Chapter 11

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LEASE
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WHAT IS LEASE?
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A LEASE IS DEFINED AS A CONTRACT OR PART OF A CONTRACT THAT
CONVEYS THE RIGHT TO USE THE UNDERLYING ASSET FOR A PERIOD
OF TIME IN EXCHANGE FOR CONSIDERATION.

THE UNDERLYING ASSET IS THE SUBJECT OF A LEASE FOR WHICH

THE RIGHT TO USE THAT ASSET HAS BEEN PROVIDED BY THE LESSOR
TO THE LESSEE.

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 LESSEE
The lessee is the entity that obtains the right to use an underlying asset
for a period of time in exchange for consideration.

LESSOR
The lessor is the entity that provides the right to use an underlying
asset for a period of time in exchange for consideration.
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ALAMIN MO!
Lease contract or not?
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 OPERATING AND
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$ FINANCING
LEASE MODEL
FOR LESSEE
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IFRS 16, PARAGRAPH 5, PROVIDES THAT A LESSEE IS PERMITTED TO
TO APPLY THE OPERATING LEASE MADE IN TWO OPTIONAL
EXEMPTIONS:

IFRS 16, PARAGRAPH 5

IFRS 16, PARAGRAPH 5

A. SHORT-TERM LEA
SE
B. LOW VALUE LEAS
E
 A short-term lease is defined as a lease with a term of twelve months
1. or less at the commencement date of the lease

The Standard does not provide for a quantitative threshold for low
2. value asset. Low value asset is a matter of professional judgment.
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OPERATING
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LEASE MODEL $

FOR LESSEE
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 If the lessee elects to apply the operating lease accounting. the lessee
shall recognize the lease payments as rent expense in either a straight
line basis over the lease term or another systematic basis if this is more
representative of the pattern of the lessee's benefit.

Under the operating lease model, the periodic rental is simply recognized
as rent expense on the part of the lessee.
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FINANCE LEASE
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MODEL FOR $

LEASE
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 IFRS 16, PARAGRAPH 22,
provides that at the commencement date, a lessee
shall recognize a right of use asset and a lease
liability

This simply means that a lessee is required to

initially recognize a right of use asset for the
right to use the underlying asset over the lease
term and a lease liability for the obligation to

FINANCE LEASE MODEL make payments.

FOR LEASE All leases shall be accounted for by the lessee

as a finance lease under the new lease
standard.
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INITIAL MEASUREMENT OF
RIGHT OF USE ASSET $

A right of use asset is defined as an $

asset that represents the right of a $
lessee to use an underlying asset over
the lease term in a finance lease.
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The cost of right of use asset
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comprises:
a. The present value of lease payments

b. Lease payments made to lessor such as lease

bonus, less any lease incentive received

c. Initial direct cost incurred by the lessee

d. Estimate of cost of dismantling and restoring $

the underlying asset for which the lessee has a
present obligation
Lease incentive is payment by the lessor to the lessee associated with
a lease or the reimbursement or assumption by the lessor of the cost
of the lessee.

The lease incentive should be deducted from the cost of the right of
use asset.
Initial direct cost is incremental cost of obtaining a lease that would
not have been incurred if the lease had not been obtained.
Leasehold improvement is not initial direct cost and not included in the
cost of the right of use asset.

Any security deposit refundable upon the lease expiration is

accounted for as an asset by the lessee.
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PRESENTATION OF RIGHT OF
USE ASSET $

The lessee shall present the right of use $

asset at cost less any accumulated $
depreciation and impairment loss as a
separate line item as noncurrent asset
in the statement of financial position. $

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DEPRECIATION
OF RIGHT OF USE$ $

ASSET
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IFRS 16, paragraph 32, provides that the lessee $
shall depreciate the right of use asset over the
useful life of the underlying asset under the
following condition:

a.
The lease transfers ownership of the
underlying asset to the lessee at the end
of lease term.

b. The lessee is reasonably certain to

exercise a purchase option.
If there is no transfer of ownership to the lessee
or if the purchase option is not reasonably $
certain to be exercised, the lessee shall
depreciate the right of the use asset over the
shorter between the useful life of the asset and
the lease term.
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MEASUREMENT OF
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LEASE LIABILITY
The lessee shall measure the lease liability $

at the present value of lease payments.

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The lease payments shall be discounted
using the interest rate implicit in the
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lease desired by the lessor.
If the implicit interest rate cannot be $
readily determined the incrementl
borrowing rate of the lessee is used.
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LESSOR
ACCOUNTING

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IFRS 16, paragraph 61, provides that a lessor shall classify leases as
either an operating lease or a finance lease.

An operating lease is a lease that does not transfer substantially all

the risks and rewards incidental to ownership of an underlying
asset.

A finance lease is a lease that transfers substantially all the risks

and rewards incidental to ownership of an underlying asset.
WHEN IS A LEASE CLASSIFIED AS FINANCE LEASE?
Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the contract.
Under IFRS 16, paragraph 63, among others, any of the following situations
would normally lead to a lease being classified as a finance lease:
a. The lease transfers ownership of the underlying asset to the lessee at the
end of the lease term.
b. The lessee has an option to purchase the asset at a price which is expected
to be sufficiently lower than the fair value at the date the option becomes
exercisable.
At the inception of the lease, it is reasonably certain that the option will be
exercised.
 c. The lease term is for the major part of the economic life of the underlying
asset even if title is not transferred.

Under USA GAAP, major part means at least 75% of the economic life of an
asset.

d. The present value of the lease payments amounts to substantially all of

the fair value of the underlying asset at the inception of the lease.

Under USA GAAP, substantially all means at least 90% of the fair value of the
underlying asset.
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OPERATING
LEASE - LESSOR
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1. IFRS 16, paragraph 81 provides that a lessor shall recognize lease
payments from operating lease as income either on a straight line
basis or another systematic basis.

2. Simply stated, the periodic rental received by the lessor in an

operating lease is simply recognized as rent income.

3. If the rentals are unequal, the total rentals shall be allocated

uniformly on a straight line basis over the lease term.
4. The underlying asset remains as an asset of the lessor.
Consequently, the lessor bears all ownership or executory costs such
as depreciation of leased property. real property taxes, insurance
and maintenance.

However, the lessor may pass on to the lessee the payment for
taxes, insurance and maintenance cost.

5. The lessor shall record depreciation of the underlying asset

consistent with the lessor's depreciation for similar asset.
6. Initial direct cost incurred by lessor in an operating lease shall be
added to the carrying amount of the underlying asset and
recognized as an expense over the lease term on the same basis as
the lease income.

7. Any security deposit refundable upon the lease expiration shall be

accounted for as liability by the lessor.

8. Any lease bonus received by the lessor from the lessee is

recognized as unearned rent income to be amortized over the lease
term.
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FINANCE
LEASE - LESSOR
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On the part of the lessor, a finance lease is either:

a. Direct financing lease

b. Sales type lease

The main distinction between the two is the presence or absence of a

manufacturer or dealer profit or loss. A direct financing lease
recognizes only interest income. A sales type lease recognizes
interest income and gross profit on sale.
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