Intacc 2 - Sem Project

College of Accountancy, Business, Economics and International Hospitality Management
CASE STUDY ABOUT PFRS 16
A Semestral Project for

Intermediate Accounting 2 (ACC 308)
To Ms. Sheena Sandoval, CPA
In Partial Fulfillment
Of the Requirements for the Degree of
Bachelor of Science in Management Accounting
By:
Aclan, Trisha Marie M.
Atienza, Chelsea Joy M.
Calahati, Rose Marylie M.
Calingasan, Yna Grace C.
Diamante, Kaycee D.
Inocentes, Justin Alexis A.
Pasion, Princess Ira Nicole D.
BSMA 3101
December 2023
Rizal Avenue Extension, Batangas City, Philippines +63 43 779 - 8400 loc. 1124
www.batstate-u.edu.ph cabeihm.pb@g.batstate-u.edu.ph
TABLE OF CONTENTS
Discuss PFRS 16 ........................................................................................................7
Effects of Lease Accounting Changes ................................................................. 2-3
Comparison of PAS 17 and PFRS 16 .................................................................. 3-6
Comprehensive Problem ............................................................................................
Lease Modification ..................................................................................... 6-91
Operating Lease ................................................................................................9
Direct Financing Lease .................................................................................. 91
Sales Type Lease ............................................................................................22
Sales and Leaseback ................................................................................. 22-24
Feedbacks/ Insights/ Comments about PFRS 16 ........................................... 24-25
References ................................................................................................................26
DISCUSS PFRS 16
The Philippine Financial Reporting Standard 16 (PFRS 16) was established to replace the
Philippine Accounting System (PAS 17), a new standard that calls for further and distinct
disclosures for leasing activities. The new standard went into effect on January 1st, 2019, and its
goal is to give financial statement users a foundation to evaluate how leasing operations affect an
entity's cash flows, performance, and financial situation. The new standard now requires lessees
to record all leases on their balance sheets.
Lessees and lessors report both qualitative and quantitative data under PFRS 16. The
qualitative and quantitative data must be provided to lessees in a single note or as a distinct
financial statement part. The accounting treatment of incentives and lease modifications for
lessors and lessees is covered by PFRS 16. The new standard specifies what disclosures must be
made and how this information should be shown on the face of the statements. PFRS 16
addresses payments between lessors and lessees upon recognition of a lease and expenses
incurred by a lessor in connection with a lease. Lessors are required to reveal both financial and
operating leases.
Accounting for Short-Term Leases and Leases for Low-Value Assets

A lease with a period of 12 months or less is classified as a short-term lease under PFRS
16, although alternatives for lease renewal are considered. At the same time, a lease for low-
value assets is one in which the underlying asset has a low value (as defined by the standard,
valued at US$5,000.00 or the equivalent of a new, comparable item). Whereas the lessor records
lease or rental income, the lessee records a lease or rental expense in its accounts. A straight-line
basis or another systematic basis that most accurately depicts the pattern of benefits obtained
under the lease contract would be used to report the lease expense and revenue. In addition, if the
lease stipulates advance rentals or security deposits, the lessee applies such costs and expenses
within the relevant term and accounts for them at the time of payment. Likewise, upon receipt,
the lessor must account for and apply the advance rental or security deposit within the relevant
time frame.
Recognition in PFRS 16
 a right-of-use asset and lease liability
 interest expense (on the lease liability)
 depreciation expense (on the right-of-use asset)
In the balance sheet, the lessee must recognize a right-to-use asset and a lease liability
based on the discounted value of future lease payments. The Income Statement reports the right-
to-use asset's depreciation expenditure and the interest payable on the outstanding lease liability.
Any lease payment is considered a reduction in the lease liability. Except for investment property
right-of-use assets, which are reported as investment property, the right-of-use asset and lease
liability must be presented or declared separately from other non-lease assets and liabilities. If a
lessee does not opt to exhibit its right-of-use assets separately on the balance sheet, they must be
presented in the same line item as if the underlying asset were owned. It depreciates right-of-use
assets straight-line from the lease start date until the end of the asset's useful life or the end of the
lease period.
Lease Payments in the Cash Flow Statement

Lease payments are classified as follows in the cash flow statement:
 as a source of funding for sums related to the repayment of the lease liability's principal
component
 in the same category as interest paid on other types of debt finance (either as a funding
or an operating activity) for sums linked to lease liability interest charges
 as short-term operating operations for funds related to as well as low-value asset leases
that are accounted for off-balance-sheet
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Lessor Requirement
The standards for a lessor are substantially the same as those in PAS 17, except that this
standard no longer distinguishes between finance and operating leases.
 the net investment for finance leases is shown on as a receivable on the balance sheet
 assets subject to operating leases are still shown
 depending on the type of the underlying asset
Tax Treatment
A leasing arrangement may be classified as an operating lease, a financing lease, or a
conditional sale under Revenue Regulations (RR) No. 19-86, depending on the nature of the
transaction. The Revenue Regulations (RR) establish the rules that regulate the tax treatment of
lease agreements and give recommendations for establishing whether transactions that appear to
be leased are conditional sales contracts.
EFFECT OF LEASE ACCOUNTING CHANGES (FROM PAS 17 TO PFRS 16)
On January 01, 2019, the Philippines' Financial Reporting Standard PFRS 16 on leasing
became effective. Leasers shall recognize all leases on the balance sheet, except relatively small
value assets and lease contracts with a term of less than 12 months, in accordance with this new
standard. A right to use an asset and a lease liability, measured at the discounted value of future
lease payments on the balance sheet, shall be recognized by the lessee. The income statements
shall then show the depreciation expense incurred by the right to use assets and the interest
charged in respect of the outstanding lease obligation. In any lease payment, a reduction of the
rent liability is taken into account. In addition, unlike the old Philippine Accounting Standard
PAS17, this single accounting model does not determine whether the financial lease is an
operational lease.
The transition from PAS 17 to PFRS 16, the new lease accounting standard, has a severe
effect on both lessees and lessors. Some of the key effects are as follows:
1. Enhanced transparency: In accordance with PFRS 16, regardless if the lease is either
operating lease or financial lease, lessees are required to recognise any liabilities arising from
that lease on their balance sheet. This makes it easier for stakeholders to get a clearer picture of
the company's financial position by making lease commitments more transparent.
2. Impact on financial ratios: An impact on the company's financial position, such as a debt to
equity ratio or leverage ratio, may be caused by recognition of lease obligations in its balance
sheet. This may lead to an impact on credit ratings and borrowing costs.
3. Change in lease expense recognition: Leaseholders shall no longer make separate lease
payments into operating and funding components in accordance with the provisions of PFRS 16.
Rather, they will recognize a Right of Use Asset and Lease liability which is subsequently
measured and recognized in the financial statements. As a result of this change, a higher
proportion of the lease liability may be recognized in the previous years of the lease term, which
may lead to a front loading of the lease costs.
4. Impact on income statement: There will be different recognition of lease expenses on the
balance sheet for lessees. A single lease expense will be recognized instead of separate rent and
depreciation expenses, which will combine the interest expense on the lease liability with the
depreciation expense on the right of use asset. Consequently, the level of operational profit and
net income might differ compared to preceding reporting periods.
5. Changes in lease classifications: The new standard sets out changes in the criteria for
assessing whether a lease is classified as an operation or finance lease. In the case of lessees, a
greater number of lease contracts will be classified as finance leases in accordance with PFRS 16,
2
leading to more recognition of rental obligations and interest costs. The criteria for classifying
leases are largely unchanged in the case of lessors.
6. Impact on tax and other regulatory matters: In particular, the transition to PFRS 16 may
affect the calculation of tax payments, covenants and bonuses. Tax implications such as the re-
characterization of lease payments for tax purposes can be triggered by an increased awareness
of leasing obligations.
Overall, there are significant changes to lease accounting as a result of the transition from
PAS17 to PFRS 16, which results in increased transparency, potential for financial ratios and
possible variations on rental expense recognition between lessees and lessors. To comply with
the new accounting standard, it is important for companies to understand and prepare for these
effects.
COMPARISON OF PAS 17 AND PFRS 16
PAS 17 Leases
The objective of PAS 17

PAS 17 (1997) aims to provide adequate accounting policies and disclosures regarding
financing and operating lease arrangements for lessees and lessors.
Scope
PAS 17 shall apply to every lease, including leases for minerals, oil, natural gas, and
similar regenerative resources; licensing agreements relating to movies, videos, plays,
manuscripts, patents, copyrights, or similar items. [PAS 17.2]
Classification of leases
If a lease is converted into ownership in such a way as to transfer all risk and reward
events significantly, the lease will be regarded as finance leasing. The operating leases shall be
classified as all other leases. At the start of the lease period, a classification shall be made. [PAS
17.4]
The substance of the transaction rather than its form is decisive as to whether a lease
constitutes a financial lease or an operating lease. The following are the situations that a lease
can be classified as a financial lease: [PAS 17.10]
 The lease is to transfer the ownership of the asset to the lessee no later than the end of
the leasing period.
 The lessee has the choice to buy the asset at a price that is lower than the fair value at
the date the choice or option become exercisable, at the inception of the lease, it is
acceptable that the choice or option should be exercised
 The lease period may be extended even if the title is not transferred since it constitutes a
significant part of the asset's economic life.
 The present level of the minimum rental payment shall be at least a substantial part of
the fair market value of the leased asset when the lease is entered into.
 The lease assets are specific and can only be used by the lessee if significant changes are
not made.
The following situations may also lead to classification as a finance lease under PAS
17.11:
 Where the lessee is entitled to terminate a lease, the lessor's loss arising from such
termination shall be passed on to the lessee.
 The gain or the losses from the shift in the fair value of the residual goes to the lessee
 The lessee may continue to lease for an additional period at a substantially lower rent
than the market rate.
3
Accounting by lessees
 The lessee's financial statements should be based on the following principles:
 At the beginning of the lease term, the financial leases should be reported as an asset
and a liability at the diminish of the fair value of the asset and the current value of the
minimum lease payments [PAS 17]
 In order to ensure a constant periodic interest rate on the remaining balance of the
liability, finance lease payments should be divided between the finance charge and the
reduction of the outstanding liability, the finance charge to be allocated. [PAS 17]
 It is necessary, in the case of assets held under finance leases, that depreciation policies
are consistent with those for owned assets. Where there is foreseeable certainty as to
whether a lessee will acquire ownership of the real estate upon its termination.
 The asset should be depreciated at a reduced duration of the lease or its life [PAS 17]
 For operating leases, unless another systematic basis is more relevant for the time
pattern of user’s benefit, lease payments should be recognized as expenditure in the
revenue statement over a given leasing period on a linear basis. [PAS 17]
Accounting by lessors
The financial statements of lessors should be based on the following principles:
 at the commencement of the lease term, the lessor should record a finance lease in the
balance sheet as loan receivable, at a value that is equal to or greater than the lease
investment. [PAS 17]
 In respect of a finance lease, the lessor should recognized funding income according to
an economic pattern based on constant periodic rate of return for its net investments
outstanding. [PAS 17]
 In accordance with the nature of the property, assets which are subject to an operating
lease should be reported on the balance sheet of the lessor. [PAS 17] If another
systematic basis is less representative of the time pattern in which use benefits derived
from leased assets are reduced then lease income should be recognized on a straight line
basis during the leasing period. [PAS 17]
Sale and leaseback transactions

Any surplus of proceeds over the carryover amount shall be deferred and amortized
during the lease term for sale and leasing back transactions resulting in finance leases. The
following are the transactions that resulted in operating lease:
 If the transaction is obvious to be performed within reasonable value, there should be
immediate recognition of any profit or loss.
 Where the selling price is less than fair value, profit and loss should be recognized
immediately except where losses are recovered by future rentals at a below market rate
during the period of use.
 If the selling price exceeds the fair value, an excess over fair value should be deferred
and amortized during the period of use.
 According to PAS 17, if the fair value at the time of the transaction does not exceeds the
carrying amount, a loss is equal to the difference and it should be recognized
immediately.
Disclosure: lessees – finance leases [PAS 17]

 carrying amount of asset
 the reconciliation of the overall minimum payments for lease and their current value
 amounts of minimum lease payments at the balance sheet date and the current value for
the following year or years 2 to 5 combined or more than five years
PFRS 16
By the provisions of PFRS 16, lessees and lessors must provide information concerning
leasing activities in their financial statements.
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Presentation
For a lessee, a lease that is accounted for under PFRS 16 results in the recognition of:
 a right-of-use asset and lease liability
 interest expense (on the lease liability)
 depreciation expense (on the right-of-use asset)
The right to use assets and leasing liabilities shall be presented or disclosed separately
from any other non-leased asset except for investment property rights declared as an investment
property. If the lessee has decided not to report its right-of-use assets separately on their balance
sheet, they shall be placed in the same line item typically applied where the underlying asset was
owned. This will involve property, equipment, and machinery in several but not all cases.
Leasing payments shall be classified under the cash flow statement:
 As a means of financing the repayment of the principal part of the lease obligation
 For amounts related to interest levied on the lease obligation, it shall be classified as
financing or operating activity in the same way as interest paid with different forms of
funding.
 As operating activities for amounts relating to short-term and low-value asset leases that
are accounted for off-balance sheet and for variable payments not included in the lease
liability.
PFRS 16 provides that the lessee may present the right of use assets separately from other
assets on the balance sheet or in the same line item as the corresponding assets if they are owned.
In the absence of separate disclosure of right of use assets, the lessee shall disclose in the notes
which line item is included in the balance sheet of the right of use assets.
PFRS 16 allows lessees to present rental liabilities separately in a statement of financial

circumstances or as part of other liabilities, including borrowings, trade, payables, and other
commitments. They shall indicate in the notes which line item they fall into unless the lessee
decides to provide separate information on leasing liabilities.
PAS 17 and PFRS 16 are two different accounting standards dealing with different
accounting aspects.
1. Scope: Leases are also covered by PAS 17, or the Philippine Accounting Standard 17, whereas
PFRS 16, or the Philippines Financial Reporting Standard 16, contains recognition, measurement,
presentation, and disclosure of lease contracts.
2. Measurement: Leases shall be considered to be either operating or finance leases by PAS 17.
The operating leases shall not be recorded on the balance sheet as assets or liabilities, while
finance leases shall be regarded as assets and liabilities. By contrast, on the other hand, PFRS 16
requires that all leases be recognized in the balance sheet as right of use for assets and lease
liabilities regardless of classification.
3. Presentation: Lease payment must be classified by lessees as operating expenditure or a

combination of interest charges and reduction in lease liabilities for financial leases, according to
PAS 17. Leaseholders are required by PFRS 16 to present a combination of interest expense and
depreciation in right-of-use assets as part of lease payments.
4. Disclosure: The lessees must provide information on their leases in the financial statements,
including the nature of the lease, the payment of rent, and other relevant information, by PAS 17
and PFRS 16. Nevertheless, compared to PAS 17, the disclosure requirements for PFRS 16 are
much more significant.
5
Compared with PAS 17, PFRS 16 has better lease coverage and represents them more
accurately on the balance sheet. This will increase transparency and consistency of the financial
statements and eliminate differences in operating and financing leases.
LEASE MODIFICATION
A lease modification is the outcome of renegotiations between the lessor and lessee. It is
defined by IFRS 16 as "a change in the scope of a lease, or the consideration for a lease, that was
not part of the original terms and conditions of the lease." Among the possible lease adjustments
are (but are not restricted to):
 modifying or eliminating the permission to use one or more underlying assets;

 reducing or lengthening the contractual lease period; and
 lease payments can be increased or decreased.
Multiple adjustments are frequently made simultaneously, such as reducing the building
space subject to a lease while extending the lease period for the remaining space. Lease
adjustments are defined equally under US GAAP.
The first stage in lease modification is determining if it will result in a new lease. If both
of the following requirements are present, a lessee accounts for a lease modification as a separate
lease:
 by granting the ability to utilize one or more underlying assets, the modification
broadens the lease's scope
 as the specific terms of the contract are taken into account, the consideration for the
lease rises by an amount equivalent to the stand-alone price for the increased scope.
A modification extending the lease term on the current underlying asset(s) fails to satisfy
the first criterion since it does not give the lessee the right to use one or more additional
underlying assets
Sample Problem: (Extension of Lease Term)
On January 1, 2021, an entity entered into a lease term for office space:
Annual rental payable beginning 12/31/21 200,000
Lease term 5 years
Implicit interest rate 9%
PV of an ordinary annuity of 1 3.89
On January 1, 2023, the entity and the lessor agreed to amend the original lease by extending the
lease term by 3 more years:
Annual rental payable beginning 12/31/23 200,000
PV of O.A of 1 for 6 periods 4.231
6
Solution:
PV of lease liability – 1/1/21 = 200,000 x 3.89 = 778,000
Depreciation = 778,000/5 = 155,600
Accumulated = 155,600 x 2 = 311,200
DATE PAYMENT INTEREST PRINCIPAL LEASE LIABILITY
01/01/2021 ₱ 778,000.00
12/31/2021 ₱200,000.00 ₱ 70,020.00 ₱ 129,980.00 ₱ 648,020.00
12/31/2022 ₱200,000.00 ₱ 58,321.20 ₱ 141,678.80 ₱ 506,341.20
The cash flows and variations in the lease liability are shown in this table for the period
beginning on January 1, 2023, and ending on December 31, 2022, when the lease term ends.
1. January 1, 2021:
 There is no payment made on this date. The lease liability, however, has been adjusted.
The lease liability begins at $778,000.
2. December 31, 2021:
 The entity pays $200,000.00.

 Interest on the remaining lease liability is $7,020.00 (9% of $778,000.00).
 The principal repayment amount is 129,980.00 (200,000.00 - 70,020.00).
 The balance of the lease liability has been reduced to $648,020.00.
3. December 31, 2022:
 The entity makes a payment of 200,000.00, as it did the previous year.

 The interest expense is $58,322.00 (9% of the previous year's remaining lease liability).
 The principal repayment amount is 141,678.00 (200,000.00 - 58,322.00).
 The outstanding lease liability has been reduced to 506,342.00.
In summary, these entries show the entity's annual cash payments, interest expense on the
remaining lease liability, principal repayment, and the resulting decrease in the lease liability
from January 1, 2021 to December 31, 2022.
Journal Entries:
Account Title Debit Credit
01/01/2021
Right of use asset 778,000
Lease liability 778,000
On January 1, 2021, the right-of-use asset and related lease liability were first recognized,
as shown by this entry. The first lease liability is $778,000 in total.
7
12/31/2021
Interest expense (778,000*9%) 70,020
Cash 200,000
Depreciation (778,000/5years) 155,600
Accumulated depreciation 155,600
Based on the remaining lease liability at the start of the period (January 1, 2021), the
interest expense is computed. Nine percent of the outstanding lease liability is the interest. The
principal repayment made during the year is documented in this section. The leasing liability is
decreased. This entry recognizes the periodic depreciation expense connected to the right-of-use
asset over the lease term, since the depreciation entry suggests that this is likely an operational
lease. The corporation makes a cash payment of 200,000, which is split between principle
repayment and interest expense. The lease liability is decreased by the entire payment.
New lease liability due to extension
PV of new rentals on 1/1/23 (200,000*4.231) ₱ 846,200.00
Carrying Amount on 1/1/2022 before the extension ₱ 506,341.80
Increase in lease liability 1/1/2023 ₱ 339,858.20
A lease extension resulted in a significant rise in the lease liability on January 1, 2023.
The extra financial commitment connected with the longer lease term is reflected in the present
value of new rentals for the extended time, which comes to ₱846,200.00. On January 1, 2022, the
carrying amount of the lease liability was ₱506,341.80 prior to the extension. On January 1, 2023,
the difference between the carrying amount prior to the extension and the present value of the
new rentals will be represented by the increase in the lease liability of ₱339,858.20. This rise
highlights how the lease extension affects the entity's overall financial obligations.
DATE PAYMENT INTEREST PRINCIPAL LEASE LIABILITY
01/01/2023 ₱ 846,200.00
12/31/2023 ₱200,000.00 ₱ 93,082.00 ₱ 106,918.00 ₱ 739,282.00
12/31/2024 ₱200,000.00 ₱ 81,321.02 ₱ 118,678.98 ₱ 620,603.02
12/31/2025 ₱200,000.00 ₱ 68,266.33 ₱ 131,733.67 ₱ 488,869.35
12/31/2026 ₱200,000.00 ₱ 53,775.63 ₱ 146,224.37 ₱ 342,644.98
12/31/2027 ₱200,000.00 ₱ 37,690.95 ₱ 162,309.05 ₱ 180,335.93
12/31/2028 ₱200,000.00 ₱ 19,664.07 ₱ 180,335.93 ₱ -

8
The cash flows and variations in the lease liability are shown in this table for the period
beginning on January 1, 2023, and ending on December 31, 2028, when the lease term ends.
1. January 2023:
 The lease liability is adjusted on this date, but no payment is made. The extension of the
lease term raises the lease liability to ₱846,200.00.
2. December 31, 2023:
 The ₱200,000.00 payment is made by the entity.

 The remaining lease liability's interest expense comes to ₱93,082.00 (11% of
₱846,200.00).
 ₱106,918.00 is the principal repayment (₱200,000.00 - ₱93,082.00).
 The amount owed on the lease is now only ₱739,282.00.
3. December 31, 2024:
 Just as it did the year before, the entity pays ₱200,000.00.

 The interest expense for the previous year is ₱81,321.02, or 11% of the remaining lease
liability.he remaining lease liability's interest expense comes to ₱93,082.00 (11% of
₱846,200.00).
 ₱118,678.98 is the principal repayment (₱200,000.00 - ₱81,321.02).
 The amount owed on the lease is now only ₱620,603.02.
4. December 31, 2025 to December 31, 2028:
 For the upcoming years, the pattern stays the same. The entity pays ₱200,000.00
annually; each year, the principal repayment rises and the interest expense falls.
 As the lease term draws to an end on December 31, 2028, the lease liability will
diminish until it equals zero.
In summary, these entries show the entity's annual cash payments, interest expense on the
remaining lease liability, principal repayment, and the resulting decrease in the lease liability
over the extended lease term.
Journal Entries:
01/01/2023
Right of use asset 339,858.20
Lease liability 339,858.20
12/31/2021
Interest expense (846200*11%) 93,082
9
Cash 200,000
Depreciation (778,000/5years) 134,443.03
Accumulated depreciation 134,443.03
Cost of Right of Use Asset ₱ 778,000.00
Less: Accumulated Depreciation - December 31, 2021 (155,600*2years) ₱ 311,200.00
Carrying Amount - Dec. ₱ 466,800.00
Add: Increase in Liability 339,858.20
Adjusted Carrying Amount - January 1, 2023 ₱ 806,658.20
The increase in liability is an adjustment of the carrying amount of the right of use asset.
OLD LEASE TERM 5 years
less: Expired term 2 years
Remaining Old Lease Term 3 years
add: Extension 3 years
Extended Lease Term 6 years
Adjusted Carrying Amount of the Right of Use Asset ₱ 806,658.20
divided by: Extended Lease Term 6 years
Depreciation Expense ₱ 134,443.03
The financial transactions for the extended lease term, which runs from January 1, 2023,
to December 31, 2023, are covered in detail by the provided journal entries. In order to reflect
the higher liability resulting from the lease extension, the firm modifies its financial records on
January 1, 2023, by recognizing a new right-of-use asset and lease liability, both equivalent to
₱339,858.20. After deducting ₱106,918 from principal payments, interest expenditure on the
remaining lease liability is reported at ₱93,082 on December 31, 2023, for a total cash payment
of ₱200,000. Furthermore, ₱134,443.03 in depreciation is recorded, which helps to lower the
right-of-use asset's carrying value. Taking into account both the original lease and the extension,
the right-of-use asset's adjusted carrying amount on January 1, 2023, is ₱806,658.20. By dividing
this adjusted carrying amount by the six-year extended lease term, the yearly depreciation
expense for the longer lease term comes to ₱134,443.03 per year. The financial nuances of the
lease extension are highlighted in this thorough summary, including with changes to assets,
liabilities, and annual depreciation estimates.
Decrease in Scope
A gain or loss should be recognized as a result of the partial termination of the lease.
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 Gain if: decrease in carrying amount of the lease liability is higher than the decrease in
the carrying amount of the right of use asset. In this case, the decrease in the obligation
to make future lease payments exceeds the decrease in the value of the leased asset. In
other words, the entity gains more from the reduction in lease obligations than it loses in
asset value.
 Loss if: decrease in carrying amount of the right of use asset is higher than the decrease
in the carrying amount of the lease liability. In this case, the decrease in the value of the
leased asset appears to be greater than the decrease in the obligation to make future
lease payments. Essentially, the entity suffers a greater loss in asset value than the
benefit of reduced lease obligations.
In conclusion, the relative changes in the carrying amounts of the right-of-use asset and
the lease liability are what determine gain or loss in the event of a reduction in scope. Gains
occur when the reduction in the liability outweighs the reduction in the asset. On the other hand,
there is a loss if the decline in the asset's carrying value is larger than the liability.
OPERATING LEASE
An arrangement to use and manage an asset without transferring power is known as an

operating lease. Common leased means include real estate, motorcars, aircraft, or heavy outfits.
By categorizing them as operating expenses, operational plans let businesses avoid declaring an
asset on their balance sheet by renting rather than holding it.
The conception of a lease is also familiar to the utmost. It is the arrangement for one
party to use an asset for an established period in exchange for yearly payments. Generally,
utmost would consider casing and buses as particulars that are leased. In business, these also
mean that a business may consider leasing rather than copping. An operating lease does not give
the border any authority; instead, it merely permits using an asset in exchange for a prearranged
payment. This is different from a capital lease, which is still a lease but must be reckoned for as
if it were an asset purchase by the company. An operating lease in account has specific rules to
define what is or is not an operating lease.
The criteria for what cannot be considered operating leases are:
 The life of the lease goes beyond 75 of the asset's life. If an asset is anticipated to have a
service life of 10 times, the lease would have to remain below seven times and six
months to be considered an operating lease.
 There is a transfer of power to the border. In the case of vehicles or real estate, neither
the title nor deed can be given over to the border.
 An arranged special purchase price happens at the end of the term. A leased item can
not be recorded as an operating lease if there is an arrangement to buy the asset at a
bargain or blinked rate at the end of the lease.
 The present value of lease payments exceeds 90 of the asset's fair request value. This is
in place because lease payments of this quantum are like a payment plan to enjoy an
asset at that point and, thus, would need to be treated as if the border possessed it.
Capitalizing an Operating Lease
It is considered an operating lease; if it does not meet any of the below criteria, means
acquired under operating leases do not need to be reported on the balance distance. Similarly, as
operating leases are not considered debt, they do not require reporting as a liability on the
balance distance. The business does not keep track of any depreciation on assets purchased under
operating leases.
11
If a lease meets any of the criteria below, it is considered a capital lease. A capital lease is
treated from an operating lease; rather than being treated as an operating expenditure, a capital
lease is considered a backing expenditure; thus, we need to acclimate the lease expenditure,
deprecation expenditure, and interest expenditure figures to regard this shift.
This will affect operating income, which will always increase when these charges are re-
categorized. Still, it will not affect net income, as the change in figures will balance out.
Sample Problem:
At the beginning of current year, Jade Company purchased a new machine for
P4,800,000 and leased it to East Company the same day.
The machine has an estimated 12-year life and will be depreciated P400,000 per year.
The lease is for a three-year period at an annual rental of P850,000. Additionally, East Company
paid P300,000 to Jade Company as lease bonus to obtain the three-year lease. Jade Company
insured insurance expense of P80,000 for the leased machine during the current year. What is the
operating profit of the lessor on the leased asset for the current year?
Solution:
First, we need to calculate the total revenue from the lease. This includes the annual
rental of P850,000 and the lease bonus of P300,000. So, the total revenue is P1,150,000. Next,
we need to calculate the total expenses. This includes the depreciation of the machine, which is
P400,000, and the insurance expense, which is P80,000. So, the total expenses are P480,000.
Finally, we subtract the total expenses from the total revenue to get the operating profit. So, the
operating profit is P1,150,000 - P480,000 = P670,000.
Therefore, the operating profit of the lessor on the leased asset for the current year is
P670,000.
Journal Entries:
When Jade Company purchased the machine, the journal entry would be:
Machinery 4,800,000
Cash
4,800,000
When East Company paid the annual rental, the journal entry would be:
Cash 850,000
Lease Revenue
850,000
When East Company paid the lease bonus, the journal entry would be:
Cash 300,000
Lease Bonus Revenue
300,000
12
When Jade Company paid for the insurance expense, the journal entry would be:
Insurance Expense 80,000

Cash
80,000
At the end of the year, when Jade Company depreciates the machine, the journal entry would be:
Depreciation Expense 400,000

Accumulated Depreciation
400,000
These entries are made assuming that all transactions are made in cash and that the
company uses straight-line depreciation method.
DIRECT FINANCING LEASE
Lessor - Finance Lease Classification
Direct Financing Lease: The lessor recognizes the lease payments they will receive over
the lease term as a receivable. They also recognize only interest income over the lease term. The
interest income is recognized in a way that provides a constant rate of return on the lessor's net
investment in the lease.
Sales Type Lease: The lessor (usually the manufacturer or dealer of the leased asset)
recognizes two types of income: the profit from the asset's sale (gross profit on sale) and the
interest income.
Direct financing lease

In a direct financing lease, the lessor operates within the finance industry. This type of
lease is a contractual agreement between a financial institution and a lessee. The only revenue for
the lessor comes from interest earnings. Dealer profit is not recognized since the asset's fair value
and cost are equal. Because the asset's leased cost is equivalent to its fair market value, the lessor
is not making a profit from the asset's sale but rather from the interest accumulated over the lease
term.
1. Asset Purchase: The lessor buys the asset the lessee wants to lease. The lessor is the legal
owner of the asset, but the lessee gets to use it.
2. Lease Agreement: The lessor and the lessee enter a lease agreement. The lessee agrees to
make periodic payments over a specified period. The lessee agrees to make regular lease
payments to the lessor for the right to use the asset.
3. Lease Term: The lease term is usually quite long, often close to the asset's useful life. This
is because the lessor wants to ensure they recover the asset's cost plus interest.
4. Interest Income: The lessor's income comes solely from the interest portion of the lease
payments. This interest is calculated on the lessor's net investment in the lease (the cost of the
asset plus any initial direct costs minus any lease payments received at or before the
commencement of the lease). The interest income is recognized over the lease term, producing a
constant periodic rate of return on the lessor's net investment.
13
5. No Dealer Profit: Because the lessor's cost to acquire the asset is equal to the asset's fair
value, there is no dealer or manufacturer's profit. The lessor is not selling the asset for more than
it cost them; they are simply financing it. Their profit comes from the interest on the lease, not
from the asset's sale.
Other Aspects of Direct Financing Leases:

a) The total investment in the lease, also known as the gross investment, is the summation of all
lease payments throughout the lease term, along with the absolute residual value, regardless of
whether it is guaranteed. The residual value represents the estimated worth of the asset at the end
of the lease term.
b) The net investment in the lease, on the other hand, is the sum of the initial cost of the leased
asset and any initial direct costs borne by the lessor. Initial direct costs may include commissions,
legal fees, or any costs directly attributable to negotiating and arranging the lease.
c) Unearned interest income is the difference between the gross and net investments in the
lease. This represents the total income the lessor expects to earn over the lease term.
d) In a direct financing lease, the lessor's initial direct costs are added to the asset's cost to
determine the net investment. This method allows the lessor to spread these costs over the lease
term, effectively reducing the interest income recognized each period.
It is worth noting that this accounting treatment aligns with the idea that the lessor in a direct
financing lease acts more as a financier than a lessor. The focus is on the interest income over the
lease term rather than profit from the asset's sale. This makes direct financing leases a unique and
essential part of the leasing industry.
Sample Problem:
Case #1: DIRECT FINANCING LEASE – WITH INITIAL DIRECT COST
The Lessor Company is in the business of leasing new sophisticated equipment. At the
beginning of current year, an machinery is lease to a lessee with the following information:
Cost of machinery to the lessor 6,000,000
Annual rental payable at the beginning of each year 1,000,000
Initial direct cost incurred by the lessor 350,000
Useful life and lease term 8 years
Present Value of annuity of 1 for 8 years a 12% 4.9676
14
Solution:
Cost of Machinery 6,000,000
Add: Initial Direct Cost 350,000
Net Investment in the Lease 6,350,000
The initial direct cost in the calculations ensures that the total investment made by the
lessor is accurately reflected. The net investment in the lease takes into account both the cost of
the machinery and the additional expenses incurred by the lessor.
By considering the initial direct cost, a comprehensive view of the lessor's investment in
the lease is obtained, which helps determine the appropriate financial figures such as the gross
rental and unearned interest income.
Gross Rental (1,000,000 x 8 years) 8,000,000
Less: Net Investment in the Lease (6,350,000)
Unearned Interest Income 1,650,000
The Net Investment in the Lease represents the total investment made by the lessor in the
lease agreement. It includes the cost of the equipment and any initial direct costs incurred by the
lessor. The Cost of Equipment refers to the amount paid by the lessor to acquire the equipment,
which in this case is 6,000,000. It is a significant component of the lessor's investment in the
lease. The Initial Direct Cost represents any additional costs incurred by the lessor specifically
related to the lease transaction. These costs can include legal fees, commissions, or other
expenses directly associated with arranging the lease. The Initial Direct Cost is 350,000. By
adding the cost of machinery and the initial direct cost, we determine the total Net Investment in
the Lease. It amounts to 6,350,000. The Net Investment in the Lease is an important factor in
calculating the financial aspects of the lease, such as determining the unearned interest income
and tracking the amortization of payments, interest, and principal over the lease term.
The unearned interest income is calculated by subtracting the net investment in the lease
from the gross rental. In this case, it is 8,000,000 - 6,350,000 = 1,650,000. The unearned interest
income represents the interest income that is recognized over the lease term.
Case #2: DIRECT FINANCING LEASE – WITH RESIDUAL VALUE
The Lessor Company is in the business of leasing new sophisticated equipment. At the beginning
of current year, an equipment is lease to a lessee with the following information:
Cost of equipment to the lessor 5,000,000
Residual value - unguaranteed 600,000
Annual rental payable at the beginning of each year 900,000
Initial direct cost incurred by the lessor 250,000
Useful life and lease term 8 years

15
Solution:
To calculate the Gross Rental, which is the annual rental payable multiplied by the
Gross Rental (900,000 x 8 years) 7,200,000
Add: Residual Value (guarantee or unguaranteed) 600,000
Gross Investment 7,800,00
Less: Net Investment in the Lease:
Cost of Equipment 5,000,000
Add: Initial Direct Cost 250,000 5,250,000
Unearned Interest Income (Recognize over the lease term) 2,550,000
lease term. In this case, it is 900,000 x 8 years = 7,200,000.
Next, add the Residual Value to the Gross Rental. The Residual Value is the estimated
value of the equipment at the end of the lease term. In this case, it is $600,000. So the Gross
Investment is 7,200,000 + $600,000 = 7,800,000.
To calculate the Net Investment in the Lease. This is the cost of the equipment plus any
initial direct costs incurred by the lessor. The cost of the equipment is 5,000,000 and the initial
direct cost is 250,000. So the Net Investment in the Lease is 5,000,000 + 250,000 = 5,250,000.
To determine the Unearned Interest Income, subtract the Net Investment in the Lease
from the Gross Investment. In this case, it is 7,800,000 - 5,250,000 = 2,550,000. The Unearned
Interest Income is recognized over the lease term.
Table of Amortization:
Date Payment Interest Principal Present Value
Jan. 1, 2020 5,250,000
Jan. 1, 2020 900,000 - 900,000 4,350,000
Jan. 1, 2021 900,000 522,000 378,000 3,972,000
Jan. 1, 2022 900,000 476,640 423,360 3,548,640
Jan. 1, 2023 900,000 425,837 474,163 3,074,477
Jan. 1, 2024 900,000 368,937 531,063 2,543,414
Jan. 1, 2025 900,000 305,210 594,790 1,948,624
Jan. 1, 2026 900,000 233,835 666,165 1,282,459
16
Jan. 1, 2027 900,000 153,895 746.105 536,354
Jan. 1, 2028 600,000 63,646 536,354 -
7,800,000 2,550,000
To create a table of amortization to track the payment, interest, principal, and present
value over the lease term. Each year, the lessee makes a payment of 900,000. The interest is
calculated based on the Net Investment in the Lease at the beginning of each year, using the
implicit interest rate of 12%. The principal is the difference between the payment and the interest.
In addition, the present value is the Net Investment in the Lease at the beginning of each year
minus the principal.
Journal Entries:
Date Account Title Debit Credit
Jan. 1, 2020 Lease Receivable 7,800,000
Equipment 5,250,000
Cash 900,000
Lease Receivable 900,000
Dec. 31 Unearned Interest Income 522,000
Interest Income 522,000
Jan. 1, 2021 Cash 900,000
Jan. 1, 2022 Cash 900,000
17
Jan. 1, 2022 Cash 900,000
Jan. 1, 2022 Cash 900,000
Jan. 1, 2022 Cash 900,000
Jan. 1, 2022 Cash 900,000
Jan. 1, 2022 Cash 900,000
Lease Receivable (Final Payment) 900,000
18
Jan. 1, 2028 Equipment 500,000
Loss of Finance Lease 100,000
1. On January 1, 2020:
 Lease Receivable is debited for 7,800,000, representing the gross investment in the lease.
 Equipment is credited for 5,250,000, representing the cost of the equipment.
 Unearned Interest Income is credited for 2,550,000, representing the unearned interest
income.
 Additionally, there is a separate entry:
 Cash is debited for 900,000, representing the rental payment received.
 Lease Receivable is credited for 900,000, reducing the outstanding lease receivable.
2. On December 31, 2020:
 Unearned Interest Income is debited for 522,000, representing the interest income
recognized over the year.
 Interest Income is credited for 522,000, recognizing the interest income earned.
3. The same pattern continues for the subsequent years:
 On January 1 of each year, Cash is debited for 900,000, representing the rental payment
received, and Lease Receivable is credited for 900,000, reducing the outstanding lease
receivable.
 On December 31 of each year, Unearned Interest Income is debited for the interest income
recognized over the year, and Interest Income is credited for the same amount, recognizing
the interest income earned.
4. On January 1, 2028:
 Equipment is debited for 500,000, representing the reversion of the equipment to the lessor.
 Loss of Finance Lease is debited for 100,000, representing the loss on the finance lease.
 Lease Receivable is credited for 600,000, reducing the outstanding lease receivable.
Case #3: DIRECT FINANING LEASE – TRANSFER OF TITLE TO LEASE
On January 1, 2022, Oceanic Company leased an equipment to another entity with the following
details:
Cost of Equipment 7,994,000
Residual Value 1,000,000
Useful Life and Leased Term 4 years
Implicit Interest Rate 15%
Present Value of annuity of 1 in advance at 15% for 4 years 2.855
19
Solution:
Cost of Equipment to be recovered from rental 7,994,000
Divide by: Present Value of annuity of 1 in advance at 15% for 4 years 2.855
Annual Rental 2,800,000
Present Value of annuity of 1 in advance at 15% for 4 years: This value represents the
present value factor for a lease term of 4 years at an implicit interest rate of 15%. It is used to
calculate the annual rental amount.
Gross Rental (2,800,000 x 4 years) 11,200,000
Less: Net Investment – Cost of Equipment (7,994,000)
Unearned Interest Income: This represents the portion of the Gross Rental that is
considered as interest income. It is calculated by subtracting the Cost of Equipment from the
Gross Rental. In this case, it is $11,200,000 minus $7,994,000, which equals $3,206,000.
Table of Amortization:
Date Payment Interest Principal Present Value
Jan. 1, 2022 7,994,000
Jan. 1, 2022 2,800,000 - 2,800,000 5,194,000
Jan. 1, 2023 2,800,000 779,100 2,020,900 3,173,100
Jan. 1, 2024 2,800,000 475,965 2,324,035 849,065

-
Jan. 1, 2025 2,800,000 127,360 2,672,640
It takes into account the cost of the equipment, the lease term, and the implicit interest
rate to calculate the appropriate rental amount and interest income. This helps in ensuring that
both parties involved in the lease agreement are fairly compensated and the financial transactions
are recorded accurately. The formula is used to determine the annual rental amount and to
allocate the interest income over the lease term.
Journal Entries:
Jan. 1, 2022 Lease Receivable 11,200,000
Equipment 7,994,000
Cash 2,800,000
20
Lease Receivable 2,800,000
Jan. 1, 2023 Cash 2,800,000
Lease Receivable 2,800,000
1. Jan. 1, 2022:
 Lease Receivable: The amount of $11,200,000 is recorded as a receivable on Jan. 1, 2022.

This represents the total amount that the lessee is obligated to pay over the lease term.
 Equipment: The cost of the equipment being leased, which is $7,994,000, is recorded as an
asset on Jan. 1, 2022.
 Unearned Interest Income: The portion of the Gross Rental that is considered as interest
income, which is $3,206,000, is recorded as unearned revenue on Jan. 1, 2022. This amount
will be recognized as interest income over the lease term.
On the other side of the entry:
 Cash: The lessee pays $2,800,000 in cash on Jan. 1, 2022, which is recorded as a cash inflow.
 Lease Receivable: The cash received from the lessee, $2,800,000, is recorded as a reduction
of the Lease Receivable balance.
Dec. 31:
 Unearned Interest Income: At the end of the year, Dec. 31, 2022, a portion of the Unearned
Interest Income is recognized as Interest Income. In this case, $779,100 is recognized as
interest income earned over the course of the year.
2. Jan. 1, 2023:
 Cash: The lessee pays $2,800,000 in cash on Jan. 1, 2023, which is recorded as a cash inflow.
 Lease Receivable: The cash received from the lessee, $2,800,000, is recorded as a reduction
of the Lease Receivable balance.
Dec. 31:
 Unearned Interest Income: At the end of the year, Dec. 31, 2023, a portion of the Unearned
Interest Income is recognized as Interest Income. In this case, $475,965 is recognized as
interest income earned over the course of the year.
21
SALES TYPE LEASE
When the leased asset's fair market value or the lease payments' present value does not
equal the lessor's expense, a sales-type lease is effectively a financing lease from the lessor's
point of view. The item's selling yields a profit or loss depending on this variance.
In the event of a sales-type lease, the lessor records the lease's start date as their net
investment, comprised of the unguaranteed residual value and the present value of lease
payments computed using the implicit interest rate. Any surplus is recognized as a profit if the
fair value of the leased item is more than this carrying amount (taking into account any residual
value).
Manufacturers and dealers frequently employ sales-type leases to realize a profit when
they transfer the asset to the lessee and earn interest income. This profit represents the extra
money from the asset's sale to the lessee.
Sample Problem:
The BSMA Company produces refrigerators. The company leases the units for three
years at P5000 a quarter, with each unit costing P40,000. With an implicit interest rate of 10%,
the present value of the lease payments is P51,300.
Solution:
The lessor should report an operating income of P11,300 (the difference between the
lease receivable and the carrying amount) since the present value of lease payments exceeds the
carrying amount of the leased asset. The lessor is required to record monthly interest revenue in
addition to the one-time profit at the beginning of the lease. For instance, it earns P1,282.50 in
interest every quarter in the first quarter (P51,300 × 10% ÷ 4).
Journal Entries:
Lease receivable 51,300
Cost of sales 40,000
Property, plant, and equipment 40,000
Revenue 51,300
SALES AND LEASEBACK
A sale and leaseback is a contract in which a company sells one of its assets to a lender
and promptly returns the item to the seller for a certain amount of time. In this way, the lender
receives a guaranteed lease, and the business receives income from the asset sale that it can
utilize more successfully elsewhere.
This strategy also gives the seller the money it needs to pay off its debt, which
strengthens the position it is in financially on its balance sheet. The disadvantage from the
seller's point of view is that the associated tax benefit is diminished because the seller can no
longer deduct any depreciation expenditure associated with the relevant asset.
22
The three main reasons for entering into a sale-leaseback transaction are to obtain tax
benefits, enhance the balance sheet, and raise money. The seller-lessee wants to free up money
locked up in an asset's worth for other uses, but they do not want to continue using the item.
Institutional investors, leasing businesses, or finance organizations seeking a transaction with a
stable return as the buyer-lessor are the usual purchasers participating in these arrangements.
Sale leasebacks are frequently observed in sectors like aircraft, real estate, transportation, and
construction with expensive fixed assets.
Sample Problem:
Case #1: SALE PRICE OR LEASE PAYMENTS ARE LESS THAN FAIR VALUE
Suppose Blue Sky Airlines sells one of its Boeing airplanes to ABC Aviation. Blue Sky Airlines
is the seller-lessee and ABC Aviation is the seller-lessor.
Asset sale amount = $78.5M
Fair-market value = $84 M
Lease period = 18 years
Annual lease payment = $3M
Interest rate = 6%
Solution:
The asset was sold by the seller-lessee for less than market value. In order to account for
the discrepancy, it should identify it and modify the right-of-use asset amount for lease
accounting.
At a 6% interest rate for 18 years, the present value of the $3 million ROU is $32,482,810.
The market value and sales price diverge by $5.5 million.
Journal Entries :
Cash Php 78,500,500
Right of Use Asset Php 26,983,310
Property, Plant and Equipment Php 84,000,000
Lease Liability Php 32,482,810
Case #2: SALE PRICE OR LEASE PAYMENTS ARE GREATER THAN FAIR VALUE
Asset sale amount = $86M
Fair market value = $84M
Lease period = 18 years
Annual lease payment = $3M
Interest rate = 6%
Solution:
The asset was sold by the seller-lessee for less than market value. In order to account for
the discrepancy, it should identify it and modify the right-of-use asset amount for lease
accounting.
23
At a 6% interest rate for 18 years, the present value of the $3 million ROU is $32,482,810.
The market value and sales price diverge by $5.5 million.
Journal Entries
Cash Php 86,000,000
Right of Use Asset Php 22,983,310
Property, Plant and Equipment Php 80,000,000
Lease Liability Php 22,983,310
Finance Liability Php 2,000,000
Gain on Sale Php 4,000,000
Note: PPE is registered with the seller-lessee at carrying value. The difference between the
asset's sale price ($86M) and carrying value ($80M) less the off-market adjustment ($2M) is the
gain on the sale.
INSIGHTS / FEEDBACKS / COMMENTS ABOUT THE NEW STANDARD

(PFRS 16)
In summary, the implementation of PFRS 16 has improved transparency by providing a

thorough depiction of leases on the balance sheet. It has also led to better uniformity in the
disclosure of other leases that the company enters into. Internal management will also benefit
from this because it provides
 a more thorough and accurate picture of the company's financial situation,
 enabling them to make better decisions regarding leasing and how best to manage cash input
and outflow—furthermore,
 offering a thorough grasp of a company's long-term financial commitment and enhanced
awareness of lease responsibilities.
The disadvantages faced by companies that switch from PAS17 to PFRS16 are that, in
order to assure compliance, a company must make essential adjustments to its systems,
procedures, and data management, which necessitate a more comprehensive representation that
is costly and challenging to prepare. Since this criterion has recently been introduced, different
stakeholders may have different opinions, so businesses must adequately disclose and convey the
specifics of their leasing activity. Moreover, the move from the old to the new standard has clear
long-term repercussions, even though organizations have only recently begun to adjust to it. This
shows that PFRS 16 has many pros and cons based on what the companies are experiencing in
shifting from the old standard (PAS17) to the new standard (PFRS16).
This case study concludes by highlighting the new standard's benefits and drawbacks.
Implementing PFRS 16 has a significant impact on businesses in the Philippines. Having said
that, as we proceed and examine PFRS 16 in greater detail, we cannot contest the positive impact
of this standard's creation and implementation. Its goal is to provide future stakeholders with a
more accurate, thorough, and transparent representation of a business's financial standing.
24
Implementing this new standard is a good idea. Although there may be challenges when
businesses gradually adapt, managers and stakeholders will ultimately gain much from it in the
long run. Businesses need more time to completely adapt to PFRS 16 before the massive impact
of the new standard becomes evident.
25
REFERENCES
(2019, January 1). Insights into PFRS 16. Grant Thornton Philippines.
https://www.grantthornton.com.ph/globalassets/1.-member-firms/philippines/accounting-
alerts/2019/insights-into-pfrs-16---presentation-and-disclosure.pdf
Tampoco, A. C. (2019, September 5). Tax implications of PFRS 16 – Leases. PWC Philippines.
https://www.pwc.com/ph/en/tax/tax-publications/taxwise-or-otherwise/2019-taxwise-or-
otherwise/tax-implications-of-pfrs-16-leases.html\
KPMG (2018). Lease modifications – Accounting for changes to lease contracts. Retrieved from:
https://kpmg.com/us/en/articles/2023/lease-
modifications.html?fbclid=IwAR0MfcGPUd0Wzpp_UiFlTvlFY_vrg3kRLZR4b6Nm4t-
6HDrsOXhU-v9yaww
Leases - Part 1 (Lease Modification). Retrieved from:

https://www.studocu.com/ph/document/misamis-university/financial-accounting/leases-part-1-
lease-
modification/30041927?fbclid=IwAR3X3NTpwwQgevriCMrI4cogI9hJVnbQJmtXT_cQSyh0Ic
hVcPD7D-WhVvM
Oracle Help Center. (n.d.). Leasing User Guide. Retrieve from

https://docs.oracle.com/cd/E74659_01/html/LE/LE02_Intro.htm#:~:text=There%20are%20two%
20parties%20to,no%20pre%2Dcondition%20for%20leasing
Heining, A., Scott M. A., & Buchanan, P. (2014). AP3C: Initial direct costs (joint with the
FASB). Retrieve from
https://www.ifrs.org/content/dam/ifrs/meetings/2014/may/iasb/leases/ap03c-initial-direct-
costs.pdf
Chapter 13: Direct Finance Lease. Retrieve from

https://www.scribd.com/document/487783155/CHAPTER-13-DIRECT-FINANCE-
LEASE?fbclid=IwAR3uDfKZxAIJWbBWOt3tFQaOYCX2w6XUEjwN-
yIR5dsaTW8RfVm2vh1f6GI
26

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College of Accountancy, Business, Economics and International Hospitality Management

CASE STUDY ABOUT PFRS 16

A Semestral Project for

To Ms. Sheena Sandoval, CPA

Discuss PFRS 16 ........................................................................................................7

Effects of Lease Accounting Changes ................................................................. 2-3

Comparison of PAS 17 and PFRS 16 .................................................................. 3-6

Comprehensive Problem ............................................................................................

Lease Modification ..................................................................................... 6-91

Operating Lease ................................................................................................9

Direct Financing Lease .................................................................................. 91

Sales Type Lease ............................................................................................22

Sales and Leaseback ................................................................................. 22-24

Feedbacks/ Insights/ Comments about PFRS 16 ........................................... 24-25

Accounting for Short-Term Leases and Leases for Low-Value Assets

Lease Payments in the Cash Flow Statement

EFFECT OF LEASE ACCOUNTING CHANGES (FROM PAS 17 TO PFRS 16)

COMPARISON OF PAS 17 AND PFRS 16

The objective of PAS 17

Sale and leaseback transactions

Disclosure: lessees – finance leases [PAS 17]

PFRS 16 allows lessees to present rental liabilities separately in a statement of financial

3. Presentation: Lease payment must be classified by lessees as operating expenditure or a

 modifying or eliminating the permission to use one or more underlying assets;

Sample Problem: (Extension of Lease Term)

Annual rental payable beginning 12/31/21 200,000

Lease term 5 years

Implicit interest rate 9%

PV of an ordinary annuity of 1 3.89

Annual rental payable beginning 12/31/23 200,000

Implicit interest rate 11%

PV of O.A of 1 for 6 periods 4.231

PV of lease liability – 1/1/21 = 200,000 x 3.89 = 778,000

Depreciation = 778,000/5 = 155,600

Accumulated = 155,600 x 2 = 311,200

DATE PAYMENT INTEREST PRINCIPAL LEASE LIABILITY

12/31/2021 ₱200,000.00 ₱ 70,020.00 ₱ 129,980.00 ₱ 648,020.00

12/31/2022 ₱200,000.00 ₱ 58,321.20 ₱ 141,678.80 ₱ 506,341.20

2. December 31, 2021:

 The entity pays $200,000.00.

3. December 31, 2022:

 The entity makes a payment of 200,000.00, as it did the previous year.

Account Title Debit Credit

Right of use asset 778,000

Lease liability 778,000

Account Title Debit Credit

Interest expense (778,000*9%) 70,020

Lease liability 129,980

Depreciation (778,000/5years) 155,600

Accumulated depreciation 155,600

New lease liability due to extension

PV of new rentals on 1/1/23 (200,000*4.231) ₱ 846,200.00

Carrying Amount on 1/1/2022 before the extension ₱ 506,341.80

Increase in lease liability 1/1/2023 ₱ 339,858.20

DATE PAYMENT INTEREST PRINCIPAL LEASE LIABILITY

12/31/2023 ₱200,000.00 ₱ 93,082.00 ₱ 106,918.00 ₱ 739,282.00

12/31/2024 ₱200,000.00 ₱ 81,321.02 ₱ 118,678.98 ₱ 620,603.02

12/31/2025 ₱200,000.00 ₱ 68,266.33 ₱ 131,733.67 ₱ 488,869.35

12/31/2026 ₱200,000.00 ₱ 53,775.63 ₱ 146,224.37 ₱ 342,644.98

12/31/2027 ₱200,000.00 ₱ 37,690.95 ₱ 162,309.05 ₱ 180,335.93

12/31/2028 ₱200,000.00 ₱ 19,664.07 ₱ 180,335.93 ₱ -

2. December 31, 2023:

 The ₱200,000.00 payment is made by the entity.

3. December 31, 2024: