(Intermediate Accounting 2)

LECTURE AID

2018

ZEUS VERNON B. MILLAN

 LEASES
Overview on the topic:
Chapter Title Sub-topics___
29 Leases - Part 1 Accounting for leases by lessees

30 Leases - Part 2 Accounting for leases by lessors

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Chapter 29 Leases (Part 1)
Related standards: PFRS 16 Leases

Learning Objectives

• Identify a lease.
• Account for leases by a lessee using the general
recognition.
• Account for leases by a lessee using the recognition
exemption.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Identifying a lease

• “A contract is, or contains, a lease if the contract

conveys the right to control the use of an
identified asset for a period of time in exchange
for consideration.” (PFRS 16.9)

INTERMEDIATE ACCTG 2 (by:

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Right to Control

An entity has the right to control the use of an identified asset if it has
both of the following throughout the period of use:
1. the right to obtain substantially all of the economic
benefits from use of the identified asset; and
2. the right to direct the use of the identified asset.

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INTERMEDIATE ACCTG 2 (by:
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Identified asset

• An asset can be identified by being explicitly stated in the contract

or by being implicitly specified at the time the asset is made
available for use by the customer.
• A portion of an asset can be identified if it is physically distinct.

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Substantive substitution rights

• A customer does not have the right to use an identified asset if the
supplier has the substantive right to substitute the asset throughout
the period of use.
• A supplier’s right to substitute an asset is substantive if both of the
following conditions exist:
1. the supplier has the practical ability to substitute alternative assets
throughout the period of use; and
2. the supplier would benefit economically from the exercise of its
right to substitute the asset.

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Right to direct the use
• The customer has the right to direct how and for what purpose the
asset is used throughout the period of use

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Accounting for leases by Lessee

GENERAL RECOGNITION
• Lessee recognizes both:
1. Lease liability; and
2. Right-of-use asset

RECOGNITION EXEMPTION
(for ‘short-term” and ‘low value’ leases)
• Lessee recognizes lease payments as expense over the lease term
using straight line basis, or another more appropriate basis.

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GENERAL RECOGNITION

INTERMEDIATE ACCTG 2 (by:

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Discount rate

• Discount rate is the interest rate implicit in the lease; if not

determinable, then the lessee’s incremental borrowing rate.

INTERMEDIATE ACCTG 2 (by:

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Separating components of a contract

• An entity accounts for each lease component of a contract separately

from the non-lease components of the contract.
• A lessee allocates the consideration in the contract to each lease
component on the basis of the relative stand-alone price of the
lease component and the aggregate stand-alone price of the non-
lease components.
• Payments for activities or costs that do not transfer goods or
services to the lessee are not a separate component of the contract.
The payments for these items are included in the total consideration
that is allocated to the separately identified components of the
contract.

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Initial direct costs

• A lessee capitalizes initial direct costs as follows:

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Lease payments made to lessor at or before
commencement date

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 APPLICATION OF
CONCEPTS
PROBLEM 2: FOR CLASSROOM DISCUSSION

INTERMEDIATE ACCTG 2 (by: MILLAN)

  QUESTIONS????
 REACTIONS!!!!!

INTERMEDIATE ACCTG 2 (by: MILLAN)

 END
INTERMEDIATE ACCTG 2 (by: MILLAN)