PFRS 16

LEASES
BY JEWEL ANN SOTTO
 OBJECTIVES
TO KNOW THE OPTIONAL APPLICATION OF
OPERATING LEASE ON THE PART OF LESSEE.

TO RECOGNIZE A RIGHT OF USE ASSET IN A

FINANCE LEASE ON THE PART OF LESSEE.

TO RECOGNIZE A LEASE LIABILITY IN A

FINANCE LEASE ON THE PART OF LESSEE.

TO IDENTIFY THE CRITERIA IN DETERMINING A

FINANCE LEASE ON THE PART OF LESSOR.
 LEASE
A lease is defined as a contract or part of a contract that
conveys the right to use the underlying asset for a period
of time in exchange for consideration.

The underlying asset is the subject of a lease for which the

right to use that asset has been provided by the lessor to
the lessee.

The lessee is the entity that obtains the right to use an

underlying asset for a period of time in exchange for
consideration.

The lessor is the entity that provides the right to use an

underlying asset for a period of time in exchange for
consideration.
 FINANCE LEASE
MODEL FOR LESSEE
IFRS 16, paragraph 22, provides that at the commencement
date, a lessee shall recognize a right of use asset and a
lease liability.

This simply means that a lessee is required to initially

recognize a right of use asset for the right to use the
underlying asset over the lease term and a lease liability
for the obligation to make payments.

All leases shall be accounted for by the lessee as a

finance lease under the new lease standard.
 OPERATING LEASE
MODEL FOR LESSEE
IFRS 16, paragraph 5, provides that lessee is permitted to
make an accounting policy election to apply the operating
lease accounting and not recognize ban asset and lease
liability in two optional exemptions short-term lease and
low value lease.

Stated differently, a lessee may or may not apply the

operating lease accounting if the lease is short-term or if
the underlying asset is low value.
 SHORT-TERM LEASE

A short-term lease as a lease is defined that has a term of

12 months or less at the commencement date of the lease.

A lease that contains a purchase option is not a short-

term lease.
 LOW VALUE LEASE
Low value asset is a matter of professional judgement.

The lessee shall assess the value of an underlying asset

based on the value of the asset when it is new regardless of
the age of the asset being leased.

A lease of an underlying asset does not qualify as a low

value lease if the nature of the asset is such that the
asset is typically not of low value when new.

Typically low value underlying assets include personal

computers, office furniture and equipment.
 ACCOUNTING FOR
OPERATING LEASE -
LESSEE
If the lessee elects to apply the operating lease accounting
the lessee shall recognize the lease payments as rent
expense in either a straight line ,basis over the lease term
or another systematic basis.

The lessee shall apply another systematic basis if this is

more representative of the pattern of the lessee’s
benefit.

Under the operating lease model, the periodic rental is

simply recognized as rent expense on the part of lessee.
 FINANCE LEASE - LESSEE

A finance lease is defined as a lease that transfers

substantially all of the risks and rewards incidental to
ownership of an underlying asset.

At the commencement date, the lessee shall recognizes a

right of use asset and lease liability.
INITIAL MEASUREMENT OF RIGHT OF USE ASSET
A right of use asset is defined as an asset that represents the right of lessee
to use an underlying asset over the lease term in a finance lease.

The cost of right of use asset comprises:

a. The present value of lease payments.
b. Lease payments made to lessor such as lease bonus, less any lease
incentive received.
c. Initial direct costs incurred by the lessee
d. Estimate cost of dismantling and restoring the underlying asset for which
the lessee has a present obligation.

A lease incentive is payment by the lessor to the lessee associated with a

lease or the reimbursement or assumption by the lessor of the cost of the
lessee.
The less incentive should be deducted from the cost of the right of use asset.

Initial direct cost is incremental cost of obtaining a lease that would not have
been incurred if the lease had not been obtained.

Leasehold improvement is not initial direct cost and not included in the cost
of the right of used asset.

Any security deposit refundable upon the lease expiration is accounted for as
an asset by the lessee.
SUBSEQUENT MEASUREMENT OF RIGHT OF USE ASSET
The lessee shall measure the right of use asset applying the cost model.
To apply the cost model, The lessee shall measure the right of use asset
at cost less any accumulated depreciation and impairment loss.

PRESENTATION OF RIGHT OF USE ASSET

The lessee shall present the right of use asset as a separate line item as
noncurrent asset in the statement of financial position.

As an alternative, the lessee may include the right of use asset in the
appropriate line item within which the corresponding underlying asset
would be presented if owned.
For example, the right of the use asset related to equipment may be
included within property, plant and equipment.
DEPRECIATION OF RIGHT OF USE ASSET
The lessee shall apply normal depreciation policy for right of use asset.

IFRS 16, paragraph 32, provides that the lessee shall depreciate the right
of use asset over the useful life of the underlying asset under the
following conditions:

a. The lease transfers ownership of the underlying asset to lessee at the

end of lease term.
b. The lessee is reasonably certain to exercise a purchase option.

If there is no transfer of ownership to the lessee or if the purchase

option is not reasonably certain to be exercised, the lessee shall
depreciate the right of use asset over the shorter between the useful
life of the asset and the lease term.
MEASUREMENT OF LEASE LIABILITY
The lessee shall measure the lease liability of the present value of lease
payments.
The lease payments shall be discounted using the internet rate implicit
in the lease desired by the lessor.
If the implicit interest rate cannot be readily determined the incrementl
borrowing rate of the lessee is used.

COMPONENTS OF LEASE PAYMENTS

a. Fixed lease payments or periodic rental.
b. Variable lease payments.
c. Exercise price of a purchase option if the lessee is reasonably certain
to exercise the lesson.
d. Amount expected to be payable by the lessee under a residual value
guarantee.
e. Termination penalties if the lease term reflects the exercise of a
termination option.
Residual value guarantee is the guarantee made to the lessor by a party
unrelated to the lessor that the value of an underlying asset at the end
of the lease term will be at least a specified amount.

Unguaranteed residual value is that portion of residual value of the

underlying asset, the realization of which by the lessor is not assured or
is guaranteed solely by a party related to the lessor.

Executory costs are ownership expenses such as maintenance, taxes

and insurance for the underlying asset.

Such executory cost are expensed immediately when incurred.

LESSOR ACCOUNTING
IFRS 16, paragraph 61, provides that a lessor shall classify leases as either an
operating lease or a finance lease.

An operating lease is a lease that does not transfer subtantially all the risks
and rewards incidental to ownership of an underlying asset.

A finance lease is the lease that transfers substantially all the risks and
rewards incidental to ownership of an underlying asset.

WHEN IS ALEASE CLASSIFIED AS FINANCE LEASE?

Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form of the contract.
Under IFRS 16, paragraph 63, among others, any of the followingsituations
would normally lead to a lease being classified as a finance lease:
a. The lease transfers ownership of the underlying asset to the lessee at the
end of the lease term.

b. The lessee has an option to purchase the asset at a price which is

expected to be sufficiently lower than the pair value at the date the option
will be exercisable
At the inception of the lease, it is reasonably certain that the option will be
exercised.

c. The lease term is for the major part of the economic life of the underlying
asset even if title is not transferred.
Under USA GAAP, major partmeans at least 75% of the economic life of an
asset.

d. The present value of the lease payments amounts to substantially all of

the fair value of the underlying asset at the inception of the lease.
Under USA GAAP, substantially all means at least 90% of the fair value of the
uhderlying asset
OPERATING LEASE - LESSOR
IFRS 16, paragraph 81, provides that a lessor shall recognized lease payments
from operating lease as income either on a straight line basis or another
systematic basis.
The lessor shall apply another systematic basis if this is more representative
of the pattern in which benefit from the use of the underlying asset is
diminished.
Otherwise stated, the periodic rental received by the lessor in an operating
lease is simply recognized as rent income.
A lessor shall present an underlying asset subject to operating lease in the
statement of financial position according to the nature of the asset.
The underlying asset remains as an asset of the lessor. Consequently, the
lessor bears all ownership or executory costs such as depreciation of leased
property, real property taxes, insurance and maintenance.
OPERATING LEASE - LESSOR
However, the lessor may pass on the lessee the payment for taxes, insurance
and maintenance cost.
The depreciation policy for depreciable leased asset shall be consistent with
the lessor’s normal depreciation for similar asset.
Initial direct cost incurred by lessor in an operating lease shall be added to
the carrying amount of the underlying asset is recognized as an expense
over the lease term on the same basis as the lease income.
Any security deposit refundable upon the lease expiration shall be
accounted for as liability by the lessor.
Any lease bonus received by the lessor from the lessee is recognized as
unearned rent income to be amortized over the lease term.
FINANCE LEASE CLASSIFICATION - LESSOR
On the part of the lessor, a finance lease is either:

a. Direct financing lease

b. Sales type lease
The main distinction between the two is the presence or absence of a
manufacturer or dealer profit or loss
A direct financing lease recognizes only interest income.
A sales type lease recognizes interest income and gross profit on sale