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Leases - Accounting For Leases by The Lessee - Finance Lease Model

The document outlines the accounting treatment for leases by lessees, specifying that all leases should be accounted for as finance leases unless exempted as short-term or low-value leases. It details the initial and subsequent measurement of lease liabilities and right-of-use assets, including the calculation methods for both. Additionally, it presents two problems involving numerical calculations related to lease agreements for practical application of the accounting principles discussed.

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King2x Rubi
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8 views3 pages

Leases - Accounting For Leases by The Lessee - Finance Lease Model

The document outlines the accounting treatment for leases by lessees, specifying that all leases should be accounted for as finance leases unless exempted as short-term or low-value leases. It details the initial and subsequent measurement of lease liabilities and right-of-use assets, including the calculation methods for both. Additionally, it presents two problems involving numerical calculations related to lease agreements for practical application of the accounting principles discussed.

Uploaded by

King2x Rubi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LEASES – ACCOUNTING FOR LEASES BY THE LESSEE

1. Finance Lease Model – all leases shall be accounted for by the lessee as a finance lease
2. Operating Lease Model – a lessee is permitted to apply in two optional exemptions: (1) short-term
lease; or (2) low-value lease.

Finance Lease Model


At the commencement of the lease, a lessee shall recognize a right-of-use asset and a lease liability.

Lease Liability
Initial Measurement
Lease liability is measured at the present value of the lease payments that are not paid at that date.
1. Fixed payments (including in-substance fixed payments) less any lease incentives receivable (such
as payment by the lessor to the lessee associated with a lease or the reimbursement or assumption
by the lessor of the costs of the lessee.
2. Variable lease payments that depend on an index or rate, initially measured using the index or
rate as at the commencement date
3. Amounts expected to be payable by the lessee under residual value guarantees,
4. The exercise price of a purchase option if the lessee is reasonably certain to exercise that
option and
5. Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising
an option to terminate the lease.

Discounted at (1) interest rate implicit in the lease. Or, (2) lessee’s incremental borrowing rate.

Subsequent Measurement
Similar to an amortized cost financial liability.

Right of Use Asset (ROUA)


Initial Measurement
1. The initial measurement of the lease liability
2. Lease payments made to the lessor at or before the commencement date less any lease incentives
received
3. Initial direct costs incurred by the lessee
4. Estimate cost of dismantling, removing and restoring the underlying asset for which the lessee has a
present obligation.

Subsequent Measurement
Right-of-use asset (under the cost model) is measured at cost less any accumulated depreciation and
impairment loss.
Problem 1
On January 1, 20x1, Soobin Corporation entered
into a 4-year lease agreement with Huening Kai
Company for industrial machine. Lease payment
is P100,000 payable annually starting January
1, 20x1. Soobin knows that the lessor expects a
10% return on the lease. Soobin has a 12%
incremental borrowing rate.

The machine is expected to have an estimated


useful life of 5 years and a residual value of
P25,000. The lease agreement contained a
purchase option at P50,000 exercisable at the
end of the lease term. It is reasonably certain
as to inception of the lease that Soobin will
exercise the option in the future. Soobin uses
the straight-line depreciation method.

The present value of P1 at 10% for 4 periods is


0.683013. The present value of annuity due in
advance at 10% for 4 periods is 3.486850.
Calculate the following:
1. The initial measurement of the lease
liability before the deduction of the
lease payments on January
2. The initial measurement of the right-of-
use asset on January 1
3. The carrying amount of the lease liability
on December 31, 20x2.
4. The carrying amount of the right of use
asset on December 31, 20x2.
Problem 2 3. How much is the depreciation expense in
On January 1, 2023, Wooyoung Company entered a 2023?
five-year lease of a floor building. The 4. How much is the carrying amount of the
building has an estimated useful life of 10 ROUA on December 31, 2024?
years. Lease payments are P3,000,000 per year 5. How much is the carrying amount of the
all payable at the beginning of each year. lease liability on December 31, 2024?

To obtain the lease, Wooyoung Company incurs


the initial direct cost of P1,400,000, of which
P600,000 relates to payment to a former tenant
occupying that floor of the building and
P400,000 relates to a commission paid to the
real estate agent that arranged the lease and
the P400,000 pertains to improvements made in
the leased premises.

As an incentive to Wooyoung Company for


entering the lease, the lessor agrees to
reimburse to Wooyoung Company the amount of
P400,000 for leasehold improvements made in the
leased property and an additional free rent for
three months in the first year. Wooyoung
guarantees a residual value of P1,000,000 at
the end of the lease term. The rate implicit in
the lease is 12%.

The present value of P1 at 12% for 5 periods is


0.567427. The present value of ordinary annuity
of P1 at 12% for 4 periods is 3.037350.
Calculate the following:
1. How much is the initial measurement of the
lease liability after the reduction of the
first lease payment?
2. How much is the initial cost of the right-
of-use asset recognized at the inception
of the lease?

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