Chapter 9

IFRS 16 Lease

International Financial Reporting Standards

(PART II)
I. Introduction, definition of lease

1982: IAS 17 Originally issued

Substance over form Present Value

Essentially unchanged for 27 years

2016:New standard IFRS 16

Different reporting
Operating Vs. Finance Lease Concept of “ Right-to-Use” in the financial
statement

IFRS 16 Leases  1 January 2019

 IAS 17 leases will no longer apply
 Early application only with IFRS 15!

Objective  To specify the principles for recognition, measurement

presentation and disclosure of leases

ZZZ IFRS 16 does Not apply to:

Î Leases to explore for/use of minerals, oil, natural gas and similar

Î Lease of biological assets (IAS 41)
Î Intellectual property licenses (IFRS 16)
Î Service concession arrangements (IFRIC 12)
Î Rights under licensing agreements (IAS 38)

1
 What is a lease?

= contract that conveys the right to use an asset for a period of time in exchange for consideration

asset

CONTRACT lessor lessee

Consideration

What is a lease?

= contract that conveys the right to use an asset for a period of time in exchange for
consideration

 In most arrangements => Very straightforward

 In some arrangements => Judgment necessary to assess

Does an arrangement contain a lease?

= throughout the period of use, the customer has both of the following rights to the identified asset:

 The right to obtain substantially all  The right to direct the use

Economic benefits

- Exclusive right of use - Decision about why and how the

- Including its primary output and asset is used
by-products - Protective rights do not limit the
right to direct the use

2
 Does an arrangement contain a lease?

= throughout the period of use, the customer has both of the following rights to the identified
asset:

Explicitly Implicitly

Capacity portion = identified asset IF:

Physically distinct OR  Substantially all of the capacity

Warehouse - Unit XYZ    Pipeline - 90%   

2
- 60 m  - 50% 

Does an arrangement contain a lease?

NO
START Q1: Is there an identified asset?
Yes

NO
Q2: The right to obtain substantially all of the economic
benefits?

Yes
Customer
Q3: The right to direct the asset’s use- customer? Supplier? Supplier
Neither party?

Neither
Yes
Q4: The right to operate the asset -customer?

NO
Yes NO
LEASE Q5: Did the customer design the asset (predetermined use)? NO
LEASE

II. Separating lease component

3
 How to separate lease component?

=> An entity accounts for a lease component SEPARATELY from a non-lease component if:

Î: The lessee can benefit from the use of asset Î: The asset is NOT highly dependent on or
interrelated with other assets in the contract

Lease component Non-lease component

- 4-year contract
-Monthly: CU 10,000 Rent of equipment Maintenance Admin
-Total: CU 480,000
- CU 9400 - CU 500
- CU 100

 Allocate CU 480,000 to rent and maintenance based on relative stand-alone price

 LESSEE do not need to separate if they elect not to

Ex

On 1 January 20X1, Worker Corp. enters into a lease contract with Rentor, for the rent of 3 printers, a
cutting system and a copy machine for 2 years. It is assumed that the machines will be returned back to
Rentor. The economic life of all machines is 5 years.

Worker will pay monthly payments of CU 5 000 for the following services:

- CU 4 700 for the rent of all machines,

- CU 200 for the maintenance of all machines,

- CU 100 to reimburse Rentor's admin costs associated with the contract.

Worker could have bought one printer for CU 60 000, a cutting system for CU 40 000 and a copy
machine for CU 45 000 when paying cash. The third party company provides similar maintenance
services for CU 30 per machine per month.

Advise Worker and Rentor how to account for the contract under IFRS 16.

Solution
1. Assessment of leases

needs to account for a right-of-use asset (no

Worker classification)

Rentor classifies a lease as operating

2. Allocation of a consideration

4
 Total consideration: 120000
Stand-alone
Item Proportion Allocated consideration
selling price
Printer 1 60,000 21.90% 26,277.37
Printer 2 60,000 21.90% 26,277.37
Printer 3 60,000 21.90% 26,277.37
Cutting system 40,000 14.60% 17,518.25
Copy machine 45,000 16.42% 19,708.03
Maintenance 9,000 3.28% 3,941.61
TOTAL 274,000 100.00% 120,000.00

3. Accounting

Worker can either:

- account for the whole contract as for the lease (i.e. total consideration of CU 120 000 = lease
payments)
- separate, and in this case:
- printers, cutting system and copy machine: recognize a right-of-use asset
and a lease liability for every machine (CU 26 277 for 1 printer, etc.)
- maintenance: recognize CU 164 (3 942/24 months) in profit or loss every
month

Rentor:
- as a lessor, he has no choice. He needs to separate contracts and account for:
- maintenance: recognize CU 164 as revenue in profit or loss every month
- rent of machines: Rentor needs to classify the leases and account for them
based on the classification (operating or finance)

III. Basic Term

IFRS 16: Key terms

Dates:

Inception of a contract Commencement date

Earlier of: = When lessor makes an underlying asset

available for use by a lessee

 Date of lease  Date of

agreement commitment by the
parties

=> Assessment of the contract is made => Accounting starts

5
 -Contract signed: 20 Jan 20X1  Assess contract on 20 Jan 20X1
-Asset taken: 1 Mar 20X1
st  Recognize right-of-use asset on 1 Mar 20X1
-1 rental payment: 1 May 20X1

Lease term = Non-cancellable period of the lease

+ period covered by an option to extend (it option exercised)
+ period covered by an option to terminate (if option not exercised)

=> Assess whether the option will be exercised:

 Terms and conditions of option  Costs of terminating the lease

 Leasehold improvements  Importance of underlying asset

-Non-cancellable term: 3 years

-Extension for another 2 years possible at market rates  Lease term = 3 years
-Lessee built expensive glass partitions  Lease term = 5 years

Lease payments = Payments made by lessee to a lessor for the right-of-use of an

underlying asset during the lease term:

 Fixed payments (also in-substance fixed payments) less any lease incentives
 Variable payments depending on an index or a rate
 Include at prevailing rate/index at measurement date: remeasure only when changed
Exercise price of purchase option (if to be exercised)
Penalties for terminating the lease
Residual value guarantees
IV. Lessee Accounting:

1.At commencement

Leases: Accounting by lessees

!!! No classification of leases!!!

AT THE COMMENCEMENT

Right-of-use asset Lease Liability

 Amount for lease liability

 Lease payments before/on Lease payments not paid at the commencement date
commencement date-lease
incentive
 Initial direct costs Discounted
 Estimate of dismantling costs Interest rate implicit in the lease

6
 Except for (optional)

Lease term < 1 year Underlying asset of low value when new

=> Lease payments on a straight-line (or another systematic) basis

Ex.
On 1 January 20X1 Worker rents a car under the lease contract. The lease term is for 1 year, with the option to
extend the lease with the same lease payments for another year. At the lease commencement date, Worker
concludes that the option will not be exercised, because for the same rentals, the new car can be leased and also
it's been Worker's practice to change the cars after 1 year.

Monthly lease payments are CU 10 000 and Worker incurred the legal cost of CU 1 200 associated with
negotiating the lease contract.

How would this transaction appear in the financial statements of Worker at 31 December 20X1?

Solution

1. Assessment at the lease commencement

The lease term = 1 year

Reasons:
- option to extend is at market rentals
- common practice of Worker

Short-term lease
- exemption can be applied

2. Journal entries:

2.1 Transaction cost:

Debit Prepayments 1,200
Credit Cash -1,200

Debit P/L - Lease expenses 100 on a monthly basis

Credit Prepayments -100

2.2 Monthly rentals:

Debit P/L - Lease expenses 10,000
Credit Cash -10,000

7
 How to determine the appropriate Discount rate ?

Lessor Lessee

=> Interest rate implicit in the lease (IRR)  Interest rate implicit in the lease (IRR)
(Difficult to determine)

 Incremental borrowing rate

 PV of lease payments  Similar term and security
 FV of underlying asset
+  Observable rates
+
 PV of unguaranteed residual
 Lessor’s initial direct cost
value

Ex

The same situation as above, but this time, Worker has an option to extend the lease term for CU 5 000 per
month (1/2 of market rentals). Due to this favorable condition, Worker expects to extend the lease term.

Monthly lease payments are CU 10 000 in arrears and Worker incurred the legal cost of CU 1 200 associated
with negotiating the lease contract.

How would this transaction appear in the financial statements of Worker at 31 December 20X1?

Assume incremental borrowing rate = 3% p.a., the fair value of the car is CU 230 000.

3. Assessment at the lease commencement

The lease term = 2 years

Reasons:
- option to extend is at below market rentals

Regular lease (extended lease term)

4. Initial measurement:

Annual discount rate: 3.00% Monthly discount rate:

Formula used: =(1+annual rate)^(1/12)-1
Monthly discount rate: 0.25%

8
 Present
Lease Discoun value of
Month
payment t factor lease
payment
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
= lease liability at the
Total commencement date

Discount factor =
1/(1+rate)^month

5. Journal entries - initial recognition

Debit Right-of-use asset 176,627

Credit Lease liability -175,427
Credit Cash -1,200

2.After the commencement

9
 Leases: Accounting by lessees

AFTER THE COMMEMCEMENT

Right-of-use asset Lessee liability

Interest on the LL Constant

Debit: Credit:
periodic
P/L – Depreciation Ex. ROU – Accumulated depr.
interest rate

 Cost model (IAS 16)

 Fair value model (IAS 40) Debit: P/L interest Credit: lease liability
 Revaluation model (IAS 16)
 Impairment test (IAS 36)
Reduction of the LL

Debit: Lease liability Credit: Cash

Ex.

10
6. Subsequent measurement

Lease Lease
Lease Decrease in
Month liability Interest liability
payment lease liability
b/f c/f
1 175,427 -10,000 -433 -9,567 165,860
2 165,860 -10,000 -409 -9,591 156,269
3 156,269 -10,000 -385 -9,615 146,655
4 146,655 -10,000 -362 -9,638 137,016
5 137,016 -10,000 -338 -9,662 127,354
6 127,354 -10,000 -314 -9,686 117,668
7 117,668 -10,000 -290 -9,710 107,959
8 107,959 -10,000 -266 -9,734 98,225
9 98,225 -10,000 -242 -9,758 88,467
10 88,467 -10,000 -218 -9,782 78,685
11 78,685 -10,000 -194 -9,806 68,879
12 68,879 -10,000 -170 -9,830 59,049
13 59,049 -5,000 -146 -4,854 54,195
14 54,195 -5,000 -134 -4,866 49,328
15 49,328 -5,000 -122 -4,878 44,450
16 44,450 -5,000 -110 -4,890 39,560
17 39,560 -5,000 -98 -4,902 34,657
18 34,657 -5,000 -85 -4,915 29,743
19 29,743 -5,000 -73 -4,927 24,816
20 24,816 -5,000 -61 -4,939 19,877
21 19,877 -5,000 -49 -4,951 14,926
22 14,926 -5,000 -37 -4,963 9,963
23 9,963 -5,000 -25 -4,975 4,988
24 4,988 -5,000 -12 -4,988 0
Total -175,427

7. Journal entries - subsequent measurement

1st monthly payment:

Debit P/L-Interest expense 433
Debit Lease liability 9,567
Credit Cash -10,000
0

Total for the year 20X1:

Debit P/L-Interest expense 3,622
Debit Lease liability 116,378
Credit Cash -120,000
0
Depreciation of right-of-use asset:

Debit P/L - Depreciation 88,314

Credit Right-of-use asset (depr.) -88,314
0

11
On 1 January 20X1 Stamper Co, producer of metal casts, enters into a lease contract to lease the
stamping machine. Cash price of machine was 500 000 EUR and Stamper incurred additional costs of
2 000 EUR for arranging the lease contract. The lessors initial direct costs were CU 3 000. Economic
life of stamping machine is 6 years. Lease term is 5 years, annual lease payments are 110 000 EUR
payable 31 December each year. At the end of the lease term, Stamper has an obligation to purchase
the machine for 1 000 EUR. There is no unguaranteed residual value of the lessor.

How would this transaction appear in the financial statements of Stamper Co. at 31 December 20X1?

1. Initial recognition

1.1 Interest rate implicit in the lease:

- put lease payments in the table
- at the lease commencement, put FV of an asset plus lessor's initial direct costs.
- lease commencement = year 0. If the lease payments are in advance, then deduct the 1st
payment from the FV of an asset + lessor's initial direct costs
- to the last period, add unguaranteed residual value of the lessor (it's 0 in this case),
- don't forget to add any price of exercising the option, etc. (here: 1 000 added to the last lease
payment)

Year Cash flow

Lease commencement 0 503,000
20X1 1 -110,000
20X2 2 -110,000
20X3 3 -110,000
20X4 4 -110,000
20X5 5 -111,000
3.11%

1.2 Present value of the lease payments:

- you don't have to calculate it again - it's 503 000, isn't it? But, let me prove it you in the table
below:

Present value
Lease Discount
Year of lease
payment factor
payments
1 -110,000 0.970 -106,679
2 -110,000 0.941 -103,458
3 -110,000 0.912 -100,334
4 -110,000 0.885 -97,305
5 -111,000 0.858 -95,225
Total -503,000

1.3 Right-of-use asset:

PV of the minimum lease payments: 503,000

Initial direct costs of the lessee: 2,000
505,000

12
 1.4 Journal entry

Recognition of asset / lease liability:

Debit Right-of-use asset 505,000

Credit Cash -2,000
Credit Lease liability -503,000
0

2. Subsequent measurement

2.1 Allocation of the lease payments

Decrease in
Lease liability Lease Lease
Year Interest lease
b/f payment liability c/f
liability
1 -503,000 -110,000 -15,660 -94,340 -408,660
2 -408,660 -110,000 -12,723 -97,277 -311,383
3 -311,383 -110,000 -9,694 -100,306 -211,077
4 -211,077 -110,000 -6,571 -103,429 -107,649
5 -107,649 -111,000 -3,351 -107,649 0
-503,000

2.2 Calculation of depreciation

Cost of right-of-use asset: 505,000

Useful life in years: 6
Annual depreciation charge (505 000 / 6): 84,167

2.3 Journal entries

Depreciation of Annual payment in the 1st

ROU: year:
Debit Depreciation expenses 84,167 Debit Interest expense 15,660
Credit Accum. dep. - ROU -84,167 Debit Finance lease liability 94,340
0 Credit Cash -110,000

3.Variable Payment, Initial direct cost

13
 Leases: Accounting by lessees

Complications
Variable lease payments

Do they depend on the index or rate?

 Included in the lease payments  Excluded from the lease payments

 Measured at the rate prevalent at the  In profit or loss
measurement date
Ex.

On 1 February 20X1 Worker enters into a 4-year lease of the office space. The information about the
contract is as follows:
- Monthly payment is CU 2 000 at the time of the lease commencement.
- Every 2 years on 1 February, the monthly payments are adjusted for the annual inflation rate
prevalent at the time of adjustment.
- If Worker installs new window blinds, then the lease payments decrease by CU 200 per month for the
period of 1 year.
Worker incurred the following expenditures related to the contract:
- Legal fees associated with the contract: CU 5 000
- Salary of an employee who negotiated the contract: CU 10 000 (allocated based on the hourly wage)
The property owner (lessor) provided a 3-month rent-free period to Worker as an initial bonus. Worker
took the office space on 1 March 20X1, but due to unexpected events, Worker moved in the office
space on 1 May 20X1.
Inflation rates: in 20X1 - 2%, 20X2 - 2.3%, 20X3 - 2.1%. Incremental borrowing rate is 4% p.a.
How would this transaction appear in the financial statements of Worker at 31 December 20X1?

1. Initial measurement:

Annual discount rate: 4.00% Monthly discount rate:

Formula used: =(1+annual rate)^(1/12)-1
Monthly discount rate: 0.33%

Month 1 = lease commencement = 1 March 20X1

14
 Month Lease payment Discount factor Present value of lease payment
03/20X1 1 0 0.997 0
04/20X1 2 0 0.993 0
05/20X1 3 0 0.990 0
06/20X1 4 -2,000 0.987 -1,974
07/20X1 5 -2,000 0.984 -1,968
08/20X1 6 -2,000 0.981 -1,961
09/20X1 7 -2,000 0.977 -1,955
10/20X1 8 -2,000 0.974 -1,948
11/20X1 9 -2,000 0.971 -1,942
12/20X1 10 -2,000 0.968 -1,936
01/20X2 11 -2,000 0.965 -1,929
02/20X2 12 -2,000 0.962 -1,923
03/20X2 13 -2,000 0.958 -1,917
04/20X2 14 -2,000 0.955 -1,911
05/20X2 15 -2,000 0.952 -1,904
06/20X2 16 -2,000 0.949 -1,898
07/20X2 17 -2,000 0.946 -1,892
08/20X2 18 -2,000 0.943 -1,886
09/20X2 19 -2,000 0.940 -1,880
10/20X2 20 -2,000 0.937 -1,873
11/20X2 21 -2,000 0.934 -1,867
12/20X2 22 -2,000 0.931 -1,861
01/20X3 23 -2,000 0.928 -1,855
02/20X3 24 -2,000 0.925 -1,849
03/20X3 25 -2,000 0.922 -1,843
04/20X3 26 -2,000 0.919 -1,837
05/20X3 27 -2,000 0.916 -1,831
06/20X3 28 -2,000 0.913 -1,825
07/20X3 29 -2,000 0.910 -1,819
08/20X3 30 -2,000 0.907 -1,813
09/20X3 31 -2,000 0.904 -1,807
10/20X3 32 -2,000 0.901 -1,801
11/20X3 33 -2,000 0.898 -1,796
12/20X3 34 -2,000 0.895 -1,790
01/20X4 35 -2,000 0.892 -1,784
02/20X4 36 -2,000 0.889 -1,778
03/20X4 37 -2,000 0.886 -1,772
04/20X4 38 -2,000 0.883 -1,766
05/20X4 39 -2,000 0.880 -1,761
06/20X4 40 -2,000 0.877 -1,755
07/20X4 41 -2,000 0.875 -1,749
08/20X4 42 -2,000 0.872 -1,743
09/20X4 43 -2,000 0.869 -1,738
10/20X4 44 -2,000 0.866 -1,732
11/20X4 45 -2,000 0.863 -1,726
12/20X4 46 -2,000 0.860 -1,721
01/20X5 47 -2,000 0.858 -1,715
02/20X5 48 -2,000 0.855 -1,710
Total -82,742

15
 2. Journal entries - initial recognition

Debit Right-of-use asset 87,742

Credit Lease liability -82,742
Credit Cash -5,000

Leases: Accounting by lessees

Complications
Initial direct costs

= Incremental costs of obtaining a lease that would NOT have been incurred without the lease
(except for manufacturer or dealer lessors)

 Internal costs
 Legal fees (contract drafting…)  Certain legal advices
 Commissions

Ex.
3. Subsequent measurement

Decrease Lease
Lease liability Lease
Month Interest in lease liability
b/f payment
liability c/f
03/20X1 1 -82,742 0 -271 271 -83,013
04/20X1 2 -83,013 0 -272 272 -83,285
05/20X1 3 -83,285 0 -273 273 -83,558
06/20X1 4 -83,558 -2,000 -274 -1,726 -81,831
07/20X1 5 -81,831 -2,000 -268 -1,732 -80,099
08/20X1 6 -80,099 -2,000 -262 -1,738 -78,361
09/20X1 7 -78,361 -2,000 -257 -1,743 -76,618
10/20X1 8 -76,618 -2,000 -251 -1,749 -74,869
11/20X1 9 -74,869 -2,000 -245 -1,755 -73,114
12/20X1 10 -73,114 -2,000 -239 -1,761 -71,353
01/20X2 11 -71,353 -2,000 -234 -1,766 -69,587
02/20X2 12 -69,587 -2,000 -228 -1,772 -67,815
03/20X2 13 -67,815 -2,000 -222 -1,778 -66,037
04/20X2 14 -66,037 -2,000 -216 -1,784 -64,253
05/20X2 15 -64,253 -2,000 -210 -1,790 -62,463
06/20X2 16 -62,463 -2,000 -204 -1,796 -60,668
07/20X2 17 -60,668 -2,000 -199 -1,801 -58,866
08/20X2 18 -58,866 -2,000 -193 -1,807 -57,059
09/20X2 19 -57,059 -2,000 -187 -1,813 -55,246
10/20X2 20 -55,246 -2,000 -181 -1,819 -53,427
11/20X2 21 -53,427 -2,000 -175 -1,825 -51,601
12/20X2 22 -51,601 -2,000 -169 -1,831 -49,770
01/20X3 23 -49,770 -2,000 -163 -1,837 -47,933
02/20X3 24 -47,933 -2,000 -157 -1,843 -46,090
03/20X3 25 -46,090 -2,000 -151 -1,849 -44,241
04/20X3 26 -44,241 -2,000 -145 -1,855 -42,386
05/20X3 27 -42,386 -2,000 -139 -1,861 -40,525
16
 06/20X3 28 -40,525 -2,000 -133 -1,867 -38,657
07/20X3 29 -38,657 -2,000 -127 -1,873 -36,784
08/20X3 30 -36,784 -2,000 -120 -1,880 -34,904
09/20X3 31 -34,904 -2,000 -114 -1,886 -33,019
10/20X3 32 -33,019 -2,000 -108 -1,892 -31,127
11/20X3 33 -31,127 -2,000 -102 -1,898 -29,229
12/20X3 34 -29,229 -2,000 -96 -1,904 -27,324
01/20X4 35 -27,324 -2,000 -89 -1,911 -25,414
02/20X4 36 -25,414 -2,000 -83 -1,917 -23,497
03/20X4 37 -23,497 -2,000 -77 -1,923 -21,574
04/20X4 38 -21,574 -2,000 -71 -1,929 -19,645
05/20X4 39 -19,645 -2,000 -64 -1,936 -17,709
06/20X4 40 -17,709 -2,000 -58 -1,942 -15,767
07/20X4 41 -15,767 -2,000 -52 -1,948 -13,818
08/20X4 42 -13,818 -2,000 -45 -1,955 -11,864
09/20X4 43 -11,864 -2,000 -39 -1,961 -9,903
10/20X4 44 -9,903 -2,000 -32 -1,968 -7,935
11/20X4 45 -7,935 -2,000 -26 -1,974 -5,961
12/20X4 46 -5,961 -2,000 -20 -1,980 -3,980
01/20X5 47 -3,980 -2,000 -13 -1,987 -1,993
02/20X5 48 -1,993 -2,000 -7 -1,993 0
Total -82,742

4. Journal entries - subsequent measurement

1st month:
Debit P/L - Interest expense 271
Credit Lease liability -271

Total for the year 20X1:

Debit P/L - Interest expense 2,611

Debit Lease liability 11,389
Credit Cash -14,000

Depreciation of right-of-use asset:

Debit P/L - Depreciation 18,280

Credit Right-of-use asset (depr.) -18,280
4.Remeasurement of the lease contract

Leases: Accounting by lessees

Complications Re-Measurement

17
  After the commencement date: => Lessee remeasures Not below 0, rest in P/L

Lease liability As an adjustment Right-of-use asset

How? => Discount revised lease payment

Revised discount rate Unchanged discount rate

WHEN? Change in lease term Change in amounts for residual value

Change in option to purchase assessment Change in future payments due to index/rate

Ex.
Example 4 continues:
On 1 February 20X3, Worker completed the installation of new window blinds and as a result, the
lease payments will decrease by CU 200 monthly for the next 12 months (starting in February 20X3).
Also, the lease payments are adjusted by the inflation rate as agreed in the contract.
How would these transactions appear in the financial statements of Worker at 31 December 20X3?

1. Remeasurement of the lease liability

The new lease payment: 2,042

(CU 2 000 x 1,021)

Discount rate: 0.33%

18
 Present
Lease Discount value of
Month
payment factor lease
payment
02/20X3 1 -2,042 0.997 -2,035
03/20X3 2 -2,042 0.993 -2,029
04/20X3 3 -2,042 0.990 -2,022
05/20X3 4 -2,042 0.987 -2,015
06/20X3 5 -2,042 0.984 -2,009
07/20X3 6 -2,042 0.981 -2,002
08/20X3 7 -2,042 0.977 -1,996
09/20X3 8 -2,042 0.974 -1,989
10/20X3 9 -2,042 0.971 -1,983
11/20X3 10 -2,042 0.968 -1,976
12/20X3 11 -2,042 0.965 -1,970
01/20X4 12 -2,042 0.962 -1,963
02/20X4 13 -2,042 0.958 -1,957
03/20X4 14 -2,042 0.955 -1,951
04/20X4 15 -2,042 0.952 -1,944
05/20X4 16 -2,042 0.949 -1,938
06/20X4 17 -2,042 0.946 -1,932
07/20X4 18 -2,042 0.943 -1,925
08/20X4 19 -2,042 0.940 -1,919
09/20X4 20 -2,042 0.937 -1,913
10/20X4 21 -2,042 0.934 -1,907
11/20X4 22 -2,042 0.931 -1,900
12/20X4 23 -2,042 0.928 -1,894
01/20X5 24 -2,042 0.925 -1,888
02/20X5 25 -2,042 0.922 -1,882
= lease liability at the
Total -48,940 remeasurement date date

Adjustment:
Lease liability before remeasurement: 47,933
Lease liability at the remeasurement date: 48,940

Change: 1,007

Right-of-use asset before the remeasurement:

Cost: 87,742
Depreciation for 23 months: 42,043
Carrying amount: 45,699

New carrying amount: 46,706

New monthly depreciation (25 months) 1,868

19
2. Subsequent measurement:

Lease
Lease Lease Decrease in
Month Interest liability
liability b/f payment lease liability
c/f
02/20X3 1 -48,940 -2,042 -160 -1,882 -47,058
03/20X3 2 -47,058 -2,042 -154 -1,888 -45,170
04/20X3 3 -45,170 -2,042 -148 -1,894 -43,276
05/20X3 4 -43,276 -2,042 -142 -1,900 -41,376
06/20X3 5 -41,376 -2,042 -135 -1,907 -39,469
07/20X3 6 -39,469 -2,042 -129 -1,913 -37,556
08/20X3 7 -37,556 -2,042 -123 -1,919 -35,637
09/20X3 8 -35,637 -2,042 -117 -1,925 -33,712
10/20X3 9 -33,712 -2,042 -110 -1,932 -31,780
11/20X3 10 -31,780 -2,042 -104 -1,938 -29,842
12/20X3 11 -29,842 -2,042 -98 -1,944 -27,898
01/20X4 12 -27,898 -2,042 -91 -1,951 -25,947
02/20X4 13 -25,947 -2,042 -85 -1,957 -23,990
03/20X4 14 -23,990 -2,042 -79 -1,963 -22,027
04/20X4 15 -22,027 -2,042 -72 -1,970 -20,057
05/20X4 16 -20,057 -2,042 -66 -1,976 -18,081
06/20X4 17 -18,081 -2,042 -59 -1,983 -16,098
07/20X4 18 -16,098 -2,042 -53 -1,989 -14,109
08/20X4 19 -14,109 -2,042 -46 -1,996 -12,113
09/20X4 20 -12,113 -2,042 -40 -2,002 -10,110
10/20X4 21 -10,110 -2,042 -33 -2,009 -8,102
11/20X4 22 -8,102 -2,042 -27 -2,015 -6,086
12/20X4 23 -6,086 -2,042 -20 -2,022 -4,064
01/20X5 24 -4,064 -2,042 -13 -2,029 -2,035
02/20X5 25 -2,035 -2,042 -7 -2,035 0
Total -48,940

3. Journal entries:

Remeasurement:

Debit Right-of-use asset 1,007

Credit Lease liability -1,007
0
Lease payment - Feb 20X3:

Debit P/L - Interest expense 160

Debit Lease liability 1,882
Credit Cash -1,842
Credit P/L Variab.lease p -200
0
Depreciation of right-of-use asset (monthly)

Debit P/L - Depreciation 1,868

Credit Right-of-use asset (depr.) -1,868

20
On 1 January 20X1, Delia enters into a 4-year lease of the office space. The information about the
contract is as follows:
- Annual payment is CU 25 000 payable in the beginning of each year;
- After 4 years, Delia has an option to extend the lease for another 2 years for the annual rental
payment of CU 25 000 adjusted by the inflation rate prevalent after 4 years. At the lease
commencement, Delia assumes that this option will NOT be exercised, because of significant increase
of new hires and the need to rent a bigger office space.
- Delia paid CU 3 000 to the real estate agent for finding the right property and arranging the lease
contract.
Inflation rate in 20X5: 2.2% p.a., incremental borrowing rate: 4% p.a.
How would this transaction appear in the financial statements of Delia at 31 December 20X1?

1. Initial recognition

Annual discount rate: 4.00%

Present value
Lease Discount
Year of lease
payment factor
payment
20X1 0 -25,000 1.000 -25,000
20X2 1 -25,000 0.962 -24,038
20X3 2 -25,000 0.925 -23,114
20X4 3 -25,000 0.889 -22,225
-94,377

Journal entry:

Debit Right-of-use asset 97,377

Credit Lease liability -94,377
Credit Cash -3,000

2. Subsequent measurement

Decrease Lease
Lease liability Lease
Year Interest in lease liability
b/f payment
liability c/f
20X1 0 -94,377 -25,000 0 -25,000 -69,377
20X2 1 -69,377 -25,000 -2,775 -22,225 -47,152
20X3 2 -47,152 -25,000 -1,886 -23,114 -24,038
20X4 3 -24,038 -25,000 -962 -24,038 0
-94,377
Journal entries in 20X1:

Annual depreciation of right-of-use

asset:

Debit Depreciation expenses 24,344

Credit Accum. dep. - ROU -24,344

21
 Annual payment in the 1st year:

Debit Lease liability 25,000

Credit Cash -25,000

Interest accrual in 20X1:

Note: You need to do interest accruals only when

payments are in advance (in the beginning of the
Debit P/L - Interest expenses 2,775 period).
The reason is that in the second payment (1-Jan-
Credit Accruals -2,775 20X2), you pay the interest for 20X1 in fact.

Annual payment in the 2nd year:

Debit Lease liability 22,225

Debit Accruals 2,775
Credit Cash -25,000

On 1 January 20X3, after the third payment was made, Delia's managers believe that no new
employees will be hired due to the economic crisis. As a result, Delia's management changes its plan
not to exercise the option to extend the lease and now they assume that the lease will be extended by
another 2 years.
How should Delia recognize these transactions in its financial statements?
The incremental borrowing rate prevalent in 20X3 is 3.5% p.a.

3. Remeasurement of the lease liability

Discount rate: 3.50%

Present value
Lease Discount
Year of lease
payment factor
payments
20X4 1 -25,000 0.966 -24,155
20X5 2 -25,000 0.934 -23,338
20X6 3 -25,000 0.902 -22,549
Total -70,041

Adjustment:
Lease liability before remeasurement: -24,038
Lease liability at the remeasurement date: -70,041

Change: -46,002

Right-of-use asset before the remeasurement:

Cost: 97,377
Depreciation for 2 years: 48,689
Carrying amount: 48,689

New carrying amount: 94,691

New annual depreciation (4 years) 23,673

22
 Lease Lease Decrease in Lease
Year Interest
liability b/f payment lease liability liability c/f

20X3 1 -70,041 0 0 0 -70,041

20X4 2 -70,041 -25,000 -2,451 -22,549 -47,492
20X5 3 -47,492 -25,000 -1,662 -23,338 -24,155
20X6 4 -24,155 -25,000 -845 -24,155 0
Total -70,041

4. Journal entries:

Remeasurement in 20X3:

Debit Right-of-use asset 46,002

Credit Lease liability -46,002

Interest accrued for 20X3:

Debit P/L - Interest expenses 2,451

Credit Accruals -2,451

Lease payment - Jan 20X3:

Debit Accruals 1,886

Debit Lease liability 23,114
Credit Cash -25,000

Lease payment - Jan 20X4:

Debit Accruals 2,451

Debit Lease liability 22,549
Credit Cash -25,000

5.Lease modification

Leases: Accounting by lessees

Lease modifications

=Change in the scope, or consideration that was NOT part of original terms

23
 Are the rights added to the lease contract to use one
or more underlying assets? NO

LEASE MODIFICATION
YES
=
CHANGE IN EXISTING
Does the consideration increase commensurate with NO LEASE
the stand-alone price for the increase in scope? (any
adjustments reflect circumstances of the contract)

YES

LEASE MODIFICATION= SEPARATE LEASE Ex.

On 1 January 20X1, Celia enters into an 8-year lease contract for 3 000 square meters of office space.
Annual lease payment is CU 120 000 payable on 31 December each year.
On 1 January 20X5, Celia and the property owner agree to amend the original lease for the remaining
4 years to include additional 4 000 square meters of office space. As a result, the lease payment
increases to CU 260 000 per year.
How should Celia account for the lease modification?
Note: Celia's incremental borrowing rate is 5% in 20X1 and 6% in 20X5.
1. Assessment

Does the modification add the right to use one or more assets? YES
Separate Lease
Does the consideration increase commensurate with the stand-alone
price? YES

Original consideration: 40 per square meter per year

Modified consideration: 37 per square meter per year

Discount (reasonable, reflecting the same lessee, no additional

cost..)

2. Initial recognition

Annual discount rate: 5.00%

24
 Present value
Lease Discount
Year of lease
payment factor
payment
20X1 1 -120,000 0.952 -114,286
20X2 2 -120,000 0.907 -108,844
20X3 3 -120,000 0.864 -103,661
20X4 4 -120,000 0.823 -98,724
20X5 5 -120,000 0.784 -94,023
20X6 6 -120,000 0.746 -89,546
20X7 7 -120,000 0.711 -85,282
20X8 8 -120,000 0.677 -81,221
-775,586
Journal entry:

Debit Right-of-use asset 775,586

Credit Lease liability -775,586

2. Subsequent measurement

Decrease
Lease liability Lease Lease
Year Interest in lease
b/f payment liability c/f
liability
20X1 1 -775,586 -120,000 -38,779 -81,221 -694,365
20X2 2 -694,365 -120,000 -34,718 -85,282 -609,083
20X3 3 -609,083 -120,000 -30,454 -89,546 -519,537
20X4 4 -519,537 -120,000 -25,977 -94,023 -425,514
20X5 5 -425,514 -120,000 -21,276 -98,724 -326,790
20X6 6 -326,790 -120,000 -16,339 -103,661 -223,129
20X7 7 -223,129 -120,000 -11,156 -108,844 -114,286
20X8 8 -114,286 -120,000 -5,714 -114,286 0
-775,586

Journal entries in 20X1:

Annual depreciation of right-of-use asset:

Debit Depreciation expenses 96,948

Credit Accum. dep. - ROU -96,948

Annual payment in the 1st year:

Debit P/L-Interest paid 38,779

Debit Lease liability 81,221
Credit Cash -120,000

3. Lease modification

Discount rate: 6.00%

25
 Present value
Lease Discount
Year of lease
payment factor
payments
20X5 1 -140,000 0.943 -132,075
20X6 2 -140,000 0.890 -124,600
20X7 3 -140,000 0.840 -117,547
20X8 4 -140,000 0.792 -110,893
Total -485,115

Journal entry:

Debit Right-of-use asset 485,115

Credit Lease liability -485,115

Subsequent measurement of the

modification:

Decrease
Lease Lease
Year Lease payment Interest in lease
liability b/f liability c/f
liability
20X5 1 -485,115 -140,000 -29,107 -110,893 -374,222
20X6 2 -374,222 -140,000 -22,453 -117,547 -256,675
20X7 3 -256,675 -140,000 -15,400 -124,600 -132,075
20X8 4 -132,075 -140,000 -7,925 -132,075 0
Total -485,115

4. Journal entries in 20X5 - total contract:

Depreciation of the right-of-use assets:

Original
lease Modification TOTAL
Debit P/L - Depreciation charge 96,948 121,279 218,227
Credit Right-of-use asset -96,948 -121,279 -218,227

Lease payment - Dec 20X5

Debit P/L Interest expense 21,276 29,107 50,383

Debit Lease liability 98,724 110,893 209,617
Credit Cash -120,000 -140,000 -260,000

26
 Lease modifications

=Change in the scope, or consideration that was NOT part of original terms

Lessee accounts:

 Allocates the consideration in modify contract

LEASE MODIFICATION  Determines the lease term of the modify lease
=
CHANGE IN EXISTING  Applies revised discount rate to re-measure the lease
LEASE liability

 Adjustment to right-of-use asset Ex.

On 1 January 20X1, Melinda enters into an 8-year lease contract for 5 000 square meters of office
space. Annual lease payment is CU 200 000 payable on 31 December each year..
On 1 January 20X5, Melinda and the property owner agree to amend the original lease for the
remaining 4 years to decrease the leased office space to only 3 000 square meters. As a result, the lease
payment decreases to CU 130 000 per year.
How should Melinda account for the lease modification?
Note: Melinda's incremental borrowing rate is 5% in 20X1 and 6% in 20X5.

1. Assessment

Does the modification add the right to use one or more assets? NO Change in the original lease
Not a separate lease

2. Initial recognition

Annual discount rate: 5.00%

Lease Discount Present value of lease

Year
payment factor payment
20X1 1 -200,000 0.952 -190,476
20X2 2 -200,000 0.907 -181,406
20X3 3 -200,000 0.864 -172,768
20X4 4 -200,000 0.823 -164,540
20X5 5 -200,000 0.784 -156,705
20X6 6 -200,000 0.746 -149,243
20X7 7 -200,000 0.711 -142,136
20X8 8 -200,000 0.677 -135,368
-1,292,643

27
Journal entry:

Debit Right-of-use asset 1,292,643

Credit Lease liability -1,292,643

2. Subsequent measurement

Decrease in
Lease
Year Lease payment Interest lease Lease liability c/f
liability b/f
liability
20X1 1 -1,292,643 -200,000 -64,632 -135,368 -1,157,275
20X2 2 -1,157,275 -200,000 -57,864 -142,136 -1,015,138
20X3 3 -1,015,138 -200,000 -50,757 -149,243 -865,895
20X4 4 -865,895 -200,000 -43,295 -156,705 -709,190
20X5 5 -709,190 -200,000 -35,460 -164,540 -544,650
20X6 6 -544,650 -200,000 -27,232 -172,768 -371,882
20X7 7 -371,882 -200,000 -18,594 -181,406 -190,476
20X8 8 -190,476 -200,000 -9,524 -190,476 0
-1,292,643

Journal entries in 20X1:

Annual depreciation of right-of-use asset:

Debit Depreciation expenses 161,580

Credit Accum. dep. - ROU -161,580

Annual payment in the 1st year:

Debit P/L-Interest paid 64,632

Debit Lease liability 135,368
Credit Cash -200,000

3. Lease modification

Discount rate: 6.00%

Present value
Lease Discount
Year of lease
payment factor
payments
20X5 1 -130,000 0.943 -122,642
20X6 2 -130,000 0.890 -115,700
20X7 3 -130,000 0.840 -109,151
20X8 4 -130,000 0.792 -102,972
Total -450,464

The proportionate decrease in the lease liability / ROU:

Original office space: 5,000 sq meters

Modified office space: 3,000 sq meters
%: 60.00%

28
Reduction of pre-modification ROU:
Cost of ROU: 1,292,643
Accumulated
depreciation: -646,321
Carrying amount before modification: 646,321
Reduced to 60%: 387,793
Difference: 258,529

Reduction of pre-modification lease liability:

Lease liability @31-Dec-20X4 -709,190
Reduced to 60%: -425,514
Difference: -283,676

Reduced pre-modification lease liability: -425,514

Modified lease liability: -450,464
Difference: 24,950

4. Journal entries

Modification adjustment - proportionate reduction in the lease liability+ROU

Debit Lease liability 283,676

Credit ROU -258,529
Credit P/L - Gain on the lease modification -25,148

Modification adjustment - difference between reduced and modified lease

liability:

Debit ROU 24,950

Credit Lease liability -24,950

Depreciation charge of ROU in 20X5:

Debit P/L - Depreciation charge 103,186

Credit Right-of-use asset -103,186

Lease payment @ 31-Dec-20X5:

Debit P/L Interest expense 27,028

Debit Lease liability 102,972
Credit Cash -130,000

Leases: Presentation & Disclosures (lessee)

Presentation:

 Present right-of-use asset separately from other assets

=> Or disclose in the notes
 Present lease liabilities separately from other liabilities

 Present interest on the lease liability separately from depreciation of ROU asset
 Cash flows:

29
 - Payments for principal: => Financing activities

- Payments for interest: => Choice(Financing or operating)

- Payments for short-term leases, low-value asset leases and

variable payment not within lease liability => Operating activities

Disclosures:

1. Disclosures of assets, liabilities, expenses and cash flows:

 In tabular format

- Depreciation of ROU by class -Income from subleasing of ROU assets

-Interest expense on lease liabilities -Cash outflow for leases
-Expense related to short-term leases -Additions to ROU assets
-Expense related to low-value leases -Gains/losses froms sale and leaseback
-Expense related to variable LP not within LL -Carrying amount of ROU by class

2.Additional disclosures

IV. Lessors

1.Classification of lease

Accounting by lessors: Classification of Leases

Are risks and rewords of ownership transferred to lessee?

RISKS REWARDS

Finance Lease Operating Lease

Situations: Ownership transferred by the end of lease term

Option to purchase the asset at price < fair value
Present value of lease payments => close to fair value
Leased assets are of specialized nature

30
 Indicator: If lessee can cancel the lease => lessor’s losses are born by lessee
Gains or losses from fluctuation accrue to the lessee
Lessee can continue the lease for secondary period at rent < Market rent

Ex.

LorryCars, the leasing company, plans to enter into a lease contract with Lessie and there are 2 options
of how the lease contract can be structured:

General information:
1. Lorry would be leased for 4 years under the non-cancellable lease that starts 1 January 20X1.
2. Rentals are paid annually on 31 December starting year 20X1.
3. In these rentals, the insurance fee of 300 CU is included.
4. At the end of lease, lorry would have market value of 12 400 CU.
5. Normal economic life of lorry is 6 years.
6. LorryCars sells this type of lorries for 35 000 CU when paid cash.
7. LorryCar's incremental borrowing rate is 3% (and it is close to the rate implicit in the lease).
Option 1: Lessie would pay annual rentals amounting to 6 800 CU. At the end of the lease term,
Lessie has an option to buy lorry for its market value or lease it for additional 2 years with the same
rental fees.
Option 2: Lessie would pay annual rentals amounting to 9 500 CU. At the end of the lease term,
Lessie has an option to buy lorry either for 200 CU, or lease it for another 2 years with rental fee of
100 CU per annum.
Advise LorryCars on correct classification of above presented leases.

1. Present value of the lease payments

Option 1 Option 2
Present
Discount factor Present value
Year Cash flow value (cash Cash flow
1/(1+0,03)^year (cash flow*DF)
flow*DF)
1 0.971 6,500.00 6,310.68 9,200.00 8,932.04
2 0.943 6,500.00 6,126.87 9,200.00 8,671.88
3 0.915 6,500.00 5,948.42 9,200.00 8,419.30
4 0.888 6,500.00 5,775.17 9,400.00 8,351.78
Total 24,161.14 34,375.00

FV at inception: 35,000.00 35,000.00

%: 69.03% 98.21%

31
 2. Assessment of leases

Option 1 Option 2
Transfer of ownership at the end of lease term no no
Option to purchase asset for price < fair value no yes
Lease term = major part of economic life no yes
Present value of LP close to fair value no yes
Leased asset - specialized nature no no
Losses from cancellation borne by lessee ? ?
Gains / losses from fluctuations to the lessee ? ?
Option to continue rent for rental under market no yes

Operating Finance

=> Land = indefinite economic life

Land + Building

Separate classification

LAND BUILDING

Operating lease unless title

Operating or finance lease
passes at the end of lease term
Ex.
 Allocation of lease payments = based on proportion of fair values
On 1 January 20X1, Belinda enters into a lease contract as a lessor to lease a specialized production
hall with land. The lease contract has the following characteristics:
1. The lease term is 40 years (= remaining economic life of the hall). At the end, the hall has no
residual value.
2. No ownership to the hall or land is transferred to the lessee after the end of the lease term.
3. Annual rentals are paid on 31 December each year amounting to 43 750 CU.
4. Belinda's incremental borrowing rate is 3,1%.
5. At the end of 20X0, the fair value of the hall and land was 800 000 CU and 200 000 CU
respectively.
Advise Belinda how to classify the lease.

1. Assessment of leases

operating lease (indefinite life, no ownership

Land transferred)

Building needs to be assessed separately

32
 2. Assessment of building element

2.1 Rentals related to building element

Fair value of buildings: 800,000 A

Total fair value (800 000 + 200 000): 1,000,000 B
Percentage of building element: 80% A/B

Total rentals:
Rentals related to building element
35,000
(80%*43 750)
2.2 Present value of the lease payments

N. of payments: 40
Amount of 1 payment at the end of each year: 35,000 Formula used:
Present value: 796,097 =PV(3,1%;40;35 000;
Percentage of present value / fair value 0))
99.51%
(796 097 / 800 000)

2.3 Assessment of buildings' lease

Transfer of ownership at the end of lease term no

Option to purchase asset for price < fair value no
Lease term = major part of economic life yes
Present value of LP close to fair value yes
Leased asset - specialized nature yes
Losses from cancellation borne by lessee ?
Gains / losses from fluctuations to the lessee ?
Option to continue rent for rental under market no

Finance lease

2. Finance leases

Accounting by lessors: Finance Leases

AT THE COMMENCEMENT

DEBIT: CREDIT:
Lease Receivable PPE

CREDIT:
Net investment in the lease: P/L Gain on sale of PPE (or Debit it loss)

33
 -Fixed payments
-Variable payments (index)
Payments not paid at the + initial direct costs
-Residual value guarantees commencement date
-Exercise price of purchase option
-Unguaranteed residual value

Accounting by lessors: Finance Leases

AFTER THE COMMENCEMENT

Lease Receivable : Lease Payments

Reduction of LR Finance income

DEBIT: Cash CREDIT:

Lease Receivable
P/L –Interest Income

Constant periodic rate of return

 Apply IFRS 9 to the net investment in the lease (impairment, derecognition)

Lease remeasurement and modification => similar as lessees Ex

On 1 January 20X1 Belinda entered into a finance lease of used stamping machine as a lessor. The fair
value of the machine was CU 500 000 and its carrying amount in Belinda's financial statements was
CU 470 000.
Belinda incurred additional costs of CU 3 000 for arranging the lease contract. Remaining economic
life of the stamping machine is 6 years. Lease term is 5 years, annual lease payments are CU 110 000
payable 31 December each year. Belinda expects that at the end on the lease term, the machine can be
sold for CU 50 000 and the lessee agrees to protect Belinda from the first CU 20 000 of loss for a sale
at a price below the estimated residual value (i.e. CU 50 000).
Belinda classifies the lease as finance.
How would this transaction appear in Belinda's financial statements at 31 December 20X1?

34
1. Initial recognition
1.1 Asset - net investment in the lease
Fair value of stamping machine: 500,000
Initial direct costs: 3,000
Net investment in the lease (500 000 + 3 000) 503,000

1.2 Journal entry

Recognition of net investment in the lease:

Debit Assets - net investment in the lease 503,000

Credit PPE - Stamping machine -470,000
Credit Cash - paid for expenses -3,000
Credit gain on sale of PPE -30,000

2. Subsequent measurement

2.1 Interest rate implicit in the lease:

Year Cash flow

0 -503,000
1 110,000
2 110,000
3 110,000
4 110,000
5 160,000
5.84%

Note:
Cash - FV of an underlying asset at the
flows commencement: -500,000
include: - lessor's initial direct costs: -3,000
- 5x annual lease payments: 550,000
- guaranteed residual value WITHIN the lease
payments: 20,000 included in year 5
- unguaranteed residual value 30,000 included in year 5

2.2 Allocation of the lease payments

Decrease in
Lease Lease Lease
Year Interest lease
receivable b/f payment receivable c/f
receivable
1 503,000 110,000 29,386 80,614 422,386
2 422,386 110,000 24,676 85,324 337,062
3 337,062 110,000 19,691 90,309 246,753
4 246,753 110,000 14,416 95,584 151,169
5 151,169 110,000 8,831 101,169 50,000

35
 2.3 Journal entry

Annual payment in the 1st year:

Debit Cash 110,000

Credit P/L - Finance income -29,386
Credit Net investment in the lease -80,614

3. Disclosures

Gross investment in the lease:

due not later than 1 year 110,000
due later than 1 year but not later than 2 years 110,000
due later than 2 years but not later than 3 years 110,000
due later than 3 years but not later than 4 years 130,000
due later than 4 years but not later than 5 years 0
due later than 5 years 0
Total 460,000
less unearned finance income -67,614
Present value of the lease payments: 392,386
Add unguaranteed residual value: 30,000
Net investment in the lease: 422,386

Check:
Net investment in the lease at the commencement
date: 503,000
Less the decrease in the first lease payment: -80,614
Net investment in the lease @31-Dec-20X1: 422,386

Accounting by lessors: Finance Leases

Manufacturer /Dealer Lessors

Selling profit Finance Lease

- Revenue –Cost of sales -Initial direct costs in P/L

- As outright sales under IFRS 15 -If artificially low interest rate => selling profit is restricted

Ex
.
In January 20X1, CarProd, manufacturer of cars, offered the following finance lease related to the
newest model of car produced:
1. The newest model of car has fair value equal to its selling price, that is CU 30 000. Cost of
manufacture is CU 27 000.

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2. The lease is non-cancellable for 4 years, with annual installments of CU 8 500 paid in arrears.
3. At the end of the lease term, the ownership of the car automatically passes to the client at no
additional cost.
CarProd incurred further cost of CU 1 000 related to negotiating contract. How would this transaction
appear in the financial statements of CarProd at 31 December 20X1?

1. Initial recognition

1.1 Asset - net investment in the lease

Fair value of new model: 30,000
Net investment in the lease: 30,000

1.2 Accounting treatment

Recognition of net investment in the lease / sale of asset:

Debit Assets - net investment in the lease 30,000

Credit Inventory - new model of car -27,000
Credit Cash - paid for expenses -1,000
Credit Profit on sale (30 000 - 27 000 - 1 000) -2,000

2. Subsequent measurement

2.1 Allocation of minimum lease payments

Decrease in Lease
Lease Lease
Year Interest lease receivable
receivable b/f payment
receivable c/f
0 n/a -30,000 30,000
1 30,000 8,500 1,560 6,940 23,060
2 23,060 8,500 1,200 7,300 15,760
3 15,760 8,500 820 7,680 8,080
4 8,080 8,500 420 8,080 0
5.20%

Interest rate implicit in the lease,

Formula used: =IRR(D32:D36)

2.2 Journal entries

Annual payment in the 1st year:

Debit Cash 8,500

Credit Finance income -1,560
Credit Net investment in the lease -6,940

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 3. Disclosures

Lease payments to be received:

due not later than 1 year 8,500
due later than 1 year but not later than 2 years 8,500
due later than 2 years but not later than 3 years 8,500
due later than 3 years but not later than 4 years 0
due later than 4 years but not later than 5 years 0
due later than 5 years 0
Total 25,500
less unearned finance income -2,440
Present value of the lease payments: 23,060
Add unguaranteed residual value: 0
Net investment in the lease: 23,060

Check:
Net investment in the lease at the commencement
date: 30,000
Less the decrease in the first lease payment: -6,940
Net investment in the lease @31-Dec-20X1: 23,060

3. Operating lease /sublease

Accounting by lessor: Operating Lease

Lease payments Underlying asset

- Revenue on straight-line(or other) basis -Initial direct costs are added to the asset
-Depreciation

Manufacturer/Dealer lessors => No selling profit Ex.

On 1 January 20X1, Lessor Co. made a following offer for operating lease to one of its biggest clients:
1. Lease relates to machinery in total fair value of CU 1 000 000.
2. Lease is non-cancellable for 6 years, whereas machines have an economic life of 10 years.
3. Annual rentals of CU 170 000 are payable in arrears on 31 December each year.
Lessor paid CU 50 000 of commission to an agent for mediating the lease.
How would this transaction appear in the financial statements of Lessor Co. at 31 December 20X1?

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1. Journal entries

1.1 Asset related entries:

Recognition of assets at commencement:

Debit PPE - machinery 1,000,000

Credit Cash -1,000,000

Initial direct costs:

Debit PPE - machinery 50,000
Credit Cash -50,000

Depreciation charge of PPE for 20X1 (w/o initial direct costs)

Debit Depreciation expenses (1 000 000 / 10) 100,000

Credit PPE - cummulated depreciation -100,000

Depreciation charge of PPE for 20X1 (initial direct costs)

Debit Depreciation expenses (50 000 / 6) 8,333

Credit PPE - cummulated depreciation -8,333

1.2 Rentals related entries:

Cash received on 31 December 20X1:

Debit Cash 170,000

Credit Rental income -170,000

2. Disclosures

Lease payments to be received:

due not later than 1 year 170,000
due later than 1 year but not later than 2 years 170,000
due later than 2 years but not later than 3 years 170,000
due later than 3 years but not later than 4 years 170,000
due later than 4 years but not later than 5 years 170,000
due later than 5 years 0
Total 850,000

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 Accounting by lessor: Sublease Lease

Original lessee Lessee

Lessor Head lease Sublease (sublease)
Intermediate lessor

Type of sublease Accounting by the intermediate lessor

Operating Keeps recognizing the head lease as before

Debit net investment in the lease/Credit ROU
Finance
asset (difference in profit or loss)
Head lease =short -term
Recognition exemption; exemption; sublease
= Operating

V. Sale and lease back

Sale & Leaseback

Sells an asset

Buyer = lessor
Seller = lessee

Leases the same asset back LEASE !!!

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 Sale & Leaseback

Is the transfer of asset a sale under IFRS 15 revenue from contract with customers ?

YES NO

 Seller(lessee):
 Seller(lessee):

-Right-of-use asset at proportion of the -Continues to recognize an asset

previous carrying amount -Financial liability(IFRS9)
-Gain/loss related to the transferred right only
 Buyer (lessor):
 Buyer (lessor):
-Financial asset (IFRS9)
-Asset under applicable standards
-Lease under IFRS 16
 Leaseback:
Ex.
-As for any other lease(adjustment for
off-market terms)
On 1 January 20X1, Relia sells an administrative building to FinanceMaster for CU 600 000 and at the
same time, Relia leases the same building back for 15 years for an annual payment of CU 50 000 due
31 December each year. Additional info:
- the fair value of the building at the time of the sale is CU 500 000,
- the carrying amount of the building in Relia's books right before the sale is CU 480 000,
- the transaction meets the definition of a sale under IFRS 15,
- the interest rate implicit in the lease is 4% p.a.
- FinanceMaster classifies the lease as operating
How should Relia and FinanceMaster account for the transaction?

1. Relia = seller = lessee

Selling price 600,000

Fair value 500,000
Difference 100,000 => additional financing to be
repaid in the lease payments
Present value of the lease payments:
N. of payments: 15
Amount of 1 payment at the end of each year: 50,000
Discount rate: 4%
Present value: 555,919
thereof:
"Loan" (financing): 100,000
Lease - payments for ROU asset 455,919
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 thereof:
"Loan" (financing): 100,000
Lease - payments for ROU asset 455,919

ROU asset = proportion of the previous carrying amount of the building that relates to the
ROU retained

Carrying amount of the building: 480,000

Fair value of the building: 500,000 => total rights
Discounted lease payments: 455,919 => the rights transferred
ROU asset: 437,683

Gain related to the rights transferred to FinanceMaster:

FV of the building: 500,000

Carrying amount: 480,000
Gain on sale: 20,000

thereof:
related to ROU retained by the seller: 18,237
related to rights transferred to the buyer: 1,763

Journal entries:

At the commencement:
Debit Cash 600,000
Debit ROU asset 437,683
Credit PPE - building -480,000
Credit Financial Liability -555,919
Credit Gain on the rights transferred -1,763

After the commencement:

Debit P/L Depreciation of ROU asset Over 15 years 29,179

Credit ROU asset (accum. dep.) -29,179

Debit P/L Interest expense 22,237

Debit Financial liability 27,763
Credit Cash -50,000
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 2. FinanceMaster = buyer = lessor

At the commencement:
Debit PPE - Building 500,000
Debit Financial asset (loan) 100,000
Credit Cash -600,000

Annual lease payment:

thereof:
for the ROU asset transferred: 41,006
for the repayment of a loan: 8,994

Debit Cash 50,000

Credit P/L - Lease income -41,006
Credit P/L - Interest income -4,000
Credit Financial asset (loan) -4,994

VI. Disclosure

Leases: Disclosure (lessor)

 In tabular format
=> For finance leases: => For operating leases:
 Selling profit or loss  Lease income
 Finance income on net inv. In the leas
 Income related to variable LP not within LR  Income related to variable LP
not depending on an index/rate
 Additional quantitative and qualitative disclosures

 Maturity analysis (refer to examples)

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 IFRS 16 How to Implement?

= mandatory effective date

(earlier application with IFRS 15 is permitted)

How to make a transition?

Full retrospective adoption Modified retrospective adoption

= retrospectively to each prior = retrospectively with cumulative effect at the date

reporting period of initial application

 No need to reassess whether  Comparatives presented under prior IFRS

contract is /contains a lease at the  IFRS 16 applied to existing and new
date of initial application (if IAS contracts onwards
17/IFRIC 4 applied)  Adjustment to opening retained earnings

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