IFRS 16

LEASES

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Permission must be obtained from the Department prior to reproduction

Learning Objectives
At the completion of studying this topic, you will be able
to:
Identify

applicable IFRS for Leases

Comprehend basic concepts and terminologies relating to leases
Comprehend the legal and regulatory frameworks for leases in Ethiopia
Apply measurement and recognitions principles for leases
Understand and apply reporting and disclosure issues relating to leases
Comprehend the difference between US-GAAP and IFRS regarding leases

List of Applicable IFRS

Topic List
LEASES
IFRS For SMEs:

Standards
IFRS 16
Section 20

IFRS 16 replaces IAS 17, IFRIC 4, SIC-15 and SIC-27 and set for application beginning
January 1, 2019. Early application is encouraged, with application of IFRS 15.

Other standards that may be consulted

Plant, Property and Equipment

IAS 16

Impairment of Assets

IAS 36

Investment Property

IAS 40

Financial Asset

IFRS 9
3

The objective of IFRS 16: WHY?

The objective of IAS 16: Ensure that lessees and lessors provide relevant
information in a manner that faithfully represents lease transactions. It is
expected to:
improve comparability between companies that lease assets and companies
that borrow to buy assets;
to reduce the need (i) for investors and analysts to make adjustments to amounts reported by
a lessee and
(ii) for lessees to provide non-GAAP information about leases; and
Create a more level playing field in providing transparent information about
leases to all market participants.
4

The Scope of IFRS 16

The Standard is to be applied in accounting for all leases including leases of right-ofuse assets in a sublease EXCEPT:
leases to explore for or use minerals, oil, natural gas and similar non-regenerative
resources; IFRS 6 (exploration or evaluation assets)
leases of biological assets within the scope of IAS 41 Agriculture held by a lessee;
service concession arrangements within the scope of IFRIC 12 Service Concession
Arrangements;
licenses of intellectual property granted by a lessor within the scope of IFRS 15
Revenue from Contracts with Customers; and
Rights held by lessee under licensing agreements within the scope of IAS 38Intangible Assets items such as; motion picture films, video recordings, plays,
manuscripts, patents and copyrights.
5

The Scope of IFRS 16

Exemptions: Optional exception to exclude from B/Sheet. i.e. lessee is not

required to recognize assets and liabilities(rules).
short-term leases (i.e. leases of 12 months or less considering the likelihood of
exercise of extension options and termination options) and
leases of low value assets

leased assets in order of magnitude of <$5,000 (<+ETB100,000)

Examples of low-value underlying assets can include tablet and personal
computers, small items of office furniture and telephones.
The assessment of whether an underlying asset is of low value is performed
on an absolute basis.
the lessee can benefit from use of the underlying asset on its own or
together with other resources that are readily available to the lessee; and
The underlying asset is not highly dependent on, or highly interrelated with,
other assets.

What is Lease? Identification of lease

What is it ?
IFRS 16 defines a lease as a contract that conveys to the customer (lessee) the right to
use an asset in exchange for consideration for agreed period of time.
Is a particular contract a lease under IFRS 16?
At inception of a contract, a company assesses whether the lease conveys the right to
control the use of an identified asset for a period of time.
IFRS 16 set out guidance on the assessment of whether a contract is, or contains, a lease
or contract is non lease(service contract).
Illustrative Question 1: You want to rent some spaces in the big warehouse in Addis for
storing your products until they will be sold. Youd like to enter in to a 3-year rental
contract and the owner of that warehouse offers 2 options to you. Which one of the 2, do
you think contains a Lease contract? Why?
Option 1: the lessee(you) will occupy a certain area of X cubic meters, but the specific
place will be determined by the owner(lessor), based on actual usage of the warehouse
7
and free storage.

Identification of lease..
Option 2: The lessee will occupy the Unit N3 of X cubic meters in the sector A of that warehouse.
This place is assigned to you and no one can change it during the duration of the contract.
Discussion:
Is the right to control the use of the asset is conveyed?
Under IFRS 16, you need to assess at the inception of the lease whether, throughout the
period of use, the customer has both of the following:
the right to obtain substantially all of the economic benefits from use of the identified
asset; and
the right to direct the use of the identified asset . i.e. while using an asset, a right to make
relevant decision regarding; what type of output to produce, when to produce, how much of
the output.
The flowchart below(next slid) may assist entities in making the assessment of whether a
contract is, or contains, a leas:
8

Identification of lease
No

Is there an Identified asset?

Yes

Does the lessee have the right to obtain substantially all of the economic
benefits from the use of the asset through out the period of use?
Yes

Does the lessee have the right to Direct the use of the asset? i.e. how
and for what purpose the asset is used given the scope of lease contract

Yes

No

Does the Lessee have the right to operate

the asset, without the lessor having the
right to change those operating
instruction?

Yes

No
It is a Lease

No

Yes

Did the Lessee design the asset in a way

that predetermines how and for what
purpose the asset will be used?

9
It is not

Identification of lease
Solution for the previous case:
Option 1: Doesnt contain a lease
Option 2: Is a Lease contract. Why?
Note : IFRS specifies some lessors right which are not taken in to account, instead they
specifies the scope of the lease(use right). Such as:
-Protective rights of lessor: to protect safety of assets or to ensure compliance with laws
-Maintaining/operating the assets: decision to maintain the asset does not grant right to
direct.
Testing your understanding; Illustrative Cases
Refer:
Case 1 through Case 3 of the separate case questions, discuss on them and
identify whether the contracts contain lease or not. Give your justifications.
10

Classification of leases
Does it matter? No: for Lessee; Yes: for Lessor
For

Accounting in the book of Lessee , IFRS 16 eliminates the classification

of leases as either operating leases or finance leases
Instead all leases, other than exemptions, are treated as acquisition of
the right of use asset.
Leases are capitalized by recognizing the present value of the lease
payments and
showing them either as lease assets (right-of-use assets) or together with
property, plant and equipment.
If lease payments are made over time, a company also recognizes a
financial liability.

11

Classification of leases

For Lessor Accounting, IFRS (Para. 61) classifies leases in to two: An

Operating Lease and Financing Lease
Finance Lease:
A lease is classified as a finance lease if it transfers substantially all the risks
and rewards incidental to ownership of an underlying asset.
Operating lease:
A lease is classified as an operating lease if it does not transfer substantially all
the risks and rewards incidental to ownership of an underlying asset.

12

Classification of leases

NB- Whether a lease is a finance lease or an operating lease depends on the

substance of the transaction rather than the form of the contract
Examples of situations that would normally lead to a lease being classified as a
finance lease are:
- the lease transfers ownership of the underlying asset to the lessee by the end
of the lease term;
- the lessee has the option to purchase the underlying asset at a price lower
than the fair value at the date the option becomes exercisable;

13

Classification of leases
the lease term is for the major part of the economic life of the underlying
asset even if title is not transferred;
_ At the inception date, the present value of the lease payments amounts to at
least substantially all of the fair value of the underlying asset; and
_ the underlying asset is of such a specialized nature that only the lessee can
use it without major modifications.
N.B. Lease classification is made at the inception date and is reassessed only if
there is a lease modification.
The diagram below(next slid) demonstrates the criteria that a Lessor applies to
differentiate between Financing and operating leases
_

14

Classification of leases

15

Classification of leases
Illustrative Question 2:
1. Can you mention any transaction you know where the organization takes position as
a lessor? Or as a lessee? For a lessor, does it qualify for:
A.Classification as finance lease? Or
B.Classification as operating lease?
2. How an organization should treat the Lease of land from the government in Ethiopia?

16

Brief overview of Legal and

regulatory frameworks of
leasing business in Ethiopia

Lease financing is a recent phenomenon in Ethiopia and yet at its infant stage of
development;
Appears (from amended procl 807/2013) that two Government bodies regulate the
leasing business in Ethiopia; the NBE (finance lease) and the MOT(operating
leases)
Lease related provisions:
Capital Goods Leasing Business Proclamation No. 103/1998 was issued eighteen
years ago.
The proclamation identified three types of leases in Ethiopia; the operating lease,
financial lease and hire-purchase
However, evidences indicate that it only enabled operating lease . The other two
are not formally practiced in Ethiopia.
17

Legal and regulatory frameworks of .

Then to support the development of manufacturing sector and industrialization

of the country,
The NBE enacted amendment of capital goods leasing proclamation No.
807/2013.
Following the enactment of the amended proclamation, the NBE, licensed five
lease finance companies:
Addis CGFC,
Oromia CGFC ,
Waliya CGFC, Debub CGFC and
Kaza CGFC, obtained capital goods finance business license in 2014

18

Legal and regulatory frameworks of

_

The major shareholders of these leasing companies are regional governments

and the five big MFIs in the country
So far, there is no private /foreign leasing companies(FLCs) joined the sector,
albeit there are some interests from foreign investors to engage in leasing
business.
Proclamation 807/2013 does not prohibit FLCs.
But investment regulation 270/2012 reserves leasing business for Dom.
Investors. This seems contradiction to be resolved.
According to the directives issued by NBE, to engage in finance lease:
_ Requires minimum paid-up capital of Birr 200 million as a minimum
regulatory capital for new entrants

19

Legal and regulatory frameworks of

Require leasing companies to be established in the form of share companies
_ Requires that the maximum exposure limit to be granted to a single lessee at
any point in time should not exceed Birr one million.
_ Requires companies report financial and operational information to NBE
quarterly with specified format
The other legal provision of leasing in Ethiopia is proclamation 721/2011,
Urban Land Lease Holding provisions, where the right of use of urban land is
permitted only by lease.
The businesses acquire the lease right through lease tender and obtain a lease
certificate.
_

20

Legal and regulatory frameworks of

the periods of right-to-use the lease-hold land have different ceiling which
varies from
_ 5 years( for short term economic or social activities on urban land not
designated for immediate development use) to
_
99 years (for residential, government offices, charitable, Religious
institutions, Sc&Tech..) with the possibility of renewal.
This depends on the level of urban development and sector of development
activity or the type of service

21

Measurement and Recognitions of leases

I. LESSEE

Initial measurement and recognition

The lessee treats the lease transaction as if it purchases the asset in a financing transaction. .
Therefore, it records at commencement date, the right to use as an asset at cost and a lease
liability.
How much is the cost?
any lease payments made at or before the commencement date ( date on which a lessor makes
an underlying asset available for use by lessee), less any lease incentives received and;
the present value of the lease payments (including guaranteed RV) discounted using the
interest rate implicit in the lease or using the lessees incremental borrowing rate and;
any initial direct costs incurred by the lessee(eg. brokers commission) and;
an estimate of costs to be incurred by the lessee in:

dismantling and removing the underlying asset, restoring the site on which it is located or

restoring the underlying asset to the condition required by the terms and conditions of the
lease

22

Measurement
and
Recognitions
of
leases
To account for lease, Understand:
-Lessee

Implicit interest rate- the rate of interest that causes:

the PV of the lease payments + The PV of Unguaranteed residual value, to equal
The Fair value of the underlying asset + the lessors initial cost of the lease
Incremental borrowing rate: interest rate that lessee should have to pay on loan for similar
purpose
Lease term- Non-cancellable period, subject to revision, for which the
lessee has
contracted to lease the asset plus any further terms for which the lessee has certainly the
renewal option.
Guaranteed residual value- Certain or determinable amount that:
Lessee will pay lessor at the end of the lease to purchase an asset or;
Lessee guarantee that lessor realizes if asset is returned.
Unguaranteed residual value: the unguaranteed carrying value of the asset at the end of
the lease term
Once cost is determined, initial recognition:
Debit: Right-of-use asset(lease)..XX
23
Credit: Cash/Lease LiabilityXX
-

Subsequent measurement -Lessee

Subsequent measurement: The right-of-use asset (The

leased asset)

Asset(Right-of-use asset) and Lease liability accounted differently

After the commencement date, a lessee shall measure the right-of-use asset
applying a cost model,
unless it applies either of the measurement models
_ Fair Value model in accordance with IAS 40-Investment Property or
_ elect to apply Revaluation model in accordance with IAS 16-PPE.

24

Subsequent measurement Lessee.

To apply a cost model, a lessee shall measure the right-of-use asset at cost:

less any accumulated depreciation and any accumulated impairment

losses; and
Adjusted for any subsequent re-measurement of the lease liability as a result
of reassessment and lease modifications
A lessee apply the depreciation requirements in IAS 16 Property, Plant and
Equipment in depreciating the right-of-use asset.
The period over which lessee depreciate the leased asset:

25

Subsequent measurement Lessee.

_

from the commencement date to the end of the useful life of the underlying
asset if the lease transfers ownership of the underlying asset to the lessee by the
end of the lease term or
the cost of the right-of-use asset reflects that the lessee will exercise a
purchase option,
Otherwise, the lessee shall depreciate the right-of-use asset from the
commencement date to the earlier of :
the end of the useful life of the right-of-use asset or
the end of the lease term.

26

Subsequent measurement Lessee..

A lessee shall apply IAS 36-Impairment of Assets to

_ determine whether the right-of-use asset is impaired and
_ to account for any impairment loss identified
If a lessee applies the fair value model in IAS 40 Investment Property ,
_ the lessee shall also apply that fair value model to right-of-use assets that
meet the definition of investment property in IAS 40.

27

Subsequent measurement Lessee

_
_

If right-of-use assets relate to a class of PPE to which the lessee applies the
revaluation model in IAS 16,
a lessee may elect to apply that revaluation model to all of the right-of-use
assets that relate to that class of property, plant and equipment.
Subsequent measurement of the Lease Liability
The subsequent measure of the lease liability requires:
increasing the carrying amount to reflect interest on the lease liability;
reducing the carrying amount to reflect the lease payments made; and

28

Subsequent measurement Lessee

_

re-measuring the carrying amount to reflect any reassessment or specific lease

modifications
To determine finance cost (Interest) on the lease liability in each period during
the lease term, use effective interest method or the actuarial method.
The periodic rate of interest:
_ Should be the discount rate used in determining present value of lease
liability, or
_ if applicable the revised discount rate up on reassessment or lease
modification.

29

Subsequent measurement Lessee

After the commencement date, a lessee shall recognize in profit or loss both:
interest on the lease liability; and
variable lease payments not included in the measurement of the lease liability,
in the period in which the event or condition that triggers those payments
occurs.
Depreciation expense on right of use leasehold

30

Examples on measurement and

recognition of leases -Lessee
Example 1: Initial measurement and recognition
Lessee enters in to a 10 year non cancellable lease of a floor of a building, with
expected UL of 20 years. Lease payment is 50,000 ETB per year payable at the
beginning of every year. To obtain a lease lessor incurred initial direct cost of
20,000 Birr, of which 15,000 ETB is related to payment for the former tenant
occupying that floor of the building and 5,000 ETB relates to the commission for
the real estate broker that arranged the lease. As an incentive the lessor
reimburse to the lessee the real estate commission of 5000 ETB and lessees
leasehold improvement of 7000 ETB. The interest rate implicit in the lease is not
readily determinable. The incremental borrowing rate is 5% per annum. PVOA of
1 for 9 rents at 5%=7.1078
How does the lessee initially measures and recognizes the asset and liability in
relation to this lease?
31

Examples on measurement and

recognition of leases -Lessee

Example 1: Solution
At the commencement date, Lessee makes lease payment for the first year, incurs
initial direct costs, receives lease incentive(note that reimbursement for leasehold
improvement is not an incentive) and measure lease liability as the present value of
the remaining nine payments of 50,000 ETB, discounted at 5% equal to ETB
355,391.
Recognition shown as follows:
Dr. Right-of-use asset(lease)..405,391
Cr. Lease liability.355,391
Cr. Cash..50,000
Dr. Right of use assets20,000
Cr. Cash..20,0000
(initial direct costs)
32

Examples on measurement and

recognition of leases -Lessee
Example 1: Solution
Dr. Cash5000
Cr. Right-of-use asset..5000
(lease incentives received by lessee)
Note: Lease accounts for the reimbursement of leasehold improvements from
lessor applying other standards and not as lease incentive. Because the costs
incurred on leasehold improvements are not included within the cost of the right-ofuse asset.

33

Examples on measurement and recognition

of leases -Lessee

Example : Subsequent measurement-amortized cost for Lease liability-Schedule for 1 st

5 years
Lease liability
Right-of-use asset(leased
building)
Beginn periodic
ing of
payt. at the
year
beginning

Principal
payment

Beg. Liability
balance after
principal
payment

Interest
expense(
5%)

Bal. with
accrued
interest

Beg. Bal. Deprecia

tion

End Bal.

355,391

17,770

373,161

420,391

(42,039)

378,352

50,000

32,230

323,161

16,158

339,319

378,352

(42,039)

336.313

50,000

33,842

289,319

14,466

303,785

336,313

(42,039)

294,274

50,000

35,534

253,785

12,689

266,474

294,274

(42,039)

252,232

50,000

37,311

216,474

10,823

227,297

252,232

(42,039)

210,196
34

10

50,000

42,039

(42,039)

Examples on measurement and

recognition of leases -Lessee
Example : Subsequent recognition and reporting assuming that the firm
recognizes finance charge on the date of payment
End of first year/Beginning of 2nd year:
Dr. Lease liability.32,230
Dr. Finance charge(interest). 17,770
Cr. Cash.50,000
Dr. Depreciation expense.42,039
Cr. Accumulated depreciation..42,039
End of 2nd year/Beginning of 3rd year:
Dr. Lease liability..33,842
Dr. Finance charge(interest)..16,158
Cr. Cash50,000
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Examples on measurement and recognition

of leases -Lessee
Example : Subsequent reporting
For First year:
In the statement of P/L:
Interest Expense. ETB 17,770
Depreciation Expense42,039
In the statement of F/P:
Assets
Non-current(PPE)
Right-of-use asset(leased building)..ETB 420,391
Accumulated depreciation .(42,039)
Carrying Value(Book Value) 378,352
Liability
Current-Lease liability(50,000-16,158).33,842
Non-current- Lease liability(323,161-33,842)289,319
Total. ETB 323,161
36

PRACTICE CASE 4

37

How to account for recognition

exemptions under IFRS 16-Lessee?

For short-term leases; and leases for which the underlying asset is of low value
(as described above):
a lessee shall recognize the lease payments associated with those leases as
an expense on either
_ a straight-line basis over the lease term or
_ another systematic basis. The lessee shall apply another systematic basis if
that basis is more representative of the pattern of the lessees benefit.

38

Measurement and Recognitions of

leases
there are two classifications of leases with which a lessor must be concerned:
Operating and 2) Financing leases.
II.1) LESSOR

_
_

Accounting for Operating Lease-lessor

A lessor recognize lease payments from operating leases as income on:
either a straight-line basis or
another systematic basis (if that basis is more representative of the pattern in
which benefit from the use of the underlying asset is diminished).
A lessor continue reporting/recognizing:
_ Asset in the statement of financial position
_ Costs incurred in earning the lease income as an expense. ,
_ depreciation (computed based on lessors depreciation policy for similar
assets),
39

Measurement and
Recognitions of Operating
leases
-LESSOR
direct costs incurred in obtaining an operating

Adds Initial
lease to the carrying
amount of the underlying asset and:
_ recognize as an expense over the lease term on the same basis as the lease
income.
apply IAS 36 to account for any impairment loss on leased asset.
A manufacturer or dealer lessor does not recognize any selling profit on entering
into an operating lease because it is not the equivalent of a sale.
Example 3
Guyo PLC leases 2 buildings to Riste PLC. The detail is that the lease payment is ETB
100,000 per year, a 3-year lease escalating at inflation of 8% per year for year 1year 3.
How should the lessor recognize the related transaction from Year 1 through Year 3?

40

Examples on Measurement
and
Recognitions
of
Operating leases -LESSOR
Solutions
In Year 1:
Debit: Cash..100,000
Credit: Lease income/Rent income100,000
Year 2:
Debit: Cash.108,000
Credit: Lease/Rent Income108,000
Year 3:
Debit: Cash..116,640
Credit: Lease/Rent Income.116,640

41

Measurement and Recognitions of Financing

leases LESSOR

Accounting for Financing Lease-lessor

Finance leases may be further subdivided into direct-financing and sales-type leases.
Under both types of financing lease, a lessor recognizes assets held under a finance
lease in its statement of financial position as a receivable
at an amount equal to the net investment in the lease-measured by using the
interest rate implicit in the lease
Net Investment in Finance lease:
Present value of minimum lease payment.XX
Plus: Present value of Unguaranteed RV.XX
Net Investment in Finance lease.. XXX
Initial direct costs, other than those incurred by manufacturer or dealer lessors, are
included in the initial measurement of the net investment in the lease

and reduce the amount of income recognized over the lease term.
42

Measurement and Recognitions of Financing

leases LESSOR.

The distinction between the two(Sales type and Direct financing type leases) is
the presence or absence of a manufacturers or dealers profit (or loss).

A sales-type lease: involves a manufacturers or dealers profit(loss), and

a direct-financing lease does not.

In Sales type lease, the profit (or loss) to the lessor is:
the difference between the fair value of the leased property or, if lower, the
present value of the lease payments accruing to the lessor, discounted using a
market rate of interest; at the inception of the lease and
the lessors cost or carrying amount (book value).

Here, the cost of sale is the cost, or carrying amount of the asset less the
present value of the unguaranteed residual value.
Selling profit or loss is recognized at the commencement date in
accordance with its policy for outright sales to which IFRS 15 applies.

43

Measurement and Recognitions of Financing

leases LESSOR.

Direct-financing leases arises from arrangements with lessors that are primarily
engaged in financing operations

For Example, Banks and Micro-Finance Institutions.

Direct-financing leases are in substance the financing of an asset purchase by the

lessee.

In this case too, the lessor records a lease receivable which is :

the present value of the minimum lease payments plus the present value of the
unguaranteed residual value.
Remember that minimum lease payments include:
rental payments (excluding executory costs),
bargain-purchase option (if any),
guaranteed residual value (if any), and
penalty for failure to renew (if any).

Also, recall that if the lessor pays any executory costs, then it should reduce the rental
payment by that amount in computing minimum lease payments.
44

Examples on Measurement
and
Recognitions
of
Financing leases -LESSOR

Work on Illustrative examples - Separate

sheet.
Case 5: Lessor Accounting for Sales type
Finance lease.

45

Examples on Measurement
and
Recognitions
of
Financing leases -LESSOR

Work on Illustrative examples - Separate

sheet.
Case 6: Lessor Accounting
Financing type lease.

for

Direct

46

Transition/Initial
should we start?

How

The Simplified Approach

Leases previously recognized as Operating Lease
Lease Liability: PV of remaining lease payment discounted using Incremental
borrowing rate
Right-of-Use asset:

Amount of lease liability adjusted by the amount of any previously

recognized prepaid or accrued lease payments; or
Retrospective calculation using a discount rate based on lessees
incremental borrowing rate at the date of initial application.
Leases previously recognized as Finance Lease
Lease Liability: Carrying amount of liability immediately before the date of
initial recognition
Right-of-use asset: Carrying amount of the lease asset immediately before
initial recognition
Leases for which the lease term ends within 12 months after initial
47
application should not be accounted in accordance with IFRS 16.
-

application:

Presentation and Disclosure

of Leases

LESSEE- Presentation and Disclosure

Presentation:
In the statement of financial position the lessee presents: right-of-use assets separately
from other assets;
Lease liabilities separately from other liabilities.
In the statement of profit or loss and other comprehensive income,
a lessee shall present interest expense on the lease liability separately from :
the depreciation charge for the right-of-use asset.
In the statement of cash flows, a lessee shall classify:
cash payments for the principal portion of the lease liability within financing activities;
cash payments for the interest portion of the lease liability applying IAS 7 Statement
of Cash Flows for interest paid; and
short-term lease payments, payments for leases of low-value assets and variable lease
payments not included in the measurement of the lease liability within operating
activities.
48

Disclosure of Leases-Lessee

Disclosure:
What should be disclosed?
depreciation charge for right-of-use assets by class of underlying asset
interest expense on lease liabilities;
the expense relating to short-term leases (can exclude the expense
relating to leases with a lease term of less than a month)
the expense relating to leases of low-value assets.;
the expense relating to variable lease payments not included in the
measurement of lease liabilities;
income from subleasing right-of-use assets;
total cash outflow for leases;
additions to right-of-use assets; and
49

Disclosure
Lessee

of

Leases-

the carrying amount of right-of-use assets at the end of the reporting

period by class of underlying asset in table
disclose a maturity analysis of lease liabilities.
i.e. The total of future minimum lease payments at the end of the reporting
period, and their present value for periods:
not later than one year,
later than one year and not later than five years, and
later than five years.

50

Presentation and
Leases-Lessor

Disclosure

of

LESSOR- Presentation and Disclosure

Presentation:
Present assets subject to operating leases in its statement of financial position
according to the nature of the asset
Disclosure:
A lessor shall disclose the following amounts for the reporting period, in tabular
form:
for finance leases:
selling profit or loss;
finance income on the net investment in the lease; and
income relating to variable lease payments not included in the measurement of
the net investment in the lease.
for operating leases:
lease income, separately disclosing income relating to variable lease payments
51
that do not depend on an index or a rate.

Presentation and Disclosure

of Leases-Lessor

A lessor shall also disclose qualitative and quantitative information about its
leasing activities for users to assess:
the nature of the lessors leasing activities; and
how the lessor manages the risk associated with any rights it retains in
underlying assets
Specifically for finance lease- lessor discloses:
explanation of the significant changes in the carrying amount of the net
investment in finance leases.
Reconciliation of the undiscounted lease payments to the net investment in
the lease.

52

Presentation and Disclosure

of Leases-Lessor
The reconciliation identify the unearned finance income relating to the
lease payments receivable and any discounted unguaranteed residual
value
a maturity analysis of the lease payments receivable, showing:

the undiscounted lease payments to be received on an annual basis for

a minimum of each of the first five years and

a total of the amounts for the remaining years.

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Presentation and Disclosure

of Leases-Lessor

Specifically for operating lease:

Provide disclosure as per the requirement of IAS 16 for PPEs subject to an
operating lease separately from owned assets held and used by the lessor.
A lessor shall apply the disclosure requirements in IAS 36, IAS 38, IAS 40 and IAS
41 for assets subject to operating leases.
disclose a maturity analysis of lease payments, showing:
the undiscounted lease payments to be received on an annual basis for a
minimum of each of the first five years and
a total of the amounts for the remaining years.

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US-GAAP Vs IFRS on LEASES

The IASB and FASB, initiated a joint project to develop a new approach to
lease accounting and IFRS 16 is an out come of this joint project.
Hence, Both USGAAP and IFRS:
Requires a lessee to recognize assets and liabilities for the rights and
obligations created by leases.
defined leases in the same way, and similar in the measurement of lease
liabilities, and
Similar in how to account for leases that were formerly classified as finance
leases.
both do not substantially change lessor accounting.
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US-GAAP Vs IFRS on LEASES

However, there are differences between USGAAP and IFRS:

for leases that were formerly classified as operating leases
I.e. with respect to the recognition of lease expenses and the reporting of leaserelated cash flows.
The IFRS adopted a single lessee accounting model whereby a lessee accounts
for all leases in the same way.
The US-GAAP adopted a dual lessee accounting model, classifying leases in a
similar manner to the previous requirements in US GAAPs for:

distinguishing between operating leases and capital leases, and

to account for those two types of leases differently.

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