Lessee

What is a lease?
A lease is a contract or part of a contract that conveys:
• Right to use an asset
• For a period of time
• In exchange for consideration
All three should be met for a transaction to be classified as a lease.

When is a contract a lease?

• It conveys the right to control the use.

• of an identified asset.
• for a period of time
• in exchange for consideration

Important definitions

A lease that transfers substantially all the risks and rewards incidental to
Finance lease
ownership of an underlying asset.
A lease that does not transfer substantially all the risks and rewards to ownership
Operating lease
of an underlying asset.
A lease that at the commencement date has a lease term of 12 months or less. A
Short-term lease
lease that contains a purchase option is not a short-term lease.
The date on which the lessor makes an underlying asset available for use to a
Commencement date
lessee.
The earlier of the date of a lease agreement and the date of commitment by the
Inception date
principle parties to the principle terms and conditions of the lease.
The non-cancellable period for which a lessee has the right to use an underlying
asset, together with both:
- Periods covered by an option to extend the lease if the lessee is
Lease term
reasonably certain to exercise that option, and
- Periods covered by an option to terminate the lease if the lessee is
reasonably certain not to exercise that option.
Payments made by a lessee to a lessor relating to the right to use an underlying
asset during the lease term, comprising the following:
- Fixed payments less any lease incentives
Lease payments - Variable lease payments depending on an index or rate
- Exercise price of purchase option if lessee is reasonably certain to
exercise that option and
- Payments of penalties
LESSEE ACCOUNTING
How to identify if a contract contains a lease:

1. Explicit / implicit
2. Asset in totality or only a 1. All the economic benefits
portion AND
3. Substantially all benefits 2. Direct the use, how and
4. Supplier right and ability for what
to substitute asset

IS THERE A CONTRACT? NO

YES

IS THERE AN IDENTIFIED ASSET? NO

YES

DO WE HAVE THE RIGHT TO CONTROL? NO

YES

= LEASE = NOT A
LEASE

Identified asset
1. Explicit or implicite identification
EXPLICIT IDENTIFICATION
• The name of the asset is specifically stated e.g., a machine or a vehicle
IMPLICIT IDENTIFICATION
• Where no mention is made in the contract, the identified asset is that which is made available for use
2. Portion of asset identified
 If the portion is physically distinct; OR
 Reflects substantially all the assets capacity

3. Assets are not ‘identified’ if supplier has substantive right of substitution

Supplier (lessor) has the practical right to substitute substantively over the period of use IF:
• supplier has practical ability to substitute – not specialised/customised in nature or a variety of assets are
on hand that could be used as alternative assets
• supplier would also benefit economically if the asset were substituted

Right to control the use of an asset

LESSEE has the right to control use of assets in these circumstances
1. RIGHT TO OBTAIN SUBSTANTIALLY ALL THE ECONOMIC BENEFITS FROM THE USE OF THE ASSET
throughout period
 Direct/indirect benefits from the use of asset
 Exclusive unconditional use throughout period
 Economic benefits that can be obtained in relation to the total economic benefits expected from the
asset
2. RIGHT TO DIRECT THE USE OF THE ASSET throughout period
 How and for what purpose it is used
 Right to operate the asset
 Where asset is designed by customer (lessee) per their specifications

Separating lease components in a contract

This is applicable where the lease involves more than one underlying asset
If there is more than one component, each need to be accounted for separately
Contract can also include a lease (accounted for in terms of IFRS 16) component and a non-lease component

The following 2 STEP should be followed in this regard:

STEP 1 – IDENTIFY EACH LEASE COMPONENT

A separate lease component exists if:
• The lessee can benefit from using asset on its own; AND
• The asset is not highly dependent on/interrelated with the other assets in the contract

STEP 2 – ALLOCATE CONSIDERATION TO EACH COMPONENT

• Relative to *stand-alone price of each lease component AND
• The aggregate stand-alone price of each non-lease component

*Price lessor would charge if only supplied that ONE component

SIMPLIFIED APPROACH
Recognition simplified approach

WHEN CAN THIS BE APPLIED FOR A LEASE

It is optional/lessee may choose this approach IF:
Short term lease; OR
• Accounting policy choice:
o If option is exercised, lessee need to carry ALL short-term leases on simplified approach

Low-value asset leases

• Value of a new asset and include:
• Tablets, PC’s, Cell phones, small items of furniture

AND items are available on a lease-by-lease basis PLUS lessee does not sub-lease the item

WHAT IT ENTAILS:
Lessee gets an exemption not to follow the general approach
Lease accounted for as an “operating lease”
• Expense the lease payments in profit or loss;
• Use the straight-line method

Initial & subsequent measurement

The cost recognised in p/l on straight-line basis is:

over the lease term
unless another systematic basis better reflects the time pattern of the user’s benefit
is recognised in the statement of profit or loss and other comprehensive income is NOT the actual amount
paid BUT rather the “equalised” amount over the lease period
(Sum of all future lease payments p.m.)/(period in months)
FOR A YEAR:
The monthly rate x 12

GENERAL APPROACH
Recognition and measurement

General approach- on the balance sheet

We recognise the lease as an asset in the financial records by debiting a “RIGHT OF USE ASSET” and crediting
a corresponding liability called “LEASE LIABILITY” also called a “FINANCE LEASE”.

This lease liability and corresponding asset is calculated by:

• Discounting the lease payments to its PRESENT VALUE
• On the commencement date
• At the implicit interest rate of the lease contract OR incremental borrowing rate of lessee if the latter
is not available.
Measurement

Lease liability
Discount the following lease payments to its present value over the lease term (non-cancellable plus certain
to exercise extension option period):
1. Lease payments
2. Guaranteed future value/amount

= Lease liability at commencement date

Right of use is measured as follows:

• Initial present value of lease liability
PLUS
• Initial indirect costs
• Prepaid payments made
• Estimated future cost of dismantling
LESS
• Reimbursements/lease incentives received

Initial measurement

COMMENCEMENT DATE
STEP 1: Recognise the lease liability and right of use asset at the PV of lease payments (contractual payments
plus guaranteed residual value.
The above amount will be provided to you in a test as either the present value (PV) or CASH PRICE
Keep in mind that the lease payments can occur annually, monthly or however stipulated per lease contract

JOURNAL ENTRY ON COMMENCEMENT DATE – INITIAL ENTRY

Dr Right-of-use-asset (SFP) xxx
Cr Lease liability (SFP) xxx

LEASE LIABILITY
Subsequent measurement of lease liability is at amortized cost using the effective interest rate method:
• Increase lease liability with INTEREST accrued for period on opening balance of liability
• Then decrease the lease liability with the PAYMENTS made for the period

LEASE LIABILITY
Dr Finance cost/interest expense (SPLOCI) xxx
Cr Lease liability (SFP) xxx
(recognise interest on lease liability using effective interest rate method)
Dr Lease liability (SFP) xxx
Cr Bank (SFP) xxx
(lease payments made)
Subsequent measurement

RIGHT OF USE ASSET

Dr Depreciation (SPLOCI) xxx
Cr Acc depreciation-right of use asset xxx
(Recognise depreciation on right of use asset)

PRESENTATION AND DISCLOSURE

Statement of financial position
Assets
Non-current Assets
Right-of use- asset
Investment property (if leased, must be included here)

Equity and liabilities

Non-current liabilities
Non-current portion of lease liability
Current liabilities
Current portion of lease liability

Statement of comprehensive income

Blue Ltd
Statement of comprehensive income for the year ended 31 December 2023 (Extract)

Note 2023 2022

R R

Profit before finance charges (the depreciation included here)

Finance charges (the finance cost from the lease is included here) 2
Profit before tax 3

Notes to the financial statements

Notes to the Financial statements (extracts) for the year ended 31 December 2021
Maturity analysis of future lease payments
Undiscounted Amounts
R
Due in 2022 XXX
Due in 2023 XXX
Due in 2024 XXX
Due in 2025 XXX
Total XXX