Professional Documents
Culture Documents
LEASE
† Lease –is a CONTRACT or PART OF A CONTRACT, that conveys RIGHT TO USE an asset (the UNDERLYING ASSET)
for a period of time in exchange for consideration.
† 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 a consideration (PFRS 16)
† Right to control:
-RIGHT to obtain SUBSTANTIALLY ALL of the economic benefits from the use of the identified assets
-RIGHT to DIRECT THE USE of the identified assets
Right to direct how and for what purpose the asset is used throughout the period of use
The asset’s use is predetermined and the supplier is precluded from changing that predetermined use
† Protective rights include CONTRACTUAL RESTRICTIONS designed to protect the supplier’s interest in the asset
or its personnel, or to ensure compliance with laws or regulations
-maximum amount of use or limit
-require particular operating procedures
-require a customer to inform the supplier of changes on how an asset will be used
† IDENTIFIED ASSET is the one that is EXPLICITLY STATED in the contract or by being IMPLICITLY specified at the
time the asset is made available for use by the customer
-physically distinct (whole or a portion)
-lessor has NO SUBSTANTIVE SUBSTITUTION RIGHT to substitute throughout the period of use. The following pertains to lessor’s right
considered as Not SUBSTANTIVE.
Substitution occurs only on a particular date or upon the occurrence of a specific event
Substitution occurs only during repairs, maintenance, or upgrading
† Initial Measurement of Lease Liability:
-Measured at PV of the LEASE PAYMENTS (at the COMMENCEMENT DATE) which includes:
PV of Fixed Payments less ANY INCENTIVES RECEIVABLE
In-Substance Fixed Payments, Variable Lease Payments based on an INDEX or a RATE
PV of Guaranteed Residual Value
PV of Purchase Option
PV of Penalty for Lease Termination (if lease reflects the lessee exercising an option to terminate the lease
† Subsequent Measurement of Lease Liability:
-measured similar to an amortized cost financial liability but remeasured to reflect any reassessment or lease modifications
-interest expense is computed using ER
-Lease payments (annual payment) is apportioned between the interest expense and the reduction of lease liability
(Note: As each period passes, interest expense for each period decreases while amortization increases)
† Initial Measurement of Right-of-Use:
-measured at COST which includes:
Initial measurement of the LEASE LIABILITY
Lease payments made at or before the commencement date less ANY INCENTIVES RECEIVED
Initial direct cost incurred
PV of decommissioning and restoration cost for which the entity has incurred an obligation, unless those cost are incurred to
produce inventories
† Subsequent Measurement of Right-of-Use:
-measured using COST MODEL, except when:
It relates to a class of PPE measured under the revaluation method, in which case, the asset may be measured using the
revaluation method
It meets the definition of an investment property and the entity uses the fair value model, in which case, the asset is measured
under the fair value method
† Cost Model measures an asset at COST:
-less any accumulated depreciation, and any accumulated impairment losses
-adjusted for any remeasurement of the lease liability
† The lessee starts depreciating the underlying asset from the commencement date over its USEFUL LIFE if:
-lease contract provides for transfer of ownership to the lessee by the end of the lease term
-there is a reasonable certainty that the lessee will exercise a purchase option
(Note: In any other case, the lessee depreciates the underlying asset over the SHORTER of the assets’s useful life and the lease term
† Annual depreciation is based on the amount of Right-of Use Asset divided by its useful life
† RECOGNITION EXEMPTION give the lessee the option not to apply the recognition requirements for the
recognition of lease liability and right-of-use for:
-SHORT-TERM assets (has a lease term of 12 months or less. Note: 1. a lease that contain a purchase option is not a short-term lease 2. A
lease term that could be terminated after the 1st year in which the lessee is reasonably certain to exercise such option could be treated as
short-term)
-LOW VALUE underlying assets (assessment of value is when the asset is new regardless of aged of the asset being leased i.e. computer,
small office furniture, telephones)
† Leased assets under the RECOGNITION EXEMPTION is recognized as an expense on a STRAIGHT-LINE BASIS
over the lease term, unless another systematic basis is more representative of the pattern of the lessee’s
benefit
† Separating the components of the contract –uses standalone prices to allocate
-Lease component -
-Non-lease component
-maintenance
-security services
-supply of utilities
-supply of goods
-supply of operational services
Accounted separately if it TRANSFERS GOODS or SERVICES to the lessee
Not accounted separately if it DO NOT TRANSFERS goods or services to the lessee
-administrative task
-real property taxes
-insurance cost where lessor is the beneficiary
† Lease of multiple asset is considered a separate lease component if both criteria are met:
-lessee can benefit from the asset on its own or together with other resources that are readily available to the lessee
-underlying asset is neither HIGHLY DEPENDENT on, nor HIGHLY INTERRELATED with the other assets in the contract
† Allocation of the consideration of the contract to each lease components is based on their RELATIVE
STANDALONE PRICE of the LEASE COMPONENT and AGGREGATE STANDALONE PRICE of the NON-LEASE
COMPONENT
† PRACTICAL EXPEDIENT is an approach allowed by PFRS 16 wherein the lease and non-lease component of the
contract is not separated but rather account them as a single lease component. (Note: this could result in an
increase in recognized lease liability and right-of-use and could have implications for impairment
† In-substance Fixed lease payments are payments that are variable in legal form but, in substance, are
unavoidable:
-payments to be made ONLY if an asset is proven to be capable of operating during the lease
-occurrence of an event that has no genuine possibility of non-occurrence
-variable payments where variability will be resolved in the future
† Lease Incentives are payments made by a lessor to a lessee associated with a lease, or the reimbursement or
assumption by a lessor of cost of a lessee
† Variable Lease Payments – varies because of changes in facts or circumstances occurring after the
commencement date, other than the passage of time
-Payments that vary based on an index or rate are included in measuring the lease payment
-Payments that vary based on future usage of the leased asset are not included in the lease payments
-Variable payments that are in-substance fixed payments are included in the lease payments
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