12 April 2016

OVERVIEW OF MFRS 16
 Issued by MASB in Jan 2016
 Sets out the principles for the recognition, measurement,
presentation and disclosure of leases for the customer
(lessee) and the supplier (lessor)
 Effective from 1 Jan 2019
 Supersedes:
 MFRS 117 Leases
 IC Int 4 Determining whether an Arrangement contains a Lease
 IC Int 15 Operating Leases – Incentives
 IC Int 27 Evaluating the Substance of Transactions Involving the
Legal Form of a Lease

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 MAIN FEATURES - LESSEE
 A single lessee accounting model
 Assets and liabilities are recorded for all leases
with a term of more than 12 months, unless the
underlying asset is of low value
 Depreciation of lease assets is shown separately
from interest on lease liabilities in the SOPL

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 MAIN FEATURES - LESSOR
 Continues to classify its leases as operating
lease or finance lease
 Account for those two types of leases
differently

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 THE NEED FOR CHANGE
 Insufficient enhancing disclosure
 MFRS 116 does not require lessees to recognise assets
and liabilities arising from operating leases
 Most lease transactions were not reported on SOFP
 Investors and analysts
 did not have a complete and understandable picture of the
financial position of a company
 were unable to properly compare companies that borrow to
buy assets with those that lease assets without making
adjustments

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 CHANGES IN SOFP
In Lessee’s books:
 All leases are treated in a similar way to finance lease
applying MFRS 117
 Leases are capitalised by recognising :
• the PV of the lease payments and
• the lease assets (right-of-use assets)
 If lease payments are made over time, recognise a
financial liability representing its obligation to make
future lease payments

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 MFRS 117 MFRS 16

Finance leases Operating leases All leases

⟰⟰
Assets ⟰⟰ -

$$$$$
Liabilities $$$$$ -

Off balance
⟰⟰
sheet rights / - -
$$$$$
obligations

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 CHANGES IN SOPL
In Lessee’s books:
Depreciation charge for lease assets
Interest expense on lease liabilities

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 MFRS 117 MFRS 16
Finance leases Operating leases All leases
Revenue x x x
Operating cost
(excluding - Rental expense -
depreciation and
amortisation)
EBITDA
Depreciation and Depreciation - Depreciation
amortisation
Operating profit
Finance cost Interest - Interest
Profit before tax

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 CHANGE IN DEFFINITION
MFRS 16 MFRS 117

A contract that conveys the An agreement whereby the

right to control the use of lessor conveys to the lessee in
an asset (the underlying return for a payment or series
asset) for a period of time in of payments, the right to use
exchange for consideration an asset for an agreed period
of time
Key elements:
Identified asset
Economic benefits
Directing the rights to use

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IDENTIFIED ASSET
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
its is made available for use by the lessee.
However a lessee does not control the use of an
identified asset if the lessor has a substantive rights to
substitute the asset for an alternative asset during the
lease term.
Eg. 1

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ECONOMIC BENEFITS
A company must assess whether the customer has the
rights to:
 Obtain substantially all of the economic benefits from
the use of the identified asset throughout the period of
use; and
 Direct the use of the identified asset
Include its primary outputs, by-products and other
economic benefits from using the asset that could be
realised from a commercial transaction with a third
party.
Eg. 2

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DIRECTING THE RIGHT TO USE
A lessee has the right to direct the use of an identified asset
when:
 The lessee has the right to direct how and for what purpose
the asset is used throughout the period of use; or
 The relevant decisions about how and for what purpose the
asset is used are predetermined and:
 The lessee has the right to operate the asset ( or to direct
others to operate he asset) throughout the period of use
 The lessee designed the asset in a way that predetermines
how and for what purpose the asset will be used throughout
the period of use
Eg. 3

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EXCEPTION
A lessee can elect not to apply the lease accounting
model to:
 Short term leases (12 months or less)
 Leases of low value items when it is new (even of the
effect is material in aggregate
 Leases of IT equipment
 Leases of office furniture

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LEASE AND NON-LEASE COMPONENTS
Lease payments should be split into lease element and
non-lease elements:
 Account for a lease element as for a lease under MFRS
16 (if it meets the criteria in MFRS 16)
 Account for a service element as an expense in SOPL
based on the relative stand-alone prices

Eg. 4

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EXAMPLE: MFRS 117 v MFRS 16
Lessee Z enters into a contract to lease a warehouse on 1
Jan 2015 for 3 years. The annual rental payments are
RM2,000,000, including the cleaning services, all payable
at the end of the year. The rental for similar warehouse
without cleaning services is RM1,800,000 per annum and
the cost of cleaning services was RM400,000 per annum.
Implicit interest rate is 5%. The estimated useful life of
the warehouse is 30 years.
Financial year end is 31 Dec.

Question: How would you account for this contract

under MFRS 117 and MFRS 16

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 ACCOUNTING UNDER MFRS 117
 Classify the lease first – lease term does not form a
major part of the useful life – operating lease
 At commencement date: Do nothing
 At the end of each year: Record the rental expense of
RM2,000,000 in SOPL

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 ACCOUNTING UNDER MFRS 16
 No classification is necessary as one accounting model
applies to all leases.
 Follow 3 steps:
1. Is it a lease under MFRS 16? Yes
2. Is there some element other than lease element? Yes
lease element: RM2 m x (1.8 m/2.2 m) = RM1,636,364
cleaning element: RM2 m x (0.4 m/2.2 m) = RM363,636
3. How do we recognise these elements?

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At the commencement:
 Recognise right to use a warehouse in the amount
equal to the lease liability plus some other items like
initial direct costs.
 Calculate lease liability at PV of lease payments over
the lease term.
RM1,638,364 x 2.72325 = RM4,456,227
 Accounting entry:
Dr Right-of-use asset RM4,456,227
Cr Lease liability RM4,456,227

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Subsequently, when a payment is made and/or at the
end of reporting period:
 Recognise depreciation of the right-of-use asset
RM4,456,227/3 years = RM1,485,409
 Recognise remeasurement of the lease liability to
include interest, exclude amount paid and take any
lease modifications into account.
Interest = 5% x RM4,456,227 = RM222,811

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 Journal entries
Dr Cr
RM RM

Depreciation Depreciation 1,485,409

Acc. depreciation 1,485,409

Interest Finance charge 222,811

Lease liability 222,811

Rental payment Lease liability 1,636,364

Cleaning services exp 363,636

Bank 2,000,000

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IMPACT ON SOPL
MFRS 117 MFRS 16

Rental payment RM2,000,000 Depreciation RM1,485,409

Interest RM222,811

Cleaning service RM363,636

RM2,000,000 RM2,071856

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 LESSEE ACCOUNTING
Initial measurement of lease liability
= PV of future lease payments
= PV of lease rental + PV of expected payments at end of lease
Subsequent measurement of LL
Measurement basis – after initial recognition, the LL is
measured at amortised cost using the effective interest method
Reassessment of the LL – LL is remeasured to reflect changes in
the lease payments using revised lease payments and an
unchanged discount rate or a revised discount rate.

Eg. 5

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LESSEE ACCOUNTING
Initial measurement of the right-of-use (ROU) asset
ROU asset
= LL + initial direct cost + prepaid lease payment
+ estimated costs to dismantle, remove or restore
- lease incentive received
Subsequent measurement of ROU asset
Measurement basis:
 at cost less acc. depreciation and acc. impairment
 Adjust the CA for remeasurement of LL unless:
 CA has been reduced to zero
 The change in LL relates to a variable lease payment that does not
depend on an index or rate
 Applies alternative measurement bases when:
 The ROU asset meets the definition of investment property
 The underlying asset of the ROU asset is tangible and revaluation model is
adopted by the lessee to the same class of PPE

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Depreciation of ROU asset:
 Follow MFRS 116 – depreciation method reflects the pattern in which the
FEB of the ROU asset is consumed.
 Normally SLM
 start at the commencement date of the lease
 Depreciation period:
 If ownership of the underlying asset is transferred to the lessee, or the
lessee is reasonably certain to exercise a purchase option, depreciation
period is the end of the estimated useful life of the underlying asset
 Otherwise, depreciation period is the earlier of the end of the useful life
of the ROU asset or the end of lease term
 Eg 6

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Impairment of ROU asset:
 Applies MFRS136 to determine whether a ROU asset is impaired and to
account for any impairment
 After the recognition of the impairment loss, future depreciation
charges are adjusted to reflect the revised CA
 Eg 7

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 LESSOR ACCOUNTING
A lessor classifies a lease as either a finance lease or an operating lease
as follows:
 Leases that transfer substantially all of the risks and rewards
incidental to ownership of the underlying asset are finance lease
 All other leases are operating leases
The lease classification test is essentially unchanged from MFRS 117.
Changes in lessor accounting:
 Definition of a lease
 Sale and leaseback guidance
 Sub-lease guidance
 Disclosure requirements

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 SALE-AND-LEASEBACK
A company (the seller-lessee) transfers an underlying asset to
another company (the buyer-lessor) and leases that asset back
from the buyer-lessor.
To determine how to account for a sale-and-leaseback
transaction, a company needs to consider whether the initial
transfer of the underlying asset is a sale.

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SALE AND LEASEBACK
LESSEE (SELLER) LESSOR (BUYER)
Transfer to • Derecognise the underlying asset and • Recognise the
buyer-lessor apply the lessee accounting model to underlying asset and
is a sale the leaseback* apply the lessor
• Measure the ROU asset at the retained accounting model to the
portion of the previous CA (ie at cost)* leaseback*
• Recognise a gain or loss related to the
rights transferred to the lessor*
Transfer to • Continue to recognise the underlying • Do not recognise the
buyer-lessor asset underlying asset
is not a sale • Recognise a financial liability under • Recognise a financial
MFRS 9 for any amount received from asset under MFRS 9 for
the buyer-lessor any amount paid to the
seller-lessee
*adjustments are required if the sale is not at fair value or lease payments are off
market
Eg. 8
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 SUB-LEASES
A transaction in which a lessee (or immediate lessor) grants a right to
use the underlying asset to a third party, and the lease (or head lease)
between the original lessor and lessee remains in effect.
A company applies MFRS 16 to all leases of ROU assets in a sub-lease.
The intermediate lessor accounts for the head lease and the sub-lease
as two different contract

Head lessor

Original lessee / Intermediate lessor

Sub-lessee
Eg. 9

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 DISCLOSURES
General objective: Lessees and lessors disclose
information that provides a basis for users of financial
statements to assess the effects that leases have on
financial position, financial performance and cash flows.

Disclosures for lessees

Disclosures for lessors

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THANK YOU

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