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I.

LESSEE

Right-of-use-asset (16.24)
+ The PV of the lease payments not paid at date
+ Any lease payments made at or before commencement
- Lease incentives received
+ Any initial direct costs incurred by the lessee
+ Asset retirement obligation (dismantling, etc. as a present obligation)

Lease liability (16.27)


+ Fixed payments, less any lease incentives receivable
+ Variable lease payments that depend on an index or rate, initially measured using the index/rate as at the commencement
date (other than the passage of time -> certain)
+ Guaranteed residual value (will be at least a specified amount)
+ Bargain purchase option
+ Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the
lease

*Executory costs (maintenance, taxes, insurance) are ownership expenses -> as incurred

II. LESSOR – OPERATING

III. LESSOR – FINANCE: DIRECT FINANCING

IV. LESSOR – FINANCE: SALES TYPE


V. SALE AND LEASEBACK

Subsequent measurement: RoU Asset


Cost model: cost (1) less accumulated depreciation and accumulated impairment loss, (2) adjusted for remeasurement in lease
liability

Depreciation life
1. Asset will revert back to lessor: Lower of useful life or lease term
2. Asset will transfer to lessee: Useful life

Investment Property: IAS40- Cost/FV model


Revaluation Model: in accordance with IAS16

Subsequent measurement: Lease Liability (16.36)


After the commencement date, a lessee shall measure the lease liability for:
1. Amortized cost
2. Remeasuring the carrying amount to reflect any reassessment or lease modifications, or to reflect revised in substance fixed lease
payments

Recognize in p/l: Loss if did not meet guaranteed residual value -> kailangan pa rin pay

Lessee reassessment of lease liability


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A lessor shall classify each of its leases as either operating or finance


Finance – transfers substantially all the risks and rewards incidental to ownership of an underlying asset
 Transfers ownership by the end of the lease term
 Bargain purchase option
 The lease term is for the major part (75%) of economic life even if title not transferred
 At the inception date, the PV of the lease payments = at least substantially all (90%) of the FV of the underlying asset
 The underlying asset is of such a specialized nature that only the lessee can use it without major modifications
** not always conclusive

Finance lease measurement (16.67)


At the commencement date, a lessor shall recognize assets held under a finance lease in its statement of fin pos and present
them as a receivable at an amount equal to the net investment in the lease

Gross investment
The sum of:
1. the lease payment receivable by a lessor under a finance lease
2. any unguaranteed residual value accruing to the lessor

Net investment
The sum of:
1. cost of machinery
2. less PV residual value (if will revert to lessor)
3. IDC -> will require new IIR

IDC = initial and direct costs


IIR = implicit interest rate

Sales-type lease
Rev = lower of (1) FV underlying asset, (2) PV lease payments @ market rate
COGS = CA less PV of UGRV
IDC = selling cost

Operating – does not transfer

Even if operating on side of lessee, lessor recognizes as RoU Asset


Given annual lease payments of 100k per year, + 5k executory cost payable every Jan 1
Commencement of elase – Jan 1 2016
Lease term – 4 years
Economic life – 5 years
Implicit rate – 12%
*For sales type lease, cost of asset = 300k
Scenario 1. No BPO/no GRV
Scenario 2. BPO = 200k, a) if exercised, b) if if not exe
Scenario 3. GRV = 200K, ERV = 300k
FV @ year 4 = a) 150k, b) 300k
Scenario 4. IDC paid by lessor = 60k, by lessee = 100k
BPO = 200k

Scenario 1 does not revert back to lessor


LESSOR – Direct Financing LESSOR – Sales Type LESSEE
Dr. Eqt 340 183.13 Dr. Invty 300k
Cr. Cash Cr. Cash
Dr. L/R 400k Dr. L/R 400K Dr. ROUA 340 183.13
Cr. UIR 59 816.87 Dr. COS 300K Cr. L/L
Cr. Eqpt 340 183.13 Cr. Invty 300k
Cr. Sales 340183.13
Cr. UIR 59 816.87
Dr. Cash 100k Dr/ Cash 100k Dr. L/L 100K
Cr. L/R Cr. L/R (same) Cr. Cash
Dr. COR 28 821.98 Dr. COR 28 821.98 Dr. Interest Expense 28
Cr. Int income Cr. Int income (same) 821.98
Cr. L/L
Dr. Depn Exp 85 045 (by
lease term)

Payment Interest Amort Principal


340 183.13
100K - 100K 240 183.13
100K 28 821.98 71 178.02 169 005.10
100k 20 280.61 79 719.39 89 285.71
100k 10 714.29 89 285.71 0

CA 2018 = 100K sakto


2019 Jan 1 = credit

Scenario 2 (a) BPO exercised


BPO = 200k, exercise only if lower than FV
BPO = part of lease payments

GI=400K lease payments + 200k BPO


NI=PV also the 200k lump sum + PV annuity due 100k for 4 yrs (normal)
Assumption MR = Implicit rate

LESSOR – Direct Financing LESSOR – Sales Type LESSEE


Dr. Eqpt 467 286.74 (PV) Dr. ROUA 467 286.74
Cr. Cash Cr. L/L
Dr. L/R 600K Dr. L/R 600K Dr. L/L 100k
Cr. UIR 132 713.26 Dr. COS 300K Cr. Cash
Cr. Eqpt 467 286.74 Cr. Sales 467 286.74
Cr. Invty 300k
Cr. UIR 132 713.26
Dr. Cash 100k Dr. Cash 100k Dr. Exp 5k
Cr. UR Cr. UR Cr. Cash
12/31 Dr. UIR 44074.41 Dr. UIR 44 074.41 Dr. Int Exp 44 074.41
Cr. Interest income Cr. Interest Income (same) Cr. L/L
Dr. Depn Exp 93 457.35
Cr. Acc Dep
Payment Interest Amort Principal
467 286.74
100k - 100k 367 286.74
100k

178 571.43
200k 21 428.57

Yr. 4
LESSOR – Direct Financing LESSOR – Sales Type LESSEE
Dr. Cash 100k Same Dr. L/L 100K
Cr. L/R Cr. Cash
12/31 Dr. Cash 200k Same Dr. L/L 178 571.43
Cr. L/R 200K Dr. Int Exp 21 428.57
Cr. Cash 200k
Dr. UIR 21 428.57 Dr. Depn Exp 93 457.35
Cr. Interest Income Cr. Acc Dep

Scenario 2 (b) BPO not exercised


If on 12/31/19 FV is 150k, mahal si BPO @200k, so entries would be:
Yr. 4
LESSOR – Direct Financing LESSOR – Sales Type LESSEE
Dr. Cash 100k Same Dr. L/L 100K
Cr. L/R Cr. Cash
12/31 Dr. Eqpt @ FV 150K Invty/NCAHFS 150K Dr. Int Exp 21 428.57
Dr. Loss on lease 50K Loss on lea Cr. L/L
Cr. L/R 200K -> remove the se 50k Dr. Depn Exp 93 457.35
receivable na Cr. L/R 200K Cr. Acc Dep
Dr. UIR 21 428.57 Dr. L/L 200K
Cr. Interest Income Cr. ROUA, net of acc dep 93
457.35 (ROUA 467 286.54-
Acc Dep 373829.39)
Cr. Gain on lease 106 542.65
Scenario 3
Scenario 3. GRV = 200K, ERV = 300k
FV @ year 4 = a) 150k, b) 300k

LESSOR – Direct Financing LESSOR – Sales Type LESSEE


PV of LP + PV of UGRV, Dr. L/R 700K (dikasama ugrv) Only has to pay PV of lease
- 100K General + 200K Dr. COS (300k=PV of payments
GRV + 100K UGRV UGRV=CA of invty) 236 Dr. ROUA 467 286.74
((ERV)) 448.19 Cr. L/L (L/R diff na from L/L)
= 530 838.55 Cr. Sales 467 286.74
Cr. UIR 169 161.45
CR. Invty 30k

Dr. L/R @GRV 700K Dr. L/L 100K


Cr. Eqpt 530 838.55 Cr. Cash
Cr. UIR 169 161.45
Dr. Cash 100k Dr. Exp 5k
Cr. L/R Cr. Cash
Dr. Int Exp 44 074.41
Cr. L/L
Dr. Depn Exp 66 821.69
Cr. Acc Dep
(467 286.74-
GRV@200K)/4yrs

Yr. 4
LESSOR – Direct Financing LESSOR – Sales Type LESSEE
b) 12/31 Dr. Eqpt 300k b) Dr. L/L 200K
Cr. L/R Cr. ROUA
a) FV 150k, a) Same
Dr. Eqpt 150k a) Dr. Loss on lease 50k
Dr. Cash 50k Cr. Cash
Dr. Loss on lease 100k
Cr. L/R 300K
c) Dr. FV 350k, c) same
Dr. Eqpt 350k
Cr. L/R 300K
Cr. Gain 50k

LESSOR – Direct Financing LESSOR – Sales Type LESSEE


P V of LP = 340 183.13 Cost = 100k Dr. ROUA 340 183.13
- IDC @ 60k Dr. L/R 400K Cr. L/L
= FV 280 183.13 Dr. COS 100K
Cr. Sales 280 183.13
Dr. Eqpt. 280 183.13 Cr. Invty 100k
Cr. Cash Cr. UIR 119 816.87
Dr. Eqpt 60k Dr. Selling Expense 60k Dr. ROUA 100K
Cr. Cash (IDC) Cr. Cash Cr. Cash (IDC)
Dr. L/R 400K
Cr. Eqpt 340 183.13
Cr. UIR 59 816.87

FINISH 2016-2019 JOURNAL ENTRIES FOR ALL SITUATIONS, AND FOR END OF LEASE TERM
20F condo bldg.
Cost/fv = 40M
Lease out 19 floors to tenants, 1 floor for admin
Lease term = 5y, 100k per floor, payable annually beg Jan 1 2016
Implicit rate = 10%

FV@ 12/31/16 = 45M


Escalation clause:
+ 20% on yr2
+ 10% on yr3, based on yr 2

LESSOR
1/1 Dr. Bldg 2M
Dr. Inv Prop 38M
Cr. Cash 40M
1/1 Dr. Cash 1.9M
Cr. Unearned Rent 1.9M
12/31 Dr. Unearned Rent 1.9M
Dr. Rent Receivable 440 800
Cr. Rent Income 2 340 800

COST METHOD
Dr. Depn Exp 800k
Cr. Acc Dep- Bldg 40k
Cr. Acc Dep- IP 760k
FV METHOD
Dr. Depn Exp 40k
Cr. Acc Dep- Bldg
Dr. Inv Prop 4.75M
Cr. MTM gain (P/L)
FV – Inv Prop = 45M x 19/20 = 42.75M
42.75M – 38M = 4.75M
LESSEE (1 floor)
1/1 Dr. ROUA 507 513.15
Cr. L/L 407 513.15
Cr. Cash 100k
12/31 Dr. Depn Exp 101 502.63
Cr, Acc Depn
Dr. Int Exp 40 751.32
Cr. L/L
MODIFICATION = Read na lang, theory na lang or may amounts na like gain = ganito, ROU before gain, so how much is ROU after.
If loss and loss exceeds ROU, excess part in P/L na.
Only appreciate the actual lease amortization. If it increases LL, increases ROU. Decrease liab, gain (p/l)
Reduction fo ROU is proportional to ??

SALE AND LEASEBACK


If ako owner ng property, and I decided to sell a land and bldg to u a group of ppl. I sold it for 100M pesos, but I retained possession
of the property with annual lease payments of 1m pesos. Its as if nagpafinance lang ako sayo. Hingi 100M pero ako pa rin
gumagamit. Form is lease, but substance is mortgage

1. Transaction is considered a sale


Seller-lessee
Recognize ROUA @ CA of right retained
G/L on the portion of the asset actually
transferred (not on the ROUA)
Meron ding L/L
Buyer-lessor
Recognize asset using applicable
standards (ex. PPE, etc)
Account for lease using lessor accounting

Example
Vehicle
CA = 900K
FV = SP = 1.5M
Rem UL = 7y
Lease Term = 5y
Annual payments 100k payable in advance = MR
Implicit Rate = 10%

Seller-lessee Buyer-lessor
Dr. Cash 1.5M Dr. Vehicle 1.5m
Dr. ROUA 250 191.93 Cr. Cash
Cr. L/L 416 986.54 Dr. Cash 100k
Cr. Vehicle 900k Cr. Unearned Rent Rev
Cr. G/L sale 433 205.38

FV ROUA = 416 986.54


FV Sold = 1 083 013.46 } = 1.5M
CA ROUA = 250 191.93
CA Sold = 649 808.07 } = 900k

If above market terms, FV=1.5M, SP = 1.7M:


Considered as additional financing ung excess over FV, pero not G/L (bawal G/L si ROUA)
PV of LP 416 986.54
+ Addtl Fin 200 000 } = FV ROUA = 216 986.54

FV basis of asset ransferred = still 1.5M, so asset transferred FV = 1283 013.46


CA basis of asset transferred = still 900k, so asset CA ROUA = 130 191.93, CA transferred = 769 808.07 (sum 900k, same as
proportion sa taas)

Seller-lessee Buyer-lessor
Dr. Cash 1.7M Dr. Vehicle 1.5M
Dr. ROUA 130 191.93 Dr. Fin Asset (Amortized cost-pic) 200k
Cr. L/L 416 986.54 Cr. Cash 1.7M
Cr. Vehicle 900k
Cr. G/L on sale 513 205.39

New situation (see photos -> annual liab amt, kasama sa exam)
FV = 1.5M, SP = 1.3M

PV LP @ FV = 416 986.54 (USING 100)


Prepayment = 200 000 } = 616 986.54

ROUA 616 986.54 (PV of lease payments)


FV asset transferred 883 013.46 } = sum 1.5M pa rin dapat

CA ROUA = 370 191.93


Transferred = 529 808.01 } = sum still 900k

Payments dapat 100 lang pero FV 150, fv of ROUA dapat based sa 100 lang
POV lessee, mas malaki binabayaran niya, so less favourable (received less during sale compared to p ayments na more than FV)

Seller-lessee Buyer-lessor
Dr. Cash 1.3M Dr. Vehicle 1.5M
Dr. ROUA 370 191.93 Cr. Cash 1.3M
Cr. L/L 416 986.54 Cr. Unearned Rent Income 200K
Cr. Vehicle 900k
Cr. G/L on sale 353 205.38

WALA SA EXAM UNG PANO ANNUAL PAYMENTS (?)


For exam, focus on changes in selling price
No more amortization for lessor

2. Transaction is not considered a sale (non-transfer of rights) -> just a financial asset on the side of the buyer-lessor, and fin
liab sa lessee
** any ONE lang of the criteria = finance lease
** know how to get CA liab middle of the year – sa amort table lang
** practice getting annuities (photo – get PVAF then divide sa FV)
** Security deposit is a separate asset, hindi kasali sa lease payments (lessor – liab, lessee separate asset)
LEASE PAYMENTS =
Fixed payments
Variable lease payments
BPO reasonably certain
Terminating penalties
GRV
Lessee: only the amount expected to be payable
Lessor: any GRV provided to the lessor

Lease incentives reduce lessee’s ROUA, L/L


Lease incentives paid to lessor reduce lease payments
Finance: reduce L/R and thereby reduce NI; selling P/L not affected
Operating: lessors defer cost over lease term, reducing lease income

Lessors use IIR that causes:


PV lease payments for ROUA use + UGRV = FV asset + IDC of lessor

IDC included in NI, reducing income recognized over term (EXCEPT for sales type lessors)
Lessees: Included in ROUA