OPERATING LEASE - LESSOR

UPDATED SCHEDULE
9/3 – Operating Lease
9/5 – Direct Financing
9/10 – Sales Type Lease
9/12 – Sale and Leaseback
9/17 – Sublease
9/19 – Quiz 2
9/20 – Prelim Exam
TECHNICAL KNOWLEDGE

1. To understand lessor accounting in contrast to

lessee accounting under the new lease
standard.
2. To define an operating lease and a finance
lease
3. To identify the criteria in determining a finance
lease on the part of lessor
4. To know the recognition of an operating lease
on the part of lessor.
INTRODUCTION

❑ Lessor
accounting under IFRS 16 is substantially
unchanged from the old lease standard under IAS
17.
❑Lessor shall classify leases as either operating
lease or a finance lease.
TWO KINDS OF LEASE
Operating lease
 Does not transfer substantially all the risks and rewards incidental
to ownership of an underlying asset

Finance lease
 A lease that transfers substantially all the risks and rewards
incidental to ownership of an underlying asset.

Note: Whether a lease is a finance lease or an operating

lease on the part of the lessor depends on the substance of
the transaction rather than form of the contract.
WHEN IS A LEASE CLASSIFIED AS
FINANCE LEASE?
IFRS 16, par 63, provides that among others, any of the
following situations would normally lead to a lease being
classified as a finance lease:
1. The lease transfers ownership of the underlying asset to
the lessee at the end of the lease term.
2. The lessee has an option to purchase the asset at a
price which is expected to be sufficiently lower than the
fair value at the date the option becomes exercisable.
 At the inception of the lease, it is reasonably certain
that the option will be exercised.
WHEN IS A LEASE CLASSIFIED AS
FINANCE LEASE?
3. The lease term is for the major part of the economic
life of the underlying asset even if title is not
transferred.
 US GAAP – at least 75% of the economic life
4. The present value of the lease payments amounts to
substantially all of the fair value of the underlying
asset at the inception of the lease.
 US GAAP – at least 90% of the FV of the leased
asset
WHEN IS A LEASE CLASSIFIED AS
FINANCE LEASE?
Other criteria
1. The underlying asset is of such specialized nature that
only the lessee can use it without major modification.
2. If the lessee can cancel the lease, the lessor’s losses
associated with the cancelation are borne by the
lessee.
3. Gains or losses from the fluctuation in the fair value of
the residual accrue to the lessee.
4. The lessee has the ability to continue the lease for a
secondary period at a rent that is substantially lower
than market rent.
LAND AND BUILDING LEASE

▪Land and building should be accounted

separately
▪For land element, consider that it has an
indefinite economic life
▪Lease payments are allocated between land and
building elements in proportion to the relative fair
value of the leasehold interests
❖If the lease payments cannot be allocated reliably
entire lease is classified as a finance lease
LAND AND BUILDING LEASE

▪If the land element is immaterial to the lease, a lessor

may treat the land and building as single unit for the
purpose of lease classification.
▪For single lease, apply the lease classification criteria for
lessor; the economic life of the building is regarded as the
economic life of the entire underlying asset.
OPERATING LEASE - LESSOR

▪Periodic rental – rent income on a straight line basis or

another systematic basis
▪Underlying asset
✓remains as an asset of the lessor
✓the lessor bears all ownership or executory costs such
depreciation, real property taxes, insurance and
maintenance
✓The depreciation policy for the depreciable leased
asset shall be consistent with the lessor’s normal
depreciation for the similar asset.
OPERATING LEASE - LESSOR
▪Initial direct cost incurred in an operating lease shall be
added to the carrying amount of the underlying asset and
recognized as an expense over the term on the same basis
as the lease income (accounted separately as Deferred
initial direct cost).
Refundable security deposit
 Liability (Liability for rent deposit)
Lease bonus
 Unearned rent to be amortized over the lease term
UNEQUAL RENTAL PAYMENTS

IFRS 16, par 81 provides that “lease payments under an

operating lease shall be recognized as income on a
straight line basis over the lease term unless another
systematic basis is representative of the time pattern of
the user’s benefit.”
The total cash payments for the lease term shall be
amortized uniformly on the straight line basis as rent
income over the lease term.
 PROBLEM 12-3 (BARNES)
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HOW TO TREAT INITIAL DIRECT COST
INCURRED BY LESSOR?
❑Initial direct cost incurred in an operating lease
shall be added to the carrying amount of the
underlying asset and recognized as an expense
over the term on the same basis as the lease
income (accounted separately as Deferred initial
direct cost).
ANSWER 12-1 (Vim Company)
12-1 (Vim Company)
2022
Jan. 1 Equipment 3,000T
Cash 3,000T

April toDec Cash (40Tx 9) 360T

Rent income 360T

April 1 Cash 120T

Unearned rent income 120T
12-1 (Vim Company)
Dec. 31 Repairs 20T
Cash 20T
Unearned rent income 30T
Rent income 30T
(120T/3x 9/12)

Dep. 300T
AD 300T
(3,000T/10)
12-1 (Vim Company)
Requirement 2

Rent income (360T +30T) 390T

Less: Repairs 20T
Dep. 300T 320T
Net income of lessor 70T
HOW TO TREAT LEASE BONUS RECEIVED
BY LESSOR?
❑Unearned rent to be amortized over
the lease term
12-2 (Myriad Company)

Required: Prepare journal entries on the books of the lessor using the operating
lease model.
12-2 (Myriad Company)
2022
Jan. 1 Tractor 1,600T
Cash 1,600T

April 1 Cash 600T

Rent income 600T

Dec 31 Deferred IDC 120T

Repairs 15T
Transportation 10T
Cash 145T
12-2 (Myriad Company)
Dec. 31 Rent income 150T
Unearned Rent income 150T
(50T x 3)

Dep. 300T
AD 300T
(1,500T/5)
Amortization of IDC 45T
Deferred IDC 45T
(120T/5 x 9/12)
12-4 (Dorey Company)
12-4 (Dorey Company)
2022
Jan1 Machinery 5,000T
Cash 5,000T
Mar 1 Cash 1,200T
Rent Income 1,200T

Lease expense 60T

Cash 60T
12-4 (Dorey Company)
2022
Dec. 31 Dep 500T
AD 500T
Rent income 200T
Unearned rent 200T
12-4 (Dorey Company)
Requirement 2
Rent Income (1,200T-200T) 1,000T
Lease expense (60T)
Depreciation (500T)
Net Rent Income 440T
12-5 (Aris Company)
12-5 (Aris Company)
2022 Rent receivable 765T
Rent income 765T

Total rent (100T x 51months) 5,100T

Average annual rent (5,100T/5) 1,020T
Rent from April to Dec 2017
(1,020Tx 9/12) 765T
12-5 (Aris Company)
2023 Cash 1,200T
Rent income 1,020T
Rent receivable 180T
2024 Cash 1,200T
Rent income 1,020T
Rent receivable 180T
Same for 2025-2026
2027 Cash 300T
Rent income 255T
Rent receivable 45T
12-6 (Dean Company)
12-6 (Dean Company)
Total rent (300T x 117months) 35,100T
Average annual rent (35,100T/10) 3,510T
Rent from October to December
(3,510T X 3/12) 877,500

2022 Rent receivable 877,500

Rent income 877,500
12-6 (Dean Company)
Average annual rent (35,100T/10) 3,510T

2023 Cash (300T x 12) 3,600T

Rent income 3,510T
Rent receivable 90T

2032 Cash (300T x 9) 2,700T

Rent income (3,510T x 9/12) 2,632,500
Rent receivable 67,500
12-7 (Gee Company)
12-7 (Gee Company)
Average annual rent (7,200T/3) 2,400T

2022 Cash (100T x 12) 1,200T

Rent receivable 1,200T
Rent income 2,400T

2023 Cash (150T x 12) 1,800T

Rent receivable 600T
Rent income 2,400T
12-7 (Gee Company)
Average annual rent (7,200T/3) 2,400T

2024 Cash (100T x 12) 4,200T

Rent income 2,400T
Rent receivable 1,800T
ASSIGNMENT

❑ 12-8,9 & 10 – Group of Nunez

❑12-11,12, 13 – Group of Palban
❑12-14,15 & 16 – Group of Pesidas
❑12-17,18 & 19 – Group of Ricabo
12-20. C
12-21. C

12-22 12-23 12-24

1. D 1. C 1. A
2. D 2. B 2. C
3. A 3. D 3. C
4. D 4. A 4. C
5. D 5. C 5. B
END