LEASES

PFRS 16
 Training Outline

 Lease definition: Identifying whether an arrangement is, or contains, a lease

 Lease term: Judgment in identifying lease term
 Lessee accounting:
 Short-term and low-value-assets exemptions
 Initial recognition of Right-of-use (ROU) asset and Lease liability
 Subsequent measurement including Lease term reassessment, Lease modification, and
Covid-19-related rent concessions
 Lessor accounting
 Lease classification (Finance or Operating Lease)
 Sublease accounting
 Presentation and disclosure
 Accounting for Leases under PFRS for SMEs and PFRS for Small Entities
 Questions and Answers
Scope of PFRS 16

PFRS 16 is applicable to all lease arrangements except for the following:

► Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources (PFRS 6)
► Leases of biological assets (PAS 41).
► Service concession arrangements (IFRIC 12)
► Licenses of intellectual property granted by lessor (PFRS 15).
► Rights held by a lessee under licensing agreements such items as motion picture films, video recordings, plays,
manuscripts, patents and copyrights. (PAS 38).

A lessee may, but is not required to, apply PFRS 16 to leases of intangible assets other
than those specifically excluded from its scope.
Lease
Definition
Lease Definition

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.

Leases

Identified asset Customer has right to control the use

and

No substantive rights to Right to obtain substantially

Explicitly / implicitly specified Right to direct the use
substitute all economic benefits

► Judgment will be required to apply the definition of a lease to certain arrangements

Identified Assets

 A contract contains a lease only if it relates to an identified asset.

 An asset can be either explicitly specified in a contract or implicitly specified at the time it is made available for
use by the lessee.
Identified Assets
Examples of identified assets:

 Specific cars / truck / ship / aircraft to transport the goods as mentioned in the contract.

 Specific retail unit identified in the contract.

 Specified servers and networks

 Access of premises for installation of telecom equipment on telecom towers.
 Specified power purchase plant.
 A capacity portion of an asset is an identified asset if it is physically distinct (for example, a floor of a building).
 A capacity or other portion of an asset that is not physically distinct (for example, a capacity portion of a fibre
optic cable) is not an identified asset, unless it represents substantially all of the capacity of the asset and
thereby provides the customer with the right to obtain substantially all of the economic benefits from use of the
asset.
Identified Assets - Substantive Substitution Right
 Substantive substitution right:
 A asset is not a identified asset if the lessor has a substantive right to substitute the asset for an alternative asset throughout the
period of use.
 A lessor's substitution right is 'substantive‘ if the lessor:
 Has the practical ability to substitute the asset throughout the period of use; and
 Would benefit economically from exercising its right to substitute the asset.

 Evaluation of lessor’s substitution right should be made at the inception of the contract.

 Supplier’s right or obligation to substitute the asset for repairs and maintenance:
• The supplier’s right or obligation to substitute the asset for repairs and maintenance, if the asset is not operating properly or if a
technical upgrade becomes available does not preclude the customer from having the right to use an identified asset.

 Where the asset is located at the customer’s premises:

• If the asset is located at the customer’s premises or elsewhere, the costs associated with substitution are generally higher
when
located at the supplier’s premises and, therefore, are more likely to exceed the benefits associated with substituting the asset.
• Considered as no substantive substitution rights.
Right to control

To assess whether a contract conveys the right to control the use of an identified asset for a period of time,
an entity is required to assess whether, throughout the period of use, the customer has both of the following:

1) Right to obtain 2) Right to direct

substantially all the use
economic benefits
Right to economic benefits

 To control the use of an identified asset, a customer must have the right to obtain substantially all of the economic benefits from
use of the asset throughout the period of use. e.g. by having EXCLUSIVE USE of the asset throughout that period.

 Economic benefits from use of an asset can be obtained by the customer in many ways e.g. by using, holding or sub-leasing
the asset.

 Such economic benefits include the primary output and by-products generated from use of the asset, and other economic benefits
from using the asset

 When assessing customer right to obtain substantially all of the economic benefits from the use of an assets, an entity considers the
economic benefits that result from use of the asset within the defined scope of a customer's right to use the asset.

Examples:
(a) Where a contract limits the use of a motor vehicle to only one particular territory during the period of use, an entity considers
only the economic benefits from use of the motor vehicle within that territory.
(b) Where a contract specifies that a customer can drive a motor vehicle only up to a particular number of miles during the period of
use, an entity considers only the economic benefits from use of the motor vehicle for the permitted mileage.
Right to direct the use

 When assessing whether the customer has the right to direct the use of the identified asset, the key question is
which party (customer or supplier) has the right to direct how and for what purpose the identified asset is used
throughout the period of use.

 PFRS 16 gives several illustrative examples of relevant decision-making rights:

 Right to change what type of output is produced.
 Right to change when the output is produced.
 Right to change where the output is produced.
 Right to change how much of the output is produced.

 Relevance of each of the decision-making rights depends on the underlying asset being considered.

 Decision-making rights are relevant when they affect the economic benefits to be derived from the use of the asset.

 If both parties have decision-making rights, an entity considers the rights that are most relevant to changing how
and for what purpose the asset is used.
Determining whether an arrangement contains a lease

No
Is there an identified asset?

Yes
No
Does the customer have the right to obtain substantially all of the economic benefits
from use of the asset throughout the period of use?

Yes
Customer Supplier
Does the customer, the supplier or neither party have the right to direct how and for
what purpose the asset is used throughout the period of use?

Neither; how and for what purpose the asset

will be used is predetermined
Yes
Does the customer have the right to operate the asset throughout the period of use,
without the supplier having the right to change those operating instructions?

No
No The contract
Did the customer design the asset in a way that predetermines how and for what
does not
purpose the asset will be used throughout the period of use?
contain a lease
Yes

The contract
contains a
lease
Examples

Particulars Identified asset? Customer has right to control the use Lease?
of the identified asset?
Explicitly / Lessor has Right to all Right to direct the use
Implicitly rights to economic
specified? substitute? benefits
1. A contract between Customer and a freight carrier (Supplier)
provides Customer with the use of 10 rail cars of a particular type Yes. There 10 No. The car Yes. Yes. Customer has a YES
for 5 years. identified rail can be Customer right to direct when and
The contract specifies the rail cars; the cars are owned by cars. substituted has where the cars are used,
Supplier. Customer determines when, where and which goods only when exclusive and which goods are
are to be transported using the cars. they need to use of the transported i.e. Customer
When the cars are not in use, they are kept at Customer’s be repaired. cars has a right to change
premises. Customer can use the cars for another purpose (for throughout how and for what
example, storage) if it so chooses. However, the contract the period of purpose the railcars are
specifies that Customer cannot transport particular types of use, used.
cargo (for example, explosives). including
If a particular car needs to be serviced or repaired, Supplier is when they The contractual
required to substitute a car of the same type. Otherwise, and are not restrictions on the cargo
other than on default by Customer, Supplier cannot retrieve the being used that can be transported
cars during the five-year period. to transport by the cars are protective
Customer’s rights of Supplier and
The contract also requires Supplier to provide an engine and a
driver when requested by Customer. Supplier keeps the engines goods. define the scope of
at its premises and provides instructions to the driver detailing Customer’s right to use
Customer’s requests to transport goods. the cars.
Examples
Particulars
2. A coffee company (Customer) enters into a
contract with an airport operator (Supplier) to use
a space in the airport to sell its goods for a three-
year period.
The contract states the amount of space and that
the space may be located at any one of several
boarding areas within the airport.
There are minimal costs to Supplier associated
with changing the space for the Customer:
Customer uses a kiosk (that it owns) that can be
moved easily to sell its goods.
There are many areas in the airport that are
available and that would meet the specifications
for the space in the contract.
Identified asset? Customer has right to control the Lease?
use of the identified asset?
Explicitly / Lessor has rights to substitute? Right to all Right to direct the
Implicitly economic use
specified? benefits
Yes. The Yes. There are many areas in the
amount of airport that meet the specifications NO
space is for the space in the contract, and
specified in the Supplier has the right to change the
contract location of the space to other space
that meets the specifications at any
time without Customer’s approval.
Supplier would benefit economically
from substituting the space. There
would be minimal cost associated
with changing the space used by
Customer because the kiosk can be
moved easily. Supplier benefits from
substituting the space in the airport
because substitution allows Supplier
to make the most effective use of
the space at boarding areas in the
airport to meet changing
circumstances.
Examples

Particulars Identified asset? Customer has right to control the use of Lease?
the identified asset?
Explicitly / Lessor has rights Right to all Right to direct the use
Implicitly to substitute? economic
specified? benefits
3. Customer enters into a contract with a building owner Yes. The No. Supplier Yes. Yes. The contractual
(Supplier) to use 500 production desks and workstations YES
production has the practical Customer restriction not to make office
located at Offices A to C, including all common areas on desks, ability to has
the 8th Floor of the building. alterations or improvements
workstations as substitute the exclusive does not prohibit Customer to
Supplier has the right to relocate the Customer to a well as specific retail unit, but use of office make the relevant decisions
smaller office should the latter not reach 80% occupancy office units are could benefit space. about how and what purpose
by the end of 6th month after the inception date. Supplier explicitly economically the production desks and
would benefit economically from relocating Customer specified. from substitution
only if a major new tenant were to decide to occupy a workstations are used.
large amount of office space. However, although it is only in specific Customer can decide when,
possible that those circumstances will arise, at inception circumstances. who and how long it will use
of the contract, it is not likely that those circumstances In addition, the asset, as well as how
will arise. Supplier’s much output it will produce
substitution right Although cleaning, security,
Customer is not allowed to make any alterations or
office improvements to the production desks and is not and IT services are essential
workstations as they are all ready for use as termed substantive to the efficient use of the
“plug and play”. because, at asset, Supplier’s decisions in
inception of the this regard do not give it the
Customer shall have access to the premises 24 hours contract, those
per day, 7 days per week, 52 weeks per year. right to direct how and for
circumstances what purpose the asset is
Supplier provides cleaning and security services, as well are not used.
as 24/7 IT and internet services, as part of the contract. considered
likely to arise.
Examples

Particulars Identified asset? Customer has right to control the use Lease?
of the identified asset?
Explicitly / Lessor has Right to all Right to direct the use
Implicitly rights to economic
specified? substitute? benefits
4. Customer enters into a contract with a manufacturer (Supplier) to Yes. The factory No. Supplier No. Supplier Yes. Customer’s rights
purchase a particular type, quality and quantity of shirts for a NO
is an identified has only one could decide are limited to specifying
three-year period. The type, quality and quantity of shirts are asset. The factory. output from the factory in
specified in the contract. to use the
factory is factory to the contract with
Supplier has only one factory that can meet the needs of implicitly fulfil other Supplier. Customer has
Customer. Supplier is unable to supply the shirts from another specified customer the same rights
factory or source the shirts from a third party supplier. The because regarding the use of the
capacity of the factory exceeds the output for which Customer contracts
Supplier can during the factory as other
has contracted (ie Customer has not contracted for substantially
all of the capacity of the factory). fulfil the contract period of customers purchasing
only through the use. shirts from the factory.
Supplier makes all decisions about the operations of the factory, use of this Supplier has the right to
including the production level at which to run the factory and asset. direct the use of the
which customer contracts to fulfil with the output of the factory factory because Supplier
that is not used to fulfil Customer’s contract.
can decide how and for
what purpose the factory
is used (ie Supplier has
the right to decide the
production level at which
to run the factory and
which customer contracts
to fulfil with the output
produced).
Examples
Particulars
5. Customer enters into a contract with a
property owner (Supplier) to use Retail
Unit A for a five-year period.
The contract requires Customer to use
Retail Unit A to operate its well-known
store brand to sell its goods during the
hours that the larger retail space is open.
Customer makes all of the decisions
about the use of the retail unit during the
period of use. For example, Customer
decides on the mix of goods sold from
the unit, the pricing of the goods sold
and the quantities of inventory held.
Customer also controls physical access
to the unit throughout the five-year
period of use.
The contract requires Customer to make
fixed payments to Supplier, as well as
variable payments that are a percentage
of sales from Retail Unit A.
Identified asset? Customer has right to control the use of the identified
asset?
Explicitly / Lessor has Right to all economic
Implicitly rights to benefits
specified? substitute?
Yes. Retail Unit No. Yes. Customer has
A exclusive use Retail Unit A
throughout the period of
use.
Although a portion of the
cash flows derived from
sales from Retail Unit A will
flow from Customer to
Supplier, this represents
consideration that Customer
pays Supplier for the right to
use the retail unit. It does
not prevent Customer from
having the right to obtain
substantially all of the
economic benefits from use
of Retail Unit A.
Lease?
Right to direct the use
Yes. Customer has a right to
direct the use of Retail Unit A. YES
The contractual restrictions on
the goods that can be sold
from Retail Unit A, and when
Retail Unit A is open, define the
scope of Customer’s right to
use Retail Unit A. Within the
scope of its right of use defined
in the contract, Customer
makes the relevant decisions
about how and for what
purpose Retail Unit A is used
by being able to decide, for
example, the mix of products
that will be sold in the retail unit
and the sale price for those
products. Customer has the
right to change these decisions
during the five-year period of
use.
Separating Components of a Contract

Key notes:

 For a contract that is, or contains, a lease, an entity shall account for each lease component within the
contract as a lease separately from non-lease components of the contract.
 Allocate the consideration in the contract to each lease component based on the relative stand-alone
price of the lease component and the aggregate stand-alone price of the non-lease components.
 The relative stand-alone price of lease and non-lease components shall be determined on the
basis of the price the lessor, or a similar supplier, would charge an entity for that component, or a
similar component, separately. If an observable stand-alone price is not readily available, the
lessee shall estimate the stand-alone price, maximizing the use of observable information.
 A LESSEE may elect, by class of underlying asset, not to separate non-lease components from
lease components, and instead account for each lease component and any associated non-lease
components as a single lease component.
Lease Term
Lease term

The lease term can be defined as :

# Particulars Years
1 Non-cancellable period, which include XXX
2 Periods covered by an option to extend the lease if the lessee is reasonably XXX
certain to exercise that option
3 Periods covered by option to terminate the lease if the lessee is reasonably certain XXX
NOT to exercise that option
Total Lease term XXXX
Lease term

Key notes:
 The assessment of the lease term is a critical estimate and a key input to the amount of the lease
liability.
 Short-term leases are EXEMPTED from right-of-use asset recognition
 Lease term begins at the commencement date and include any rent-free period.
 Changes in lease term after the commencement date are accounted for as either lease
remeasurement or lease modification.
 Termination options held by the lessor are not considered when determining the lease term.
• “If only a lessor has the right to terminate a lease, the non-cancellable period of the lease
includes the period covered by the option to terminate the lease.” (Paragraph B35, PFRS 16)
 A lease is no longer enforceable when the lessee and the lessor each has the right to terminate the
lease without permission from the other party with no more than an insignificant penalty.
(Paragraph B34, PFRS 16)
Lease term

Factors to consider for the lessee to exercise, or not to exercise, an option to extend
or terminate:

 Contractual terms and conditions compared with market rates

 Termination penalties and other costs
 Significant leasehold improvements
 The importance of the underlying asset to the lessee’s operations
 Conditions for exercising the option
 The length of non-cancellable period
 Lessee’s past practice
Examples – What is the Lease Term?

Particulars Non- Periods Periods reasonably Total Lease

cancellable reasonably certain certain not to Terms
period to extend terminate

(a) (b) (c) (d) = a+b+c

1. A 10-year lease contract may be terminated by the lessee

anytime with 2 months notice for zero penalty. 2 months n/a 4 years 5 years
and 10
The lessee is reasonably certain to exercise its option to
terminate effective at the end of the 5th year term. months

2. A 10-year lease contract may be terminated by the lessor

anytime after the end of 5th year, with 2 months notice, and 10 years n/a n/a 10 years
for zero penalty.

3. A 10-year lease contract may be terminated by either the

lessor or the lessee without permission from the other party 2 months n/a n/a 2 months
anytime with 2 months notice for zero penalty.
4. A 10-year lease contract for plant may be terminated by
either the lessor or the lessee without permission from the
other party anytime after the 5th year term for zero penalty.
5 years n/a 5 years 10 years

The lessee is reasonably certain NOT to exercise its option to

terminate after the 5th year term because it has already built
significant improvements and the asset is needed for its 10-
year contract with a customer.
Examples - What is the Lease Term?

Particulars Original Periods Periods reasonably Total Lease

Enforceable reasonably certain certain not to Terms
Lease Term to extend terminate

(a) (b) (c) (d) = a+b+c

5. A 10-year lease contract may be terminated by either the

lessor or the lessee without permission from the other party
anytime after the 5th year term. 5 years n/a 3 years 8 years
There will be a significant penalties on the terminating party.
The lessee is reasonably certain to exercise its option to
terminate at the end of 8th year.

6. A 10-year lease contract with option to extend for another 5

years.
The lease may also be terminated by the lessee after the 8th 8 years 5 years 2 years 15 years
year with significant penalties.
Lessee is reasonably certain to exercise the extension
option and not to exercise the termination option

7. A 1-year lease contract, renewable for another year subject

to mutual agreement of both parties.
The lessee, being reasonably certain to renew the lease, 1 year n/a n/a 1 year
constructed leasehold improvement on the leased asset.
Examples - What is the Lease Term?

Particulars Original Periods Periods reasonably Total Lease

Enforceable reasonably certain certain not to Terms
Lease Term to extend terminate

(a) (b) (c) (d) = a+b+c

8. Same as in Example # 5, except that historically, the parties

have always come to a mutual agreement to renew the
contract. 1 year n/a n/a 1 year
The Lessee is virtually certain to renew the contract up to 5
years.

9. A 12-month lease that continues to be renewed until either

party terminates.
1 year n/a It depends It depends

10. A 10-year lease contract with rolling 12-month extension

options. 10 years It depends n/a It depends
Lessee
Accounting
Recognition and measurement

A lessee applies a single lease accounting model under which

it recognises all major leases on statement of financial position

Financial Position Profit and Loss

Asset Lease expenses
= Right-of-use asset = Depreciation + Interest

Liability
= Lease liability
Recognition and measurement exemption

Two optional exemptions

Low value Short-term leases
►
assets
Applies to assets that are not dependent on, or highly ► Applies to leases with a lease term of 12 months or
interrelated with, other assets. less
► Examples of low-value underlying assets can ► A lease that contains a purchase option does not
include tablet and personal computers, printers, qualify.
small items of office furniture, telephones and ► To be applied by class of underlying assets.
water dispensers.
► Sublease : If a lessee subleases an asset, or
expects to sublease an asset, the head lease does
not qualify as a lease of a low-value asset.
► To be applied by lease-by-lease basis

≤ 12 months

► Lessees
► Not to recognise ROU assets or lease liabilities on the balance sheet

► Recognise lease expense on a straight-line basis over the lease term or another systematic basis.
Initial measurement – ROU Asset

At the commencement date Lease liability

+
Initial direct cost

+
Prepaid lease payments
Right-of-use asset
= -
Lease incentives

+
Present value of estimated cost to dismantle, remove or
restore (in accordance with PAS 37)

+
Difference between the nominal amount and
fair value of security deposit
Initial measurement – ROU Asset
Typical initial direct costs of a
lease
Include Exclude
 Commissions  General overheads
 Legal fees*  Costs to obtain offers for potential leases
 Costs of negotiating lease terms
and conditions*
 Costs of arranging collateral
 Payments made to existing tenants to
obtain the lease

* If they are contingent on origination of the

lease
Initial measurement – Lease liability

Initial measurement of lease liability :

 Lease liability shall be recognised at the Present Value of the outstanding lease payments*.

 Such lease payments shall be discounted using the interest rate implicit in the lease. If that
rate cannot be readily determined, the lessee shall use its incremental borrowing rate.

Fixed payments (include in-substance fixed) less any lease

incentives

Lease liability Variable lease payments that depend on an index or a rate

include Exercise price of a purchase
these option
payments
Penalties for terminating the
lease

Residual value guarantees

 *Any prepaid are not included in the lease liability.

Discount Rate
Interest rate implicit in the lease
► The rate of interest that causes the present value of
► (a) the lease payments and
► (b) the unguaranteed residual value
► to equal the sum of
► (i) the fair value of the underlying asset and
► (ii) any initial direct costs of the lessor.
► Lessor-specific
► Usually not readily available
Pag
Incremental borrowing rate (IBR)
► The rate of interest that a lessee would have to pay to borrow over
a similar term, and with a similar security, the funds necessary to
obtain an asset of a similar value to the right-of-use asset in a
similar economic environment.
► Can be used If implicit interest rate cannot be readily determined.
► Lessee-specific
► The use of IBR is widespread in practice
► Common reference rate in the Philippines: BVAL rate
► Go to: https://www.pds.com.ph/
► Market data > Downloadable data > Fixed income reports >
Daily reports > PHP BVAL Reference Rates – Benchmark
Tenors
Subsequent measurement – Lease liability

LEASE LIABILITY

CARRYING AMOUNT

Plus
Similar to
financial
Interest Expense
liabilities at
Less amortized cost
Lease Payments under PFRS 9
Adjusted for
Remeasurement to reflect New requirement
any reassessment or lease
modifications
Subsequent measurement – ROU Asset

RIGHT-OF-USE ASSET

Cost model Other models

Cost ► FairValue Model - If the ROU assets
meet the definition of investment
Less PAS 16 property; and the lessee applies the
Over useful life or lease term, fair value model in accordance with
Accumulated Depreciation PAS 40 to its investment properties.
whichever is shorter
Less
Accumulated Impairment ► Revaluation Model - If right-of-use
Losses PAS 36 assets relate to a class of property,
Adjusted for plant and equipment to which the
Remeasurement of Lease lessee applies the revaluation model in
New requirement PAS 16
Liability
Comprehensive Activity

On January 1, 2021, Customer B and Supplier F entered into an agreement for the use of office space located at Unit 31, BCF GeneRex
Building for 2 years starting April 1, 2021.
The following are the key terms and provisions in the contract:
• The building is closed for maintenance every 1 st Sunday of the month. Hence, all tenants cannot use the premises during these days.
• Customer B has an option to extend the contract for another year upon written notification of its intention 3 months before the end of
the contract.
• Monthly rental is P150,000 plus VAT on the first year with 5% annual escalation.
• 3 months rent-free
• Customer B to pay P450,000 plus VAT equivalent to 3 months advance rentals upon signing of the contract. These advances will be
applied to the last 3 months of the contract.
• The office should be restored to its original form upon its turnover to Supplier F at the end of the contract.

On March 1, 2021, Customer B paid P200,000 to the existing tenants to convince them to early vacate the office so that Customer B can
renovate and improve the office before the commencement date. Customer B incurred P300,000 in improvements. Customer B estimates
that it will incur P100,000 at the end of the lease to remove these improvements.

Customer B is reasonably certain to exercise its option to extend the contract.

Requirements:
1. Identify whether the contract is, or contains, a lease.
2. How much is the ROU asset at initial recognition, if any?
3. What is the balance of ROU asset and lease liability as of December 31, 2021, if any?
Lease Reassessment

 After the commencement date, a lessee reassesses the lease term upon the occurrence of a significant event or a significant change in
circumstances that is within the control of the lessee and affects whether the lessee is reasonably certain to exercise an option not previously
included in its determination of the lease term, or not to exercise an option previously included in its determination of the lease term.

 Examples:

• significant leasehold improvements not anticipated at the commencement date that are expected to have significant economic benefit for
the lessee when the option to extend or terminate the lease, or to purchase the underlying asset, becomes exercisable;

• a significant modification to, or customization of, the underlying asset that was not anticipated at the commencement date;

• the inception of a sublease of the underlying asset for a period beyond the end of the previously determined lease term;

• a business decision of the lessee that is directly relevant to exercising, or not exercising, an option (for example, a decision to extend the
lease of a complementary asset, to dispose of an alternative asset or to dispose of a business unit within which the right-of-use asset is
employed).

 Accounting for lease reassessment:

a) Remeasure the lease liability to reflect changes to the lease payments.

b) Recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

c) If the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability,
a lessee shall recognize any remaining amount of the remeasurement in profit or loss.

d) Reassessment to a short-term lease applying recognition exemption is considered a new lease.

Lease modification

Lease modification:
 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.
 Examples:
• Adding right to use one or more underlying asset
• Terminating the right to use one or more underlying asset
• Extending or shortening the contractual lease term
• Increasing or decreasing the lease payments
Effective date of the modification:
 The date when both parties agree to a lease modification.
Accounting for lease modification:
 As a new lease
• A lease modification pertaining to adding right to use one or more underlying asset
• All lease modifications of a short-term leases applying recognition exemption.
 Proportionate reduction or decrease in the carrying amount of ROU asset - A lease modification pertaining to terminating right
to use one or more underlying asset
 The same as accounting for lease reassessment but using discount rate at the date of modification – all other lease
modifications
COVID-19 Related Rent Concessions

Amendments to PFRS 16, COVID-19-Related Rent Concessions:

 The amendments introduce an optional practical expedient that simplifies how a lessee accounts for rent concessions that are a direct
consequence of COVID-19.
 A lessee that applies the practical expedient is not required to assess whether eligible rent concessions are lease modifications, and accounts
for them in accordance with other applicable guidance.
 The practical expedient applies only if all of the following conditions are met:
a) the revised consideration is substantially the same or less than the original consideration
b) the reduction in lease payments affects only payments originally due on or before June 30, 2022, and
c) no other substantive changes have been made to the terms and conditions of the lease.

Accounting for COVID-19-Related Rent Concessions:

 Practical expedient – common practice to treat the reduction in lease consideration as a negative variable lease payments
recognized in profit or loss.
 Practical expedient not availed by the lessee – account as a lease modification.
Examples

Particulars Lease Lease COVID-19 Accounting

Reassessment Modification Related Rent
Concessions

1. A 5-year lease contract with rolling 12-month extension

options commenced on January 1, 2020.
At the commencement date, lessee is not reasonably certain Adjustment to
to exercise the extension option. p ROU asset
On December 1, 2021, the lessee became reasonably certain
to exercise the extension option up to December 31, 2028.

2. A 3-year lease contract for 3 office units commenced on

January 1, 2018.
On April 1, 2020, the lessee decided to end the lease effective Adjustment to
June 30, 2020 as its management planned to implement p ROU asset
lifetime work from home setup due to covid-19 pandemic.
The lessor agreed to the early termination of the lease upon
payment of penalties.

3. Same in number 2, except that the lessee would like to retain Proportionate
1 office unit. p reduction in the
carrying amount
of ROU asset
Examples

Particulars Lease Lease COVID-19 Accounting

Reassessment Modification Related Rent
Concessions

4. A 1-year lease contract commenced on January 1, 2020,

renewable for another year subject to mutual agreement of
both parties. p New lease
On January 1, 2021, the contract was renewed for another 1
year with option to extend for another year and option to
terminate the lease early.

5. A 12-month lease commenced on January 1, 2020 that

continues to be renewed until either party terminates.
At the commencement date, the lessee is reasonably certain
to terminate the lease after one year. However, on January 1,
p New lease
2021, there was a change in circumstance and the lessee
became reasonably certain not to terminate the lease until
December 31, 2025.

6. A 10-year lease contract commenced on January 1, 2020.

Adjustment to
In March 2020, the lessor agreed to waive the 3 months rent p ROU asset
for March to May 2020 and give 10% discount on monthly
rental until December 2022.
Comprehensive Activity – Subsequent Measurement

On December 29, 2018, Lessee B and Lessor F entered into an agreement for the use of office space located at Unit 31, BCF GeneRex
Building for 2 years starting January 1, 2019.
The following are the key terms and provisions in the contract:
• Lessee B has an option to extend the contract for another year upon written notification of its intention 3 months before the end of the
contract.
• Lessee B has an option to terminate the lease upon written notification 3 months before the intended effective date of termination.
However, if he does so, he will pay penalty, at the effective date of termination, equivalent to 50% of the rentals for the remaining
unused lease term.
• Monthly rental (payable at the beginning of each month) is P150,000 plus VAT for the first year with 5% annual escalation.

At the commencement date, Lessee B is not reasonably certain to exercise its option to extend or early terminate the lease.

Requirements:
1. How much is the ROU asset and lease liability at initial recognition?
2. On December 31, 2019, Lessee B became reasonably certain to terminate the lease effective April 1, 2020. What related adjusting
entry on ROU asset and lease liability is needed to take up on December 31, 2019?
3. On December 31, 2020, Lessee B became reasonably certain to exercise the option to extend the lease for another year.
a) What is the related adjusting entry on ROU asset and lease liability of December 31, 2020?
b) How much depreciation expense will be recognized for the year ended December 31, 2021?
4. On April 1, 2020, Lessor F agreed to give Lessee B 50% discount on its rental for 6 months from April to September 2020 due to
pandemic. Lessee B applies the practical expedient from amendments to PFRS 16. How much lease-related profit or loss is
recognized for the year ended December 31, 2020?
Comprehensive Activity – Subsequent Measurement

On December 29, 2018, Lessee B and Lessor F entered into an agreement for the use of office space located at Unit 31, BCF GeneRex
Building for 1 year starting January 1, 2019. Monthly rental (payable at the beginning of each month) is P150,000 plus VAT. The lease may
be renewed for another year subject to mutual agreement of both parties

Requirements:
1. How much is the ROU asset and lease liability at initial recognition?
2. On December 31, 2019, Both parties agreed to renew the lease for another year for a monthly rental of P175,000 plus VAT. What
related adjusting entry on ROU asset and lease liability is needed to take up on December 31, 2019?
3. Same scenario, except that Lessee B has the option to extend the lease for another year for P175,000 monthly rental. At
commencement date, Lessee was not reasonably certain to exercise the option. However, on December 31, 2019, Lessee became
reasonably certain to exercise the option. What related adjusting entry on ROU asset and lease liability is needed to take up on
December 31, 2019?
Comprehensive Activity – Subsequent Measurement

On December 29, 2018, Lessee B and Lessor F entered into an agreement for the use of 5 units of office space located at Unit 31-35,
BCF GeneRex Building for 2 year starting January 1, 2019.
The following are the key terms and provisions in the contract:
• Lessee B has an option to extend the contract for another 2 years upon written notification of its intention 3 months before the end of
the contract.
• Monthly rental (payable at the beginning of each month) is P1M plus VAT for the first 2 years, and P1.1M for the 2 years optional
extension period.

At the commencement date, Lessee B is reasonably certain to exercise its option to extend the lease.

Requirements:
1. How much is the ROU asset and lease liability at initial recognition?
2. On March 31, 2020, Lessee requested to terminate 2 units of office space effective July 1, 2020 due to pandemic. The revised
monthly rental for the remaining 3 units is P600k until December 31, 2020 and P650k for the optional extension period. Both parties
agreed and signed the revised contract on April 1, 2020. What is the effective date of the modification? What entry should the Lessee
take up on its books on this date?
3. On March 31, 2020, both parties agreed to modify the contract by adding a training room to the lease. Monthly rental will be increased
by P100k starting April 1, 2020 and by P110k for the 2 years optional extension period. What entry should the Lessee take up on
March 31, 2020?
Tax Effects

Under the Tax Code, lease payments are deductible as expense upon payment.

Thus, both ROU Assets and Lease Liabilities give rise to temporary difference.

Initial recognition exemption (IRE) under PAS 12:

 A deferred tax liability shall not be recognized on temporary differences arises from the initial recognition of an asset
or liability in a transaction which:
i. is not a business combination; and
ii. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Amendments to PAS 12 Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction
(Effective January 1, 2023)
 IRE exception - on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible
temporary differences.
Lessor and
Sublease
Accounting
Lessor accounting - Overview

Lease classification
Lessor accounting remains test
similar to current practice.
Finance leases and
operating leases

A lessor classifies a lease as either a finance lease or an operating lease,

as follows:
(a) Leases that transfer substantially all of the risks and rewards incidental
to
ownership of the underlying asset are finance leases; and
(b) All other leases are operating leases.
Finance Lease

Following indicators individually or in combination would normally lead to a

lease being classified as finance lease, else it would be an operating lease:

Lease for
Ownership
transfers
Purchas majority of
Minimum
lease
Specialised Finance
e economic nature
at end of
lease
option life
payments Lease

Additional indicators for Finance lease:

1) Lessee can cancel the lease and Lessor’s losses of cancellation borne by lessee.
2) Gains or losses from the fluctuation in the fair value of the residual fall to the lessee
3) Lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.
Accounting Treatment - Lessor

Particulars Finance lease Operating Lease

Statement of  Derecognise the underlying  Continue to present the

financial position asset underlying asset.

 Recognise a finance lease receivable at an amount equal to the net  Add any initial direct costs
investment in the lease (equal to the present value of the lease incurred in connection with
payments to be received) obtaining the lease to the
carrying amount of the
underlying asset

Statement of  Will apportion the amount received between finance income and  Recognise lease income over the
profit or loss reduction in receivable. lease term, typically on a
straight-line basis.
 Finance income will be computed to give a constant periodic rate
of return.  Depreciation expense to be
recognised related to the
 Manufacturer or dealer lessor underlying asset
 Recognize revenue being the fair value of the underlying asset
or the present value of lease payments whichever is lower
 Recognize cost of sale
Sublease accounting - Overview

Sublease - A transaction for which an underlying asset is re-leased by a lessee

(‘intermediate lessor’) to a third party, and the lease (‘head lease’) between the head lessor Lessor
and lessee remains in effect.

Accounting for Head Lease : Head

Lease
 Follow ‘Lessee Accounting’ but instead of recognizing ROU Asset,
recognize investment property.
Lessee
 Subsequently measure the investment property in accordance with PAS 40
either:
• Cost model
Intermediate lessor
• Fair value model
 If a lessee subleases an asset, or expects to sublease an asset, the head
Sub
lease does not qualify as a lease of a low-value asset.
Lease
Accounting for Sublease:
 Follow lessor accounting but by reference to the ROU asset arising from head Third party
lease, rather than by reference to the underlying asset.
 if the head lease is a short-term lease that the entity, as a lessee, has applied
short-term exemption, the sublease shall be classified as an operating lease.
Presentation
and
Disclosure
Presentation - Lessee

Statement of financial position Statement of profit or loss Statement of cash flows

ROU asset:
► Present separately from other assets; or ► Depreciation expense
► Include within the same line item as (Outright expense
that within which the corresponding unless part of
underlying assets would be presented if inventories or cost of
they were owned; PPE)
► As investment properties if it meets the
definition of investment property;
► Always under non-current assets
Lease liability:
► Separately from other liabilities, or together ► Interest expense (Under finance ► Principal payments
with other liabilities and disclose line items cost) within Financing
containing lease liabilities ► Rent expense for short-term and activities
► Separate current and non-current portion low-value leases ► Interest payments consistent
with policy election in PAS 7
Statement of Cash Flows
(either within operating
activities or financing
activities)
Presentation - Lessor
Statement of financial position
Operating lease:
► Continue to present the
underlying asset.
Finance lease:
► Derecognize the underlying asset.
► Recognise a finance lease
receivable (i.e., net
investment in the lease –
present value of lease
payments and unguaranteed
residual value)
Statement of profit or loss Statement of cash flows
Operating lease: Both lease types:
► Recognise lease income over the lease ► Cash lease payments received
terms, typically on a straight-line presented in accordance with
basis. PAS 7, generally within
► Expense costs related to underlying operating activities
asset
e.g. depreciation.
Finance lease:
► Recognize finance income on the
receivable based on the effective
interest method.
Disclosures - Lessee

Related to statement of financial position

 Additions to right-of-use assets;
 Year-end carrying amount of right-of-use assets by class of underlying asset;
 Amount of Lease liabilities
 Maturity analysis for lease liabilities

Related to statement of profit & loss and other comprehensive income

 Depreciation charge for right-of-use assets by class of underlying asset;
 Interest expense on lease liabilities;
 Expense relating to short-term leases for which the recognition exemption is applied (leases with a lease term
of up to one month can be excluded);
 Expense of low-value lease items for which the recognition exemption is applied;
 Expense relating to variable lease payments not included in lease liabilities;
 Income from sub-leasing right-of-use assets;
 Gains or losses arising from sale-and-leaseback transactions.
Disclosures - Lessor

For Finance lease

 Reconciliation between the gross investment in the lease at the end of the reporting period, and the present value
of MLPs (≤ 1 year, > 1 year and ≤ 5 years, > 5 years)
 Unearned finance income
 Unguaranteed residual values accruing to the benefit of the lessor
 The accumulated allowance for uncollectible minimum lease payments receivable

For Operating leases

 Future minimum lease payments (≤ 1 year, > 1 year and ≤ 5 years, > 5 years)

General Disclosures
 Contingent rents recognised as income in the period.
 A general description of the lessor's material leasing arrangements.
Example Presentation

Statement of financial position

NON-CURRENT ASSETS
Loans receivable - non-current, net 2, 7 3,209,911 10,537,101
Financial asset at fair value through other
comprehensive income 2, 10 650,000 700,000
Property and equipment, net 2, 11 155,158 247,341
Right-of-use assets, net 2, 12 14,236,684 22,375,221
Investment properties, net 2, 13 10,434,129 11,118,336
Refundable deposits 2, 14 6,851,322 6,528,908
Real and other properties acquired 2, 15 4,983,060 4,983,060
Other non-current assets held for sale 2, 15 25,411,670 26,377,387
Intangible asset, net 2, 16 127,528 45,833
Deferred tax assets, net 2, 17 46,270,041 35,935,941

Total Non-current Assets 112,329,503 118,849,128

Example Presentation

Statement of financial position

CURRENT LIABILITIES
Accruals and other payables 2, 18 4,002,148 4,701,773
Lease liabilities - current 2, 19 8,437,369 7,994,381
Income tax payable 2, 21 531,877 -

Total Current Liabilities 12,971,394 12,696,154

NON-CURRENT LIABILITIES
Lease liabilities - non-current 2, 19 3,011,638 11,455,762
Security deposits 2, 23 167,834 148,734

TOTAL LIABILITIES 16,150,866 24,300,650

Example Presentation

Statement of comprehensive income

OPERATING AND ADMINISTRATIVE EXPENSES

Selling expenses 30 22,464,381 27,374,285
Administrative expenses 31 26,330,109 29,148,268
Other expenses 32 31,618,835 8,424,853

Total Operating and Administrative Expenses 80,413,325 64,947,406

PROFIT (LOSS) FROM OPERATIONS (29,348,579) 945,242

FINANCE COST 33 1,582,587 2,235,768
Example Presentation

Statement of cash flows

CASH FLOWS FROM OPERATING ACTIVITIES
Loss before provision for income tax (30,931,166) (1,290,526)
Adjustments for:
Interest income 29 (527,793) (1,145,990)
Interest expense 33 1,582,587 2,235,768
Retirement benefits 22 558,151 854,172
Gain on sale of assets 28 (1,534,283) (10,378)
Provision for doubtful accounts 35 28,694,463 4,466,642
Depreciation and amortization 37 9,290,728 10,307,341
Write-off of property and equipment (151) -
Unrealized loss (gain) on foreign exchange, net 38 30,940 19,550
Operating profit (loss) before working capital changes 7,163,476 15,436,579

CASH FLOWS FROM FINANCING ACTIVITIES

Payment of lease liabilities (8,262,792) (8,573,627)
Interest paid 33 (1,582,587) (2,235,768)
Receipt of security deposits 19,100 14,000

Net cash provided by (used in) financing activities (9,826,279) (10,795,395)

Example Presentation

Notes to financial statements – Accounting Policies

Example Presentation

Notes to financial statements – Accounting Policies

Example Presentation

Notes to financial statements – Accounting Policies

Example Presentation

Notes to financial statements – Critical judgments and estimates

Example Presentation

Notes to financial statements – Critical judgments and estimates

Example Presentation

Notes to financial statements – Liquidity risk management

Example Presentation

Notes to financial statements – ROU asset

Example Presentation

Notes to financial statements – Lease liability

Example Presentation

Notes to financial statements – Lease agreements

Example Presentation

Notes to financial statements – Lease agreements: Short-term leases

PFRS for SMEs and Small Entities – Key Differences

FULL PFRS PFRS for SMEs PFRS for Small Entities

Lessee:
► ROU Asset Accounting ► Finance and operating lease ► Recognize all lease payments as expense
classification in profit or loss in the period in which
they are incurred.
► Finance lease – similar to ROU
Accounting
► Operating lease – recognize rental
expense on a straight-line basis over
the lease term.
Lessor
► Finance and operating lease ► Finance and operating lease ► Recognize all lease receipts as
classification classification income in profit or loss in the
► Operating lease – recognize rental ► Operating lease – recognize rental period in which they are
income on a straight-line basis over the income on a straight-line basis over incurred.
lease term. the lease term.
Question and
Answer
Thank You