Lessee
- user of the asset
- under IFRS lease always capitalized and recognized as an ROU asset and lease liability
ROU Asset initial measurement
- initially recognized at cost, which includes:
- initial measurement of lease liability
- any payments made on or before commencement date
- any direct costs incurred by lease
- estimated costs at end/termination of lease (dismantle/removal costs of asset)
Lease liability
- initially measured at PV of all future payments
Future payments (for lease liability)
- fixed lease payments (regular interval payments)
- variable payments that are dependent on an index or rate (inflation rate) (variable payments are payments that vary depending on some future circumstance (rate or future event not included in initial measurement))
- exercise price of reasonable BPO (BPO is an option at the end to allow the lessee to purchase the asset at a bargain)
- guaranteed RV (guaranteed RV is the lessee guarantees to the lessor that they can sell the asset for at least the RV, if not guaranteed it is not included in initial measurement) (unguaranteed RV is when there is no guarantee of the value at the end of the leasure)
- termination penalties is expected to be paid
Non-lease components
- non-lease component costs are excluded from lease liability value unless otherwise told to
BPO in PV formula
BPO = FV if there is one, otherwise FV = 0
ROU asset subsequent measurement
1) cost model (most common)
2) revaluation model
3) FV model (investment property only)
Cost model
- measure at cost less depreciation
- must depreciate over useful life if ownership transferred at the end
- DR. dep exp. , CR. acc. dep - ROU asset
Lease liability subsequent measurement
1) cost model
2) revaluation model
- lease liabilities recorded when paid (DR. lease liability, CR. cash)
- each year interest expense on the lease obligation should also be recognized (DR. int. exp., CR. lease liability)
Interest expense when Payment due at beginning of year
- interest expense = the balance of obligation at the end of the PY - CY payments x interest rate used to record lease
Interest expense when payment due at the end of the year
- interest expense = lease obligation at the end of the year before payment x interest rate used to capitalize lease
When there is a change to future lease payments
- the change in value is discounted and revised to lease liability and ROU asset
When lease for less than 1 year, and low value: payments can be expensed if…
- asset of low value when new
- the lessee can benefit from the use of asset on its own with available resources
AND - the lease assets is not highly integrated/dependent with other assets
Derecognition
- lease terminates and asset returned to lessor (Dr. acc. dep - ROU asset, CR. ROU asset)
- lease terminates and asset returned and residual guarantee (DR. acc dep - ROU asset, CR. ROU asset & DR. lease liability, DR/CR G/L on derecognition, CR. cash)
-lease agreement extended with new terms (remeasure and adjust current balances) - transfer to lessee when BPO has no payment at end (DR. asset, DR. acc dep- ROU asset, CR. ROU asset)
- transfer to lessee when BPO to be paid (DR. lease liability, CR. cash)
Disclosures
- depreciation and interest expense of ROU asset
- expenses relate to short term/low value leases expensed
- additions to ROU assets
- G/L on sale leasebacks
- details of lease agreement (terms, restrictions, commitments, nature of activities, termination, etc)
Lessor POV of recording lease
1) operating lease
2) financing lease
Financing lease if…
- title transfer to lessee at end of lease
- BPO exists and at commencement date it is reasonably assured to be exercised
- lease terms that gives the lessee all of the economic benefits derived from asset
- PV of minimum lease payments = FV of asset (or substantively equals)
- asset is specialized and only the lessee can use without modifications
If financing lease criteria not met
= operating lease
financing lease – initial recognition
DR. lease receivable
DR. COGS
CR. revenue
CR. inventory (net)
Financing lease – when payments received
DR. cash
CR. lease receivable
Financing lease – interest income recorded each year
- if payment due at the beginning of year: balance of lease receivable at the end of the PY - CY payment x implicit rate
- if payment due at the end of the year: lease receivable at PY before payment x implicit rate
- DR. lease receivable, CR. interest income
Operating lease
- no asset recorded
- recorded CY payments to income
- if prepayment at beginning of year, record as obligation and lower each time payment received/revenue recognized
Financing lease – derecognition
- if title transfer/BPO used: lease receivable is derecognized
- if asset returned: G/L recognized
Sale and lease back
Please see notes in note book
