LEASES

(PAS 17)

Crisostomo-Coden-Dayego-de Ocampo

OBJECTIVE

to prescribe, for lessees and lessors,

the appropriate accounting policies and
disclosure to apply in relation to leases

SCOPE

applied in accounting for leases other

than:
leases to explore for use minerals, oil,

natural gas and similar non-regenerative

resources and
licensing agreements for such items as
motion picture films, video recordings,
plays, manuscripts, patents and copyrights

SCOPE

not to be applied as basis of

measurement for:
property held by lessees accounted as

investment property, investment property

provided by lessors under operating
leases, biological assets held by lessees
under finance lease or biological assets
provided by lessors under operating lease

OPERATING LEASE and

leaseback
Chapter 7: Financial
Accounting Vol 2 by Valix

OPERATING LEASE
A lease that does not transfer
substantially all the risks and rewards
incidental to ownership

OPERATING LEASE

LESSEE

Lease payments under an operating

lease shall be recognized as an
expense on a straight line basis
over the lease term unless another
systematic basis is more
representative of the time pattern of
the users benefit

OPERATING LEASE

LESSOR

Lease income from operating lease shall

be recognized on a straight line basis
over the lease term, unless another
systematic basis is more representative of
the time pattern in which use benefit
derived from the leased asset is diminished.
Initial direct costs are added to the
carrying amount of the leased asset.

SALE AND LEASEBACK

An

arrangement whereby one party sells

a property to another party and then
immediately leases the property back
from its new owner.
Seller-Lessee
Purchaser-Lessor

SALE AND LEASEBACK

OPERATING LEASE
If Selling Price = Fair Value
Recognize Gain or Loss Immediately
If Selling Price < Fair Value
Recognize Gain or Loss Immediately
Unless loss is compensated by future lease rental
at below market value (LP<FV). Loss is deferred.
If Selling Price > Fair Value
Selling Price > Deferred > Fair Value > Gain > Cost

SALE AND LEASEBACK

FINANCE LEASE
Selling Price > Carrying Amount
Gain is deferred and is amortized
over the lease term.
Selling Price < Carrying Amount
Loss is immediately recognized.

Finance lease - lessee

Chapter 8: Financial
Accouting Vol 2 by Valix

DEFINITION

Lease purchase
American Standard = Capital Lease
Transfer of substantially all risks and
rewards of ownership

POI
NT
OF
VIE
W

L
E
S
S
O
R
L
E
S
S
E
E

Transfer of property
Recognition of:
Receivable
Revenue

Asset is purchased
Recognition of periodic depreciation
Lease Liability
Periodic rental payment
Payment of interest

CRITERIA
Transfer of ownership
Bargain purchase option

Option for the lessee to purchase the leased

asset at a price sufficiently lower than the

fair value

Lease term is a major part of the

economic life of the asset
PV of min lease payment =
substantially all of the FV at the
inception date

OTHER CRITERIA

Leased asset is of specialized nature

Lessee can cancel the lessee and bear
the losses thereof
Gains or losses accrue to the lessee in
form rent rebate
Lessee continues lease at a rent
substantially lower than the market
rate

CANCELABLE AND NONCANCELABLE LEASE

If substantially all risks and rewards of

ownership of the asset have been
transferred, then lease is a finance lease
In general, if there is an option to
cancel the lease if likely to be an
operating lease
However, if the losses due to cancellation
are borne by the lessee (penalty),
lease could be a finance lease

CANCELABLE AND NON-CANCELABLE LEASE

Is there a substantial transfer of all risks and
rewards of ownership of asset?
Yes

No
Cancelable
BUT subject
to question

Noncancelable

Are losses associated with

cancellation borne by the
lessee?

Finance Lease

Yes

Finance
Lease

No

Operating
Lease

CANCELABLE AND NON-CANCELABLE LEASE

Cancellable is deemed non-cancellable

and thus, is classified as a finance
lease when:
Lease can only be cancelled upon the

occurrence of remote contingency

Lease can only be cancelled with the
permission of the lessor
Upon cancellation, new lease is entered for
the same or equivalent asset with the
same lessor
Lease can only be cancelled upon
payment of penalty

IMPORTANT DATES

Inception
The earlier of the date of the lease

agreement and the date of commitment by

the parties to the principal provisions of
the lease

Commencement
Date from which the lessee is entitled to

exercise its right to use the leased asset

Initial recognition of the assets,
liabilities, income or expense

LAND AND BUILDING

LEASE

Normally considers land and building as

separate element
Classify the Land and Building Lease
based on classification criteria
Minimum Lease Payments are allocated
to land and building in proportion to their
fair value
If the lease payments cannot be
allocated reliably, the entire lease is
classified as finance lease

LAND AND BUILDING LEASE

Record asset and lease liability whichever

is lower between the fair value at the
inception date or the present value of the
minimum lease payments
Implicit interest rate is the discount
rate used to compute for the present
value of the minimum lease payments
Lessee's incremental borrowing rate
is the rate of the interest that the lessee
would have to pay on a similar lease

MINIMUM LEASE
PAYMENTS

Payments that the lessee is obligated

to make. Examples include:
Rental payments
Bargain purchase option
Guaranteed residual value

Unguaranteed residual value is the

portion of the residual value solely
guaranteed by a party related to the
lessor

MINIMUM LEASE PAYMENTS

Contingent rent and executory costs

are not included in the computation of
the minimum lease payments
Contingent rent is the portion of the lease

payment that is not fixed in amout

Executory costs are ownership expenses
which are expensed immediately as incurred
(ie maintenance, taxes and insurance)

Initial direct costs which are incurred in

connection with specific leasing activities
are included as part of the cost the asset

DISCLOSURES

carrying amount of asset;

reconciliation between total minimum lease
payments and their present value;
amounts of minimum lease payments at balance
sheet date and the present value thereof, for:
a) not later than one year;
b) later than one year and no later than five years
c) later than five years contingent rent recognised
as an expense;
total future minimum sublease income under
noncancellable subleases; and

DISCLOSURES

general description of significant leasing

arrangements, including contingent rent
the total of future minimum lease payments at
balance sheet date under noncancellable
operating leases for each of the following
periods:
a) not later than one year;
b) later than one year and no later than
five years
c) later than five yearsthe total future
minimum sublease payments expected to be
received under noncancellable subleases at
the balance sheet date;

DISCLOSURES

lease and sublease payments recognised as a

expense in the period, with separate amounts
for minimum lease payments, contingent rents
and sublease payments.
A general description of significant leasing
arrangements, including:
a) The basis on which contingent rent
payable is determined;
b) The existence and terms of renewal or
purchase options and escalation clauses; and
c) Restrictions imposed by lease
arrangements, such as those concerning
dividends, additional debt and further leasing.

Direct financing lease lessor

Chapter 9: Financial
Accouting Vol 2 by Valix

Finance Lease Classification

Direct Finance Lease

Lessor engaged in financing business
Only recognizes interest income

Sales Type Lease

Recognizes interest income and gross

profit on sale

DIRECT FINANCING
LEASE - LESSOR

Gross Investment
gross rentals for entire lease + absolute

amount of residual value whether

guaranteed or unguaranteed (dr to lease
receivable)

Net-Investment in the Lease

cost of asset + initial direct cost paid by

the lessor

Unearned Interest Income

Gross Investment-Net Investment

DIRECT FINANCING LEASE - LESSOR

Initial Direct Cost

added to the cost of the asset to get net

investment in the lease

reduces interest income as the cost is
being spread over the lease term
interest rate implicit = recomputed to
include initial direct cost in the
measurement of lease receivable through
interpolation

DIRECT FINANCING LEASE - LESSOR

Assets held under a finance lease should

be recognized in the statement of financial

position and presented as a receivable
equal to the net investment in the lease.
Current Portion or Non-Current Portion:

Lease Receivable-Unearned Interest

Income

DIRECT FINANCING LEASE - LESSOR

If there's neither a transfer of title nor a

bargain purchase, the leased asset
would revert to the lessor.
PV of residual value = deducted from cost of

asset to get net investment

When the fair value of leased asset is

lower than residual value,the difference
would be:
-paid in cash by lessee to lessor
(guaranteed)
-recognized as loss by the lessor

DIRECT FINANCING LEASE - LESSOR

If Direct Financing Lease with Residual

Value and will Revert to the Lessor
PV of residual value would be deducted

from cost of leased asset to get the net

investment to be recovered in computing
annual rental income

If Direct Financing Lease with Residual

Value but will not Revert to the Lessor
residual value=completely ignored in

computation of annual rental and

unearned interest income

Sales type lease - lessor

Chapter 10: Financial
Accouting Vol 2 by Valix

SALES TYPE LEASE LESSOR

Lessor manufacturer or dealer that

uses the lease as a means of
facilitating the sale of its products
Recognition of lessors profit on the
transfer of the asset to the lessee is
needed

Computations Sales Type

Lease with RV
Gross Rentals XXXX
Residual Value (G/UG) XXXX
Gross Investment XXXX
PV of Gross Rentals XXXX
PV of Residual Value XXXX
Net Investment XXXX
Gross Investment XXXX
Net Investment XXXX
Unearned Interest Income

XXXX

Sales (Net Investment / Fair Value of asset (lower)) XXXX

Cost of Goods Sold (cost of asset + initial direct costs) XXXX
Gross Profit XXXX

Computations Sales Type Lease

with Bargain Purchase Option
Gross Rentals XXXX
Bargain Purchase Option XXXX
Gross Investment XXXX
PV of Gross Rentals XXXX
PV of BPO XXXX
Net Investment XXXX
Gross Investment XXXX
Net Investment XXXX
Unearned Interest Income

XXXX

Sales (Net Investment / Fair Value of asset (lower)) XXXX

Cost of Goods Sold (cost of asset + initial direct costs) XXXX
Gross Profit XXXX

Basic Journal Entries Sales

Type Lease
To record the sale:
Lease Receivable xxxx
Sales xxxx
Unearned Interest Income xxxx

To record the cost of sales (perpetual):

Cost of sales xxxx
Inventoryxxxx

To record the collection of annual rental

Cash xxxx
Lease receivable xxxx

To record the interest income earned for the period

Unearned interest icnome xxxx
Interest income xxxx

SALES TYPE LEASE WITH

RESIDUAL VALUE

When the lease expires, the machinery will

revert to the company. If the FV of the
machinery is less than the estimated value:

Guaranteed scenario:
Cash xxxx
Inventory xxxx
Lease Receivable xxxx
Unguaranteed scenario:
Loss in finance lease xxxx
Inventory xxxx
Lease Receivable xxxx

SALES TYPE LEASE WITH BPO

Exercise of bargain purchase option at
the end of the lease term entries:
Cash xxxx
Lease Receivable xxxx

BPO not exercised

Inventory xxxx
Loss on finance lease xxxx
Lease Receivable xxxx

ACTUAL SALE OF LEASED

ASSETS
Selling Price < Carrying Amount of LR
Cash xxxx
Unearned Interest Income xxxx
Loss on Sale of leased equipment xxxx
Lease Receivable xxxx

Selling Price > Carrying Amount of LR

Cash xxxx
Unearned Interest Income xxxx
Gain on Sale of leased equipment xxxx
Lease Receivable xxxx

Reminders:
Under the guaranteed RV scenario, PV
of the RV is included in the
computation of sales revenue while in
the unguaranteed RV scenario, this PV
is not.
Accordingly, the PV of unguaranteed
RV is deducted from the cost of the
leased asset in computing CGS.

END