books of CCL
--------- Rs. million --------
01-03-19 ROU asset (W-2) 74.70
Lease liability 74.70
01-04-19 ROU asset 4.00

Cash 4.00
[Installation cost]
31-05-19 Interest expense (W-2) 2.99

[Interest expense for Q-1]


30-11-19 Lease liability 12.00

Cash 12.00
[1st rental paid]
31-12-19 Interest expense [2.88(W-2) x 1/3] 0.96

[Interest accrual at year end]
31-12-19 Depreciation [74.70/30 x 10 + 4/29 x 9] 26.14

Accumulated depreciation 26.14
[Depreciation for 2019]
W-2 Rs. million

PV of lease payments [12 x 8 Qtr-annuity factor x 2 Qtr-discount factor at 4%] 74.70
W-3 Lease schedule

Date Open. Bal Interest Payment Clos. Bal
31-05-19 74.70 2.99 - 77.69
31-08-19 77.69 3.11 - 80.79
30-11-19 80.79 3.23 12.00 72.02
29-02-20 72.02 2.88 12.00 62.91
Solution No. 16
In this contract, the dimension of space and location in shopping mall are specified but still Capri does not have the
right to use the identified space because
YL has the substantive right to substitute the space on following grounds:
(i) YL has the discretion to relocate Capri to any other floor.
(ii) YL would benefit economically from substituting the space i.e. accommodate other customers for conducting
promotional events and activities in the mall.
Moreover, one of the elements of lease is “exchange of consideration”. In given scenario consideration for YL has not
been mentioned.
In light of the above, this contract does not constitute a lease.
Solution No. 17
(a)
DL
Extracts - SOFP
as at Dec 31, 2020 Rs. million
Non-Current assets
Right of use asset (W-2.1) 72.66
Non-current liabilities
Provision for decommissioning (W-2.3) 3.19
Lease liability (W-2.2) 37.82
Current liabilities
Lease liability (W-2.2) [68.14 + 8.18 - 37.82] 38.50
Extracts - SOCI
for the year ending Dec 31, 2020 Rs. million
Depreciation (W-2.1) 36.33
Interest expense [8.18(W-2.2) + 0.84(W-2.3)] 8.52
WORKINGS
W-1 Initial measurement Rs. million
Lease liability:
- 1st payment [35 - 2 (i.e. lease incentive)] 33.00
- 2nd payment [35 x 1.1 x 1.12-1] 34.38
2 -2
- 3rd payment [35 x 1.1 x 1.12 ] 33.76
- Expected payment under RV guarantee -
101.14
Initial direct cost 5.00
De-commissioning obligation [4 x 1.12-3] 2.85
ROU asset 108.98
W-2 Subsequent measurement

W-2.1 ROU asset
Cost 108.98
Depreciation [108.98/3] (36.33)
Carrying amount 72.66
W-2.2 Lease liability
01-01-20 101.14 - 33.00 68.14
01-01-21 68.14 8.18 38.50 37.82
01-01-22 37.82 4.53 42.35 -
W-2.3 Provision for dismantling

Initial 2.85
Interest [2.85 x 12%] 0.34

Carrying amount 3.19
(b)
LLL
Extracts - notes
for the year ending Dec 31, 2020 Rs. million

4.1 Maturity analysis
Lease payments are receivable as follows:
Year 1 38.50
Year 2 [42.35 + 20] 62.35
100.85
4.2 Reconciliation
Total lease payments 100.85
Add: Unguaranteed residual value [30 - 20] 10.00
Gross investment in lease 110.85
Less: Unearned finance income (bal.) (9.85)
Net investment in lease (W-2) [90.99 + 10.01] 101.00
WORKINGS
W-1 Initial measurement Rs. million
Net investment in lease:
- 1st payment 35.00
-1
- 2nd payment [35 x 1.1 x 1.11 ] 34.68
2 -2
- 3rd payment [35 x 1.1 x 1.11 ] 34.37
- Total RV [30 x 1.11-3] 21.94
- Lease incentive (2.00)
123.99
W-2 Subsequent measurement

01-01-20 123.99 - 33.00 90.99
01-01-21 90.99 10.01 38.50 62.50
01-01-22 62.50 6.88 42.35 27.03
31-12-22 27.03 2.97 - 30.00

IFRS 16 Complete Chapter FAR II CAF-5 by Sir Nasir Abbass

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IFRS 16 Complete Chapter FAR II CAF-5 by Sir Nasir Abbass

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LEASES (IFRS-16) (1)

1.9 Economic life is either:

1.15 Gross investment in the lease [GIL] is the sum of:

1.17 Unearned finance income [UFI] is the difference between:

Calculation of implicit rate:

Initial measurement of the lease liability

Subsequent measurement of right-of-use asset

Other measurement model

Subsequent measurement of the lease liability

provided that the information is incorporated by cross-reference in the single note or

6.2 Finance lease – Initial recognition and measurement

Manufacturer or dealer lessors

manufacturer or dealer lessor shall recognise selling profit or loss on a finance

Journal entry for initial recognition:

6.3 Finance lease – Subsequent measurement

Calculation of lease rental:

Treatment of BPO in lease schedule [for both lessee and lessor]:

6.4 Operating lease – recognition and measurement

OBJECTIVE TYPE QUESTIONS

3. Beta Leasing (BL) provided a machine on lease under following terms:

5. Which of following is correct regarding lease accounting in books of lessee?

SOLUTIONS TO OBJECTIVE TYPE QUESTIONS

Date b/f Installment Interest Principal c/f

Lease was commenced on January 1, 2012. Payment terms were as follows:

The market rate of interest is 14% per annum.

SOLUTIONS TO PRACTICE QUESTIONS

Income statement – Extracts

Balance sheet – Extracts

PV of LP = 29,155 x Annuity factor + 20,000 x Discount factor

W–3 Accrued finance charge

W–1 Residual value 45,000

BALANC SHEET – Extracts

NOTES TO THE ACCOUNTS

Finance income 45,000

BALANC SHEET – Extracts

W–1 PV of LP [discounted at 18%]

BALANC SHEET - Extracts

NOTES TO THE ACCOUNTS

For the year: Rs.

ii) Amount to be capitalized

iii) Lease Amortization Schedule

Note: Annuity due means payment in advance i.e at start.

1,200,000 = R  4.31212  + 68,058

(b) Computation of Gross Investment in Lease:

Computation of Unearned Finance Income

(c) Books of Ahmad Nadeem & Co.

ABC speed boat Rs. Rs.

Unearned finance income [GIL - NIL] 128,825

Net investment in lease

Unearned finance income [GIL - NIL] 622,658

XYZ water bike

Unearned finance income [GIL - NIL] 54,942

LEASE - XYZ motor boat

LEASE - XYZ water bike

W–1 NIL = 860,000 x Annuity factor + 100,000 x discount factor

NOTES TO THE ACCOUNTS

LEASE - B [OPERATING LEASE]

W–1 PV of LP = 2,000 x Annuity factor

Sale value / FV = 6,963.448 x (1 + 25%)

year 3 (95%) 3,610

W–1 Residual value 700

W–2 NIL = FV = 2,715.224 x Annuity factor + 700 x Discount factor

Miracle Textile Limited