Reviewer PFRS 16 Leases PDF

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Summary

PFRS 16 LeasesIdentifying a lease“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)Right to ControlAn entity has the right to control the use of an identified asset if it has ...

Description

PFRS 16 Leases Identifying a lease “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) 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.

CRITERIA 1. IDENTIFIED ASSET • An asset can be identified by being explicitly stated in the contract or by being implicitly specified at the time the asset is made available for use by the customer. • A portion of an asset can be identified if it is physically distinct. 2. SUBSTANTIVE SUBSTITUTION RIGHTS

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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. 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.

3. RIGHT TO DIRECT THE USE • The customer has the right to direct how and for what purpose the asset is used throughout the period of use Accounting for leases by Lessee GENERAL RECOGNITION Lessee recognizes both: 1. Lease liability; and 2. Right-of-use asset RECOGNITION EXEMPTION (for ‘short-term” and ‘low value’ leases) • Lessee recognizes lease payments as expense over the lease term using straight line basis, or another more appropriate basis.

GENERAL RECOGNITION

DISCOUNT RATE • Discount rate is the INTEREST RATE IMPLICIT in the lease; if not determinable, then the lessee’s incremental borrowing rate. CLASSIFICATION OF LEASE BY THE LESSOR A lessor classifies a lease as either a finance lease or an operating lease.  FINANCE LEASE - A LEASE THAT TRANSFERS SUBSTANTIALLY ALL THE RISKS AND REWARDS INCIDENTAL TO OWNERSHIP OF AN ASSET. TITLE MAY OR MAY NOT EVENTUALLY BE TRANSFERRED.  OPERATING LEASE - A LEASE OTHER THAN A FINANCE LEASE.

Indicators of a finance lease

Accounting for Finance Leases by Lessors Initial recognition  Lessors recognize assets from a finance lease as receivable measured at an amount equal to the net investment in the lease.  IN THE PART OF LESSEE LEASE LIABILITY IS INITIALLY MEASURED AT PRESENT VALUE OF THE LEASE PAYMENTS THAT ARE NOT YET PAID AS AT THE COMMENCEMENT DATE and SUBSEQUENTLY MEASURED AT AMORTIZED COST

Lease payments • Fixed payments, including in-substance fixed payments, less any lease incentives payable;

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Variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; Guaranteed residual value; 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.

Discount rate •

The discount rate to be used in calculating the present value of the lease payments is the interest rate implicit in the lease.

Accounting for operating lease • The accounting for operating leases is straight-forward. The lessor recognizes the lease payments as rent income on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern of user’s benefit....