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IAS

IFRS17
16--LEASES
LEASES
IFRS 16 LEASES
- issued in January 2016 and applies to annual
reporting periods beginning on or after 1 January
2019.
The objective of IFRS 16 is to report information
that :
(a) faithfully represents lease transactions and
(b) provides a basis for users of financial statements to
assess the amount, timing and uncertainty of cash
flows arising from leases.

To meet that objective, a lessee should recognise assets


and liabilities arising from a lease.
What is the Difference
between
IAS 17 and IFRS 16?
OLD (IAS17) vs NEW (IFRS16) standard
• IAS 17
“A finance lease is a lease that transfers all the risk
and rewards incidental to ownership of an asset.
Title may or may not eventually be transferred.” (IAS
17.4)

• IFRS 16
“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)
 OVERVIEW
 IDENTIFYING A LEASE
 SEPARATING COMPONENTS OF A
CONTRACT
 LEASES IN THE FS OF LESSORS
 LEASES IN THE FS OF LESSEES
 SINGLE LESSEE ACCOUNTING
MODEL
 SALE AND LEASEBACK
TRANSACTIONS
 EFFECTIVE DATE AND
TRANSITION

HIGHLIGHTS
Overview
IFRS 16 LEASES
 specifies how an IFRS reporter will recognise,
measure, present and disclose leases.

 The standard provides a SINGLE LESSEE


ACCOUNTING MODEL, requiring lessees to
recognise assets and liabilities for all leases unless
the lease term is 12 months or less or the underlying
asset has a low value.

 LESSORS continue to classify leases as operating


or finance, with IFRS 16’s approach to lessor
accounting substantially unchanged from its
predecessor, IAS 17.
IDENTIFYING A LEASE
A contract is, or contains, a lease if it conveys the
right to control the use of an identified asset for
a period of time in exchange for consideration.
(PFRS 16.9)
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.
Identified Asset
• An identified asset is essential in the definition of a lease. An asset
can be identified by being explicitly stated in the contract or by being
implicitly specified at the time of the asset is made available for use
by the customer.
EXAMPLE: Identified Asset
• Customer X enters into a five-year contract with Supplier Y for the use
of a towing car. The specification of the car is stated in the contract
(brand, engine, capacity, dimension etc.)

• Case 1: The towing car is readily available at the inception of the


contract.

• Case 2: The towing car is not yet built at the inception of the contract.
Analysis
• Case 1: The towing car is an identified asset. It is identified by
explicitly specified in the contract.

• Case 2: The towing car is an identified asset. Although the towing car
cannot be identified at the inception of the contract, it is expected to
be identifiable at the commencement of the lease, ie., it is implicitly
specified at the time the asset is made available for use by the
customer.
Portion of Assets
• A capacity portion of an asset is an identified asset if it is physically
distinct (e.g., a floor of a building). A capacity or other portion of an
asset that is not physically distinct 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 the use of the asset. (PFRS 16.B20)
The first thing you would look at is whether an
underlying asset can be identified.
EXAMPLE A: Analysis
 The first contract does not contain any lease, because no asset
can be identified.
• The reason is that the supplier (warehouse owner) can exchange one
place for another and you lease only certain capacity.

Therefore, you would account for rental payments


as for expenses in profit or loss.
EXAMPLE A: Analysis
 The second contract does contain a lease, because an
underlying asset can be identified– you are leasing the unit n. 13
of XY cubic meters in the sector A.

Therefore, you need to account for this contract as


for the lease and it means recognizing some asset
and a liability in your balance sheet.
Example: Portion of the Assets
• Customer X enters into a 10-year contract with Supplier Y for the right
to use three fibers within a larger cable connecting Country A and
Country B. The contract specifically identifies the 3 fibers within the
15 fibers comprising the cable. The 3 fibers shall be used exclusively
to transmit Customer X’s data during the duration of the contract.
Example: Portion of the Assets
• Customer X enters into a 10-year contract with Supplier Y for the right
to use the equivalent capacity of 3 fibres within a larger cable
connecting Country A and Country B. The cable consists of 15 fibres.
The contract requires Supplier Y to make available for Customer X the
equivalent capacity of 3 fibres all throughout the duration of the
contract. However, Supplier Y makes the decision as to which of the
15 fibres shall be used in transmitting Customer X’s data.
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.
Substantive substitution rights
A supplier’s right to substitute an asset is substantive if both of the
following conditions exist:

The supplier has the practical ability to substitute alternative assets


throughout the period of use; and

The supplier would benefit economically from the exercise of its right to
substitute the asset
Substantive substitution rights
A supplier’s right to substitute an asset is not substantive if it cannot be
exercised throughout the period of use, such as when substitution is
made:

Only on a particular date or upon the occurrence of a specified event; or

Only during repairs, maintenance or upgrading


A customer has the right to direct the
use of an identified asset throughout the
period of use if:

Right to direct The customer has the right to direct


how and for what purpose the asset is
the use used throughout the period of use; or

The asset’s value is predetermined and


the supplier is precluded from
changing the predetermined use.
Rights to change the type of output that is
produced by the asset;

Rights to change when the output is


Right to produced;
direct the
Right to change where the output is
use produced; and

Right to change whether the output is


produced, and the quantity of that output
Protective Rights
• Protective rights include contractual restrictions designed to produce the
supplier’s interest in the asset or its personnel, or to ensure compliance
with laws and regulations.

• For example, a contract may (i) specify the maximum amount of use of an
asset or limit where or when the customer can use the asset, (ii) require a
customer to follow particular operating procedures, or (iii) require a
customer to inform the supplier changes in how an asset will be used.

• Protective rights typically define the scope of the customer’s right of use
but do not, in isolation, prevent the customer from having the right to
direct the use of an asset.
Illustration: Identifying a Lease
• Customer X, engaged in quarrying constructions aggregates, enters
into a 10-year contract with Supplier Z for the use of 20 dump trucks
of a particular type.

• The contract specifies the following:


Supplier Z remains the owner of the specified trucks and shall provide drivers
for their operation and technicians for repairs and maintenance.
The trucks are to be used for hauling excess materials from Customer X’s
mining site to any dumping site that Customer X will specify. Customer X can
use the trucks to deliver construction aggregates to customers. However,
Customer X is prohibited from using the trucks to transport toxic waste.
Illustration: Identifying a lease
The contract specifies the following:
Customer X operates 24/7 and 365 days a year. Thus, Supplier Z is required to
make all the specified trucks available at all times during the duration of the
contract.
The trucks are to be kept in Customer X’s premises. If not in use, a truck
becomes idle. Supplier Z cannot retrieve any of the trucks other than for the
reasons of default.
Is a truck needs to be services or repaired, Supplier Z is required to provide a
substitute truck of the same type.
Analysis
• The trucks are identified assets (explicitly specified in the contract)
and Customer X has the right to obtain substantially all of the
economic benefits from their use throughout the period of use.

Substitution Rights: Supplier Z’s substitution rights is not substantive because


substitution is made only during repairs and maintenance, rather than
throughout the period of use.
Analysis
• Customer X has the right to direct the use of the trucks because
Customer X makes the relevant decisions on how and for what
purpose the trucks are to be used. Although Supplier Z controls the
drivers and technicians, this is necessarily only for the efficient use of
the trucks and dies not give Supplier Z the right to direct how and for
what purpose the trucks are to be used.

Protective Rights: The contractual restriction on the cargo that can be


transported by the trucks is a protective right of Supplier Z and does not
prevent Customer X from having the right to direct the use of the trucks.
Illustration: Identifying a Lease
• Customer X, a seller of “siomai” enters into a contract with Supplier Y
to use a space in Supplier Y’s mall to sell its goods. The contract states
the amount of space and the space may be located at any one of the
several areas within the mall. Supplier Y has the right to change
location of the space allocates to Customer X at any time during the
period of use. Changing the space entails minimal costs to Supplier Y
because Customer X uses a booth that it owns and can be moved
easily. There are many areas in the mall that are available and would
meet the specifications for the space in the contract.
Analysis
• The contract does not contain a lease because there is no identified
asset. Customer X controls its booth but the contract is for space in
the mall, and this space can change at the discretion of Supplier Y.
Supplier Y’s substitution right is substantive because:

a. Supplier Y has the practical ability to substitute alternative spaces


throughout the period of use; and

b. Supplier Y would benefit economically from the exercise of its right


to substitute the space.
Lease Term
• Lease term is the noncancelable period of a lease, together with
both:
• Periods covered by an option to extend the lease if the lessee is reasonable
certain to exercise that option.
• Periods covered by an option to terminate the lease if the lessee is reasonably
certain not to exercise that option. (PFRS 15.18)
Lease Term
If only the lessee has the right to terminate the lease, the lessee
considers this right when determining the lease term (i.e., whether
the exercise is reasonably certain or not).

If only the 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.
To extend or not?
The lessee may be reasonably certain to exercise an option to extend
the lease if:

Lease payments on the extended period are expected to be below


market rate
The lessee made significant leasehold improvements with useful life
longer than the original lease term.
To terminate or not?
• The lessee may be reasonably certain not to exercise an option to
terminate the lease if:

The costs of terminating the lease (relocation costs) are significant.


The leased asset is important to the lessee’s operations (because it is
specialized in nature or because of its location and it would be difficult to find
a replacement asset if the lease is terminated).
Illustration: Assessment of Lease Term
• Entity X enters into a 3-year non-cancellable lease for an office space.
Upon expiration, Entity X has the option to extend the lease for
another 3 years:
• Entity X intends to make significant leasehold improvements with expected
useful life of 6 years.
• The lease payments on the extended period are equal to the lease payments
on the original term of the lease, and therefore, are expected to be below
market value rate during the extended period, after consideration of the
effects of inflation.
• The office space is strategically located and, therefore, important to Entity X.
Entity X expects that an alternative office space in a similar location would not
be readily available at the end of the 3-year term of the lease.
Illustration: Assessment of Lease Term
• Entity X enters into a 3-year non-cancellable lease for an office space.
Upon expiration, Entity X has the option to extend the lease for
another 3 years:
• Entity X intends to make significant leasehold improvements with expected
useful life of 6 years.
• The lease payments on the extended period are equal to the lease payments
on the original term of the lease, and therefore, are expected to be below
market value rate during the extended period, after consideration of the
effects of inflation.
• The office space is strategically located and, therefore, important to Entity X.
Entity X expects that an alternative office space in a similar location would not
be readily available at the end of the 3-year term of the lease.
SINGLE LESSEE ACCOUNTING MODEL
A lessee is required to recognise a

 right-of-use asset representing its right to


use the underlying leased asset or PPE and
a

 lease liability representing its obligation to


make lease payments.
ACCOUNTING BY LESSEES
INITIAL MEASUREMENT & RECOGNITION

Upon lease commencement a lessee recognises a right-of-use asset and a lease liability.

RIGHT-OF-USE ASSET LEASE LIABILITY

Lease liability PV of the lease payments


+ Initial direct costs
+/- Adjustments  over the lease term
 discounted at the rate implicit in the lease if
= RIGHT OF USE ASSET that can be readily determined
• If not, incremental borrowing rate
Lease payments
Fixed payments less any lease incentives receivable;
Variable lease payments that depend on an index or a rate initially
measured using the index or rate as at the commencement date;
Amounts expected to be payable by the lessee under residual value
guarantees;
The exercise price of a purchase option if the lessee is reasonably
certain to exercise that option; and
Payments of penalties for terminating the lease, if the lease term
reflects the lessee exercising an option to terminate the lease (PFRS
16.27)
EXAMPLE
On 1 January 20X1, Entity X enters into 1 3-year
lease of equipment for an annual rent of P100,000
payable at the end of each year. The equipment has a
remaining useful life of 10 years. The interest rate
implicit in the lease is 10% while the lessee’s
incremental borrowing rate is 12%. Entity X uses the
straight-line method of depreciation.
Initial Measurement
ACCOUNTING BY LESSEES
SUBSEQUENT MEASUREMENT & RECOGNITION

After lease commencement, a lessee shall measure the right-of-use asset using a
COST MODEL, unless
the right-of-use asset is an investment property and the lessee fair values its investment property
under IAS 40; or
the right-of-use asset relates to a class of PPE to which the lessee applies IAS 16’s revaluation
model, in which case all right-of-use assets relating to that class of PPE can be revalued.

Under the cost model a right-of-use asset is measured at cost less accumulated
depreciation and accumulated impairment.
Subsequent Measurement
ACCOUNTING BY LESSEES
REMEASUREMENT OF LEASE LIABILITY

The lease liability is subsequently remeasured to reflect changes in:


 the lease term (using a revised discount rate);
 the assessment of a purchase option (using a revised discount rate);
 the amounts expected to be payable under residual value guarantees (using an unchanged discount rate); or
 future lease payments resulting from a change in an index or a rate used to determine those payments
(using an unchanged discount rate).

The remeasurements are treated as adjustments to the right-of-use asset.


Lease modifications may also prompt remeasurement of the lease liability
unless they are to be treated as separate leases.
• A lessee may elect not to apply the recognition
Recognition requirements described earlier for:
• Short-term leases; and
Exemptions • Leases for which the underlying asset is of
low-value
Short-term Lease
• A short-term lease is “a lease that, at the commencement date, has a
lease term of 12 months or less. A lease that contains a purchase
option is not a short-term lease. (PFRS 16. Appendix A)
Low valued asset
• The assessment of value is based on the value of the asset when it is
new, regardless of the age of the asset being leased.

• The assessment is performed on an absolute basis, meaning, it is not


affected by materiality or the lessee’s size, nature or circumstances.

• Examples include tablet and personal computers, small items of office


furniture and telephones.
Accounting for short-term and low-valued asset
• The lessee may elect to recognize the lease payments associated with
a (a) short-term lease or (b) lease of a low valued asset as an expense
on a straight line basis over the lease term, unless another systematic
basis is more representative of the patter of the lessee’s benefit.
Illustration: Recognition exemption – asset of low value

• On January 1, 20X1, Entity X enters into a 3-year lease of a group of


office furniture with similar nature. Entity X assesses that the lease is
a lease of an underlying asset of low value and elects to apply the
recognition exemption of PFRS 16.

• The annual lease payments, payable at the end of each year, are as
follows:
Year Amount
20X1 P8,000
20X2 12,000
20X3 14,000
Illustration: Recognition exemption – asset of low value
SEPARATING COMPONENTS OF A CONTRACT
For a contract that contains a lease component and additional lease and non-lease
components, such as the lease of an asset and the provision of a maintenance
service, lessees shall allocate the consideration payable on the basis of the relative
stand-alone prices, which shall be estimated if observable prices are not readily
available.
As a practical expedient, a lessee may elect, by class of underlying asset, not to
separate non-lease components from lease components and instead account for all
components as a lease.
Lessors shall allocate consideration in accordance with IFRS 15 Revenue from Contracts
with Customers.

The new standard IFRS 16 provides a detailed guidance to determine whether your contract
is a lease contract or a service contract (non-lease contract).
Under new IFRS 16, you need to split the rental or lease
payments into lease element and non-lease element
Examples of Non-Lease elements
• Maintenance services
• Security services
• Supply of utilities
• Supply of goods
• Supply of operational services
Illustration: Separating the components of a contract
ABC Co. enters into a 3-year contract for three machines – a printer, a binder, and
electric power converter equipment. The binding machine can be used on its own.
However, the converter is necessary to run the printer. ABC Co. would not lease a
printer without a converter, and vice versa.

The contract requires fixed annual payments of P240,000, itemized as follows:


P225,000 rent for three machines, P11,000 for maintenance, and P4,000 for
administrative tasks.
The contract includes two lease components and three non-lease components:
1) lease components: (1) lease of binder and (2) lease of printer and converter
2) Non-lease components: 3 maintenance services for the three machines

based on their relative stand-alone selling prices (i.e. for similar contracts
when got separately).
LET’S SAY…
ABC Co find out that the stand-alone prices are the following:
Binder P52,000 Maintenance of binder 4,000
Printer 180,000 Maintenance of printer 8,000
Converter 15,000 Maintenance of converter 1,000

The total consideration of P240,000 is allocated to the separately identified components as


follows:
CLASSIFICATION OF LEASES
Leases are required to be classified as either finance leases and operating
leases.

A lease is classified as a finance lease if it transfers substantially all the


risks and rewards incidental to ownership. A lease is classified as an operating
lease if it does not transfer substantially all the risks and rewards incidental to
ownership. (IAS 17)
the leased assets are of such a specialised nature that only the
lessee can use them without major modifications.
Indicators of Finance Lease
1. The lease transfers ownership of the asset to the lessee by the end of the lease
term.
2. The lessee has the option to purchase the underlying asset at a price that is
expected to be sufficiently lower than the fair value at the date the option
becomes exercisable for it to be reasonably certain, at the inception date, that
the option will be exercised
3. The lease term is for the major part of the economic life of the asset even the
title is not transferred.
4. The PV of the lease payment amounts to at least substantially all of the fair
value of the leased asset at the inception date.
EXAMPLE
On 1 January 20X1 an entity entered, as lessee, into
a five-year non-cancellable lease of a machine that has an
economic life of five years and nil residual value. On 1
January 20X1 (the inception of the lease) the fair value (cash
cost) of the machine is P100,000.
On 31 December for each of the first four years of the
lease term the lessee is required to pay the lessor P23,000.
At the end of the lease term, ownership of the
machine passes to the lessee upon payment of the final lease
payment of P23,539.
The interest rate implicit in the lease is 5 percent per
year. This rate approximates the lessee’s incremental
borrowing rate.
Analysis

The arrangement is a finance lease.

On 1 January 20X1 the lease transfers substantially all the


risks and rewards incidental to ownership from the lessor to
the lessee.

In substance the lessee now owns the machine. The lessee


is the party that benefits from the use of the leased asset
and changes in its fair value during its entire expected
economic life.
EXAMPLE
On 1 January 20X1 an entity entered, as lessee, into a five-day non-
cancellable lease of a motor vehicle that has an economic life of five years and nil
residual value. On 1 January 20X1 (the inception of the lease), the fair value (cash
cost) of the motor vehicle is P100,000.
The lessor charges the lessee P120 per day for the use of the motor vehicle. At
the end of the lease term the lessee returns the motor vehicle to the lessor.
Analysis

The arrangement is an operating lease.

The lease does not transfer substantially all the risks and rewards
incidental to ownership from the lessor to the lessee.
ACCOUNTING BY LESSORS
FINANCE LEASE
INITIAL RECOGNITION AND MEASUREMENT

A lessor shall recognise assets held under a finance lease in their statements of financial
position and present them as a receivable at an amount equal to the net investment in the
lease. The net investment in a lease is the lessor’s gross investment in the lease discounted
at the interest rate implicit in the lease.

The gross investment in the lease is the aggregate of:


(a) the minimum lease payments receivable by the lessor under a finance lease, and
(b) any unguaranteed residual value accruing to the lessor.
EXAMPLE
On 1 January 20X1 an entity acquired a machine to lease
to an independent third party under a finance lease for
P100,000. The entity immediately enters into a five-year non-
cancellable lease to transfer the right of use of a machine that
has an economic life of five years and nil residual value to
another independent third party.
The lessee is required to pay the entity four yearly
payments of P23,000 and a final payment of P23,539 payable
yearly in arrears (ie on 31 December of each year). Ownership
of the machine passes to the lessee at the end of the lease
term. The present value of the lease payments discounted at the
interest rate implicit in the lease is P100,000.
Analysis
The arrangement is a finance lease.

Therefore, the lease is recognised, and the finance lease


receivable measured the fair value of the leased property or, if lower,
the present value of the minimum lease payments.
EXAMPLE D: Analysis – JOURNAL ENTRIES
The initial recognition of the lease is:
1 January 20X1
<Dr> Machine (acquired to lease to another) P100,000
<Cr> Cash P100,000
To recognize the asset acquired to lease to an independent party.

<Dr> Finance lease receivable P100,000


<Cr> Machine (acquired to lease to another) P100,000
To recognize finance lease of an asset acquired to lease to another
ACCOUNTING BY LESSORS
FINANCE LEASE
SUBSEQUENT MEASUREMENT

The recognition of finance income shall be based on a pattern reflecting a constant


periodic rate of return on the lessor’s net investment in the finance lease.
Lease payments relating to the period, excluding costs for services, are applied
against the gross investment in the lease to reduce both the principal and the
unearned finance income.
If there is an indication that the estimated unguaranteed residual value used in
computing the lessor’s gross investment in the lease has changed significantly, the
income allocation over the lease term is revised, and any reduction in respect of
amounts accrued is recognised immediately in profit or loss.
EXAMPLE E
The facts are the same as in the previous example.

To apportion the lease payments between the finance


income and the reduction of the outstanding receivable, the rate
that produces a constant periodic rate of interest on the remaining
balance of the receivable must be established (ie the interest rate
implicit in the lease).
EXAMPLE E: Analysis – JOURNAL ENTRIES
The subsequent apportionment of the lease payments between the finance income
and the reduction of the outstanding receivable is recorded by processing the
following journal entries:

31 December 20X1
<Dr> Cash P23,000
<Cr> Profit or loss—finance income P5,000
<Cr> Finance lease receivable P18,000
To recognise apportionment of the lease payments between the finance income and the reduction of the
outstanding lease receivable.
EXAMPLE E: Analysis – JOURNAL ENTRIES
31 December 20X4
<Dr> Cash P23,000
<Cr> Profit or loss—finance income P2,163
<Cr> Finance lease receivable P20,837
To recognise apportionment of the lease payments between the finance
income and the reduction of the outstanding lease receivable.

31 December 20X5
<Dr> Cash P23,539
<Cr> Profit or loss—finance income P1,121
<Cr> Finance lease receivable P22,418
To recognise the final lease payments.
KEY POINTS :
(a) the inception of the lease is the earlier of the date of the lease agreement and
the date of commitment by the parties to the principal provisions of the lease.
(b) economic life is either:
• the period over which an asset is expected to be economically usable by one or
more users; or
• the number of production or similar units expected to be obtained from the
asset by one or more users.
(c) minimum lease payments are the payments over the lease term that the lessee
is or can be required to make, excluding contingent rent, costs for services and
taxes to be paid by and reimbursed to the lessor
KEY POINTS :
Indicators of situations that individually or in combination could also lead to a
lease being classified as a finance lease are:

a) if the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee.
b) gains or losses from the fluctuation in the residual value of the leased asset
accrue to the lessee (eg in the form of a rent rebate equaling most of the sales
proceeds at the end of the lease).
c) the lessee has the ability to continue the lease for a secondary period at a
rent that is substantially lower than market rent.
ACCOUNTING BY LESSORS
OPERATING LEASE
RECOGNITION AND MEASUREMENT

A lessor shall present assets subject to operating leases in its statement of


financial position according to the nature of the asset.

A lessor shall recognise lease income from operating leases (excluding amounts
for services such as insurance and maintenance) in profit or loss on a straight-
line basis over the lease term, unless either
a) another systematic basis is representative of the time pattern of the lessee’s benefit from
the leased asset, even if the receipt of payments is not on that basis, or
ACCOUNTING BY LESSORS
OPERATING LEASE
RECOGNITION AND MEASUREMENT

b) the payments to the lessor are structured to increase in line with expected general inflation (based
on published indexes or statistics) to compensate for the lessor’s expected inflationary cost
increases. If payments to the lessor vary according to factors other than inflation, then condition (b)
is not met.

A lessor shall recognise as an expense costs, including depreciation, incurred in


earning the lease income. The depreciation policy for depreciable leased assets shall
be consistent with the lessor’s normal depreciation policy for similar assets.
EXAMPLE
On 1 January 20X1 an entity entered, as lessor, into a five-year non-cancellable
operating lease of a building it completed constructing earlier that day at a cost of
P800,000. The building has an economic life of 60 years and nil residual value.

The entity accounts for the building as property, plant and equipment using the cost
model because the fair value of the property cannot be determined reliably without undue
cost or effort on an ongoing basis.

No lease amount is payable for the first four years of the lease. The single lease
payment of P150,000 is due on 1 January 20X5.
Analysis
The operating lease payments are accounted (ie P30,000 is recognised as income in profit or loss of
each year of the lease term —
calculation: P150,000 total lease payments ÷ 5 years = P30,000 income per year
By 1 January 20X5 the lessor would have accrued P120,000 lease receivables as a current asset
(ie P30,000 related to 20X1 + P30,000 related to 20X2 + P30,000 related to 20X3 + P30,000 related
to 20X4).

On 1 January 20X5 the lessor could recognize the following journal entry:
<Dr> Cash P150,000
<Cr> Operating lease receivable P120,000
<Cr> Lease income received in advance P 30,000
To recognize payment received from the lessee on 01 January 20X5
SALE AND LEASEBACK TRANSACTIONS
 A sale and leaseback transaction involves the
sale of an asset and the leasing back of the
same asset. The lease payment and the sale
price are unsually interdepedent because they
are negotiated as a package.

 To determine whether the transfer of an asset is


accounted for as a sale an entity applies the
requirements of IFRS 15 for determining when a
performance obligation is satisfied.
SALE AND LEASEBACK TRANSACTIONS
If an asset transfer satisfies IFRS 15’s requirements to be accounted for as a sale the
seller measures the right-of-use asset at the proportion of the previous carrying amount
that relates to the right of use retained. Accordingly, the seller only recognises the
amount of gain or loss that relates to the rights transferred to the buyer.
Illustration: Sales and Leaseback
Analysis
Analysis
Analysis
DISCLOSURE
The objective of IFRS 16’s disclosures is for information to be provided
in the notes that, together with information provided in the statement of financial
position, statement of profit or loss and statement of cash flows, gives a basis
for users to assess the effect that leases have.
***EOP***