03/10/2023

INSTRUCTOR INFORMATION

LECTURE Full name: DANG THI THUY HANG, MB, Ph.D.

Address: Room 1114, 11th Floor, Building A1, NEU
Phone number: +84 915 166 150
LEASES
Email: hangdt@neu.edu.vn
Faculty/Institute: School of Accounting and Auditing
Department: Financial Accounting

Hà Nội, 2023
Copyright © 2019 - Trường Đại học Kinh tế Quốc dân 1 2

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LEARNING OBJECTIVES MAIN TOPICS

Fundamentals of Accounting for Leases

 Describe the nature, economic roles and benefits of leasing
transactions.
 Explain the accounting for leases by lessees. Lessee Accounting

 Explain the accounting for leases by lessors.

 Discuss the accounting and reporting for special features of lease Lessor Accounting
arrangements.
 Presentation and disclosure about leases.
Financial Statement Presentation

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CLASSIFICATION OF LEASE AGREEMENT

Classification Characteristics

Direct The lessor transfers substantially all the risks and rewards
Finance leases incidental to ownership of an underlying asset to the lessee.
LESSOR ACCOUNTING Finance
Leases
The lessors are lease finance companies or banks.
Sales-Type The lessor transfers substantially all the risks and rewards
Lease incidental to ownership of an underlying asset to the lessee.
The lessors are manufacturers or dealers.
The lessor does not transfer substantially all the risks and
Operating leases rewards incidental to ownership of an underlying asset.

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FINANCE LEASE LESSOR CLASSIFICATION TESTS

(meet 1 of these 5 tests)

Transfer of Ownership test

Bargain purchase option test

Lease Term test

Present Value test

Alternative Use Test

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INDICATORS LEAD TO A FINANCE LEASE FINANCE LEASE

(meet 1 of these 5 tests)
Transfer of Ownership Test
1 If the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee; If the lease transfers ownership of the asset to the
lessee, it is a finance lease.
Gains or losses from the fluctuation in the fair value of the residual Purchase Option Test
2 accrue to the lessee (for example, in the form of a rent rebate equaling
most of the sales proceeds at the end of the lease); The lease purchase option allows the lessee to
purchase the property for a price that is
significantly lower than the underlying asset’s
3 The lessee has the ability to continue the lease for a secondary period at
a rent that is substantially lower than market rent.
expected fair value at the date the option
becomes exercisable (bargain purchase option).

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FINANCE LEASE FINANCE LEASE

(meet 1 of these 5 tests) (meet 1 of these 5 tests)
Lease Term Test
• The lease term is a major part of the remaining economic life of the leased Present Value Test
asset
• The present value of the lease payments is reasonably close to the
• IASB implementation guideline: if the lease term is 75 percent or greater of fair value of the asset
the economic life of the leased asset the lease meets the lease term test and
finance lease treatment is appropriate (75% test). • IASB implementation guideline: if the present value of the lease
payments equals or exceeds 90 percent of the fair value of the asset,
• Lease term is generally considered to be the fixed, non-cancelable term of then a lessor should use the finance method to record the lease (the
the lease. 90% test).
• Bargain-renewal option can extend this period.

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FINANCE LEASE
(meet 1 of these 5 tests)
Alternative Use Test

Finance Lease
If at the end of the lease term the lessor does not have an
alternative use for the asset, the lessee classifies the
lease as a finance lease.
The assumption is that the lessee uses all the benefits
from the leased asset and therefore the lessee has
essentially purchased the asset.

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INITIAL RECOGNITION AND MEASUREMENT INITIAL RECOGNITION AND MEASUREMENT

At commencement of the lease At commencement of the lease
 * Lessors recognize 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 investment
in the lease.
 * At commencement of the lease, the lessor generally records a Lease Receivable and
eliminates the leased asset.
 * The lessor should use the implicit rate to determine the net investment in the lease.
In the case of a sublease, if the interest rate implicit in the sublease cannot be readily
determined, an intermediate lessor may use the discount rate used for the head lease
(adjusted for any initial direct costs associated with the sublease) to measure the net
investment in the sublease.
 * Initial direct costs are included in the initial measurement of the net investment in
the lease and reduce the amount of income recognized over the lease term.

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INITIAL RECOGNITION AND MEASUREMENT INITIAL RECOGNITION AND MEASUREMENT

Lease Receivable
1. Fixed payments less (-) lease incentives;
 2. Variable payments;
 3. Residual values (whether guaranteed or not);
 4. Payments related to purchase or termination options that the lessee is
reasonably certain to exercise;
 5. Payments of penalties for terminating the lease, if the lease term reflects
 the lessee exercising an option to terminate the lease.
The lessors are manufacturers or dealers
 1. Record sales revenue at the lower of fair value of the underlying assets or
the PV of lease payments to the lessor, discounted using a market rate of
interest;
 2. Cost of goods sold is the costs or carrying amount of the underlying assets
less (-) PV of unguaranteed residual value;
 3. Selling profit or loss (the difference between sales revenue and COGS) is
recorded according to IFRS 15.

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SUBSEQUENT RECOGNITION AND MEASUREMENT

SUBSEQUENT RECOGNITION AND MEASUREMENT
After commencement date
 * Lessors then recognize finance income (interest revenue) on the lease receivable
over the life of the lease using the effective-interest method.
 * 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.
After commencement date
 * A lessor shall apply the derecognition and impairment requirements in
IFRS 9 to the net investment in the lease.
 *A lessor that classifies an asset under a finance lease as held for sale (or
includes it in a disposal group that is classified as held for sale) applying
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations shall
account for the asset in accordance with that Standard.

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ILLUSTRATION ILLUSTRATION
T Financial Services Co. and H Corporation sign a lease agreement dated January 1, 2019, that
calls for T to lease a construction machine to H. The terms and provisions of the lease
agreement, and other pertinent data, are as follows. PV of lease payments
• The term of the lease is five years, beginning January 1, 2019. The lease agreement is non-
cancelable, requiring equal rental payments of VND100 millions at the beginning of each year Lease payment (beginning) VND100,000,000
(on 5/1).
• The construction machine has fair value VND500 millions, useful life 5 years, residual value Present value factor (i=12%, n=5)
at the end of lease term is nil.
PV of lease payment
• The lease contains no renewal options. The machine reverts to T at the termination of the
lease.
• H’s incremental borrowing rate is 12 percent per year.
• H depreciates, on a straight-line basis, similar equipment that it owns. Lease Receivable:
Required:
1. Compute PV of lease payments.
2. Record at lessor, T Co.
3. Record at lessor, T Co. when rental payments paid at the end of each year.
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ILLUSTRATION ILLUSTRATION

Interest on
Annual lease Reduction of lease PV of lease payments
Date lease Lease receivable
payment receivable
receivable
1/1/2019 Lease payment (ending) VND100,000,000

5/1/2019 100,000,000 Present value factor (i=12%, n=5)

5/1/2020 100,000,000 PV of lease payment

5/1/2021 100,000,000
5/1/2022 100,000,000 Lease receivable:
5/1/2023 100,000,000
500,000,000 96,265,000 403,735,000
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ILLUSTRATION ACOUNTING FOR LEASES AT LESSOR

RENTAL PAYMENTS PAID AT THE END OF EACH YEAR RENTAL PAYMENTS PAID AT THE BEGINNING OF EACH YEAR
Interest on On 1/1/2019
Annual lease Reduction of lease
Date lease Lease receivable
payment receivable Lease receivable Lease receivable
receivable
PPE, Cash,… PPE, Cash,…

1/1/2019 Pay the first rental payment on 5/1/2019

Cash 100,000,000
5/1/2020 100,000,000 NO ENTRY
Lease receivable 100,000,000
5/1/2021 100,000,000 Record interest revenue on 31/12/2019

5/1/2022 100,000,000 Lease receivable Lease receivable

Interest revenue Interest revenue

5/1/2023 100,000,000
Pay the second rental payment on 5/1/2020
5/1/2024 100,000,000 0 Cash 100,000,000 Cash 100,000,000

500,000,000 96,265,065 360,477,620 Lease receivable 100,000,000 Lease receivable 100,000,000

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ILLUSTRATION ILLUSTRATION
M Construction Machinery JSC. and H Corporation sign a lease agreement dated January 1,
2019, that calls for M to lease a construction machine to H. The terms and provisions of the Annual lease payment
lease agreement, and other pertinent data, are as follows.
• The term of the lease is five years, beginning January 1, 2019. The lease agreement is non-
cancelable, requiring equal rental payments at the beginning of each year (on 5/1). Fair value of leased machine VND500,000,000
• The construction machine has fair value VND500 millions, useful life 5 years, a guaranteed
residual value at the end of lease term is VND5 millions (which is less than the expected
PV of the residual value (i=12%, n=5)
residual value of the machine at the end of the lease). Further, assume the underlying asset (5,000,000/(1+12%)^5)
has an VND350 millions cost to the manufacturer, M Co.
• The lease contains no renewal options. The machine reverts to M at the termination of the Amount to be recovered by lessor through lease payments
lease.
• The rate of return the investment at M is 12% (the implicit interest rate). Five beginning-of-year lease payments to earn a 12% return
• Collectibility of payments by Caterpillar is probable.
Required:
Record at lessor, M Co.

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ILLUSTRATION ILLUSTRATION

Lease receivable On 1/1/2019, M records:

PV of lease payments Lease receivable

PV of the residual value (i=12%, n=5) Sales revenue
Cost of goods sold 350,000,00

Lease receivable VND500,000,000 Inventory 350,000,00

Gross profit:

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ILLUSTRATION ILLUSTRATION
Interest on
Annual lease Reduction of lease On 5/1/2019, payment day:
Date lease Lease receivable
payment receivable
receivable
Cash
1/1/2019
Lease receivable
5/1/2019 123,140,888
5/1/2020 123,140,888 At 31/12/2019, M records interest:
5/1/2021 123,140,888
Lease receivable
5/1/2022 123,140,888 Interest revenue
5/1/2023 123,140,888
5/1/2024 5,000,000 0
620,704,442 120,704,442 500,000,000
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ILLUSTRATION ILLUSTRATION

On 5/1/2020, payment day: At 31/12/2023, M records interest:

Cash Lease receivable
Lease receivable Interest revenue

At 31/12/2020, M records interest: On 5/1/2024, M receives the leased asset:

Lease receivable Inventory
Interest revenue Lease receivable

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GUARANTEED AND UNGUARANTEED RESIDUAL VALUES

SALES-TYPE LEASE

Guaranteed Unguaranteed residual value

Items residual value
Net investment
(Lease receivable) 500,000,000 500,000,000 Operating Lease
Sales revenue 500,000,000

COGS 350,000,000

Gross profit 150,000,000 150,000,000

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RECOGNITION AND MEASUREMENT RECOGNITION AND MEASUREMENT

 * A lessor shall recognize lease payments from operating leases as income on
either a straight-line basis or another systematic basis.
 * A lessor shall recognize costs, including depreciation, incurred in earning the
lease income as an expense
 * A lessor shall add initial direct costs incurred in obtaining an operating lease to
the carrying amount of the underlying asset and recognize those costs as an
expense over the lease term on the same basis as the lease income.
 * 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.
 * 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.
 * A manufacturer or dealer lessor does not recognize any selling profit on entering
into an operating lease because it is not the equivalent of a sale.

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ILLUSTRATION
ILLUSTRATION

M Construction Machinery JSC. and H Corporation sign a lease agreement dated January 1, Annual lease payment
2019, that calls for M to lease a construction machine to H. The terms and provisions of the
lease agreement, and other pertinent data, are as follows. Fair value of leased machine VND300,000,000
• The term of the lease is three years, beginning January 1, 2019. The lease agreement is non-
cancelable, requiring equal rental payments at the beginning of each year (on 1/1). PV of the residual value (i=12%, n=3)
• The construction machine has fair value VND300 millions, useful life 5 years, a unguaranteed
residual value at the end of lease term is VND75 millions
• The lease contains no renewal options. The machine reverts to M at the termination of the Amount to be recovered by lessor through lease payments
lease.
• The rate of return the investment at M is 12% (the implicit interest rate).
Required:
Record at lessor, M Co. Five beginning-of-year lease payments to earn a 12% return

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ILLUSTRATION

On 1/1/2019, 2020, 2021, payment day:

Cash
SPECIAL LEASE
At 31/12/2019, 2020, 2021, M records rent revenue:
Unearned Lease Revenue ACCOUNTING PROBLEMS
At 31/12/2019, 2020, 2021, M records depreciation expense:
Depreciation Expense (300,000,000/5) 60,000,000
Accumulated Depreciation-Equipment 60,000,000
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SPECIAL LEASE ACCOUNTING PROBLEMS

Executory costs

 * Normal expenses associated with owning a leased asset, such as property

Executory costs insurance and property taxes
 * A gross lease, the payments to the lessor are fixed as part of the rental payments
in the contract.
 * A net lease, the lessee makes variable payments to a third party or to the lessor
• Lease prepayments and incentives directly for the executory costs
* Executory costs included in the fixed payments required by the lessor should be
included in lease payments for purposes of measuring the lease liability.

• Initial direct costs * Payments by the lessee made directly to the taxing authority or insurance provider
are considered variable payments and are expensed as incurred.

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Initial direct costs

Lease Prepayments and Incentives Included Excluded

• Commissions (including payments to • Employee salaries

1. Lease prepayments made by the lessee increase the right-of-use asset. employees acting as selling agents)
• Legal fees resulting from the execution
2. Lease incentive payments made by the lessor to the lessee reduce the right-of- of the lease
use asset • Lease document preparation costs
incurred after the execution of the lease
3. Initial direct costs incurred by the lessee increase the right-of-use asset but are • Consideration paid for a guarantee of
not a part of the lease liability. residual value by an unrelated third
party
• Internal engineering costs
• Legal fees for services rendered before
the execution of the lease
• Negotiating lease term and conditions
• Advertising
• Depreciation
• Costs related to an idle asset

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PRESENTATION, DISCLOSURE,
PRESENTATION
AND ANALYSIS
Lessee

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PRESENTATION PRESENTATION

Statement of financial position

Statement of Profit or Loss
NON-CURRENT ASSETS EQUITY
PPE xxx Expenses xxxxx
Intangible assets
Right-of-use assets Interest expense x
CURRENT ASSETS NON-CURRENT LIABILITIES
x Lease liability xx Amortization expense (leased assets) xx

CURRENT LIABILITIES Net Income xxxx

xxxx

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PRESENTATION

Statement of financial position

NON-CURRENT ASSETS EQUITY
PRESENTATION PPE
Accumulated Depreciation-PPE
xxx

Lease receivable
Lessor
CURRENT ASSETS NON-CURRENT LIABILITIES
Inventory x Lease liability xx

CURRENT LIABILITIES
xxxx

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PRESENTATION

Statement of Profit or Loss

Revenue

Interest revenue xx
DISCLOSURE
Rent revenue (operating lease) x

Expenses

Depreciation expense(operating lease) xxx

Net Income

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QUALITATIVE LEASE DISCLOSURES LESSEE QUANTITATIVE DISCLOSURES

• Nature of its leases, including general description of those leases.
 • How variable lease payments are determined.
 • Existence and terms and conditions for options to extend or terminate the lease and for
residual value guarantees.
 • Information about significant assumptions and judgments (e.g., discount rates).
 • Total lease cost.
 • Finance lease cost, segregated between the depreciation of the right-of-use assets and
interest on the lease liabilities.
 • Low-value and short-term lease cost.
 • Weighted-average remaining lease term and weighted-average discount rate.
 • Maturity analysis of finance lease liabilities, on an annual basis for a minimum of each of
the next five years, the sum of the undiscounted cash flows for all years thereafter.

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LESSOR QUANTITATIVE DISCLOSURES DISCUSSION

 • Lease-related income, including profit and loss recognized at lease commencement for
sales-type and direct financing leases, and interest income.
 • Income from variable lease payments not included in the lease receivable.
 • The components of the net investment in sales-type and other financing leases,
including the carrying amount of the lease receivable, the unguaranteed residual asset,
and any deferred profit on direct financing leases.
 • A maturity analysis for operating lease payments and a separate maturity analysis for
the lease receivable (sales-type and direct financing leases).
 • Management approaches for risk associated with residual value of leased assets (e.g.,
buyback agreements or third-party insurance).

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