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Lessor

The document defines key terms related to lessor accounting for finance leases under IFRS 16. It discusses that a lease can be classified as a finance lease if it transfers ownership to the lessee by the end of the lease term, if the lessee has the option to purchase the asset at a lower price, or if the lease term represents a major part of the asset's economic life. For finance leases, the lessor derecognizes the underlying asset and recognizes the net investment in the lease, which includes unearned finance income. Subsequent accounting involves amortizing the unearned finance income over the lease term and reducing the gross investment as payments are received.

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Zance Jordaan
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23 views3 pages

Lessor

The document defines key terms related to lessor accounting for finance leases under IFRS 16. It discusses that a lease can be classified as a finance lease if it transfers ownership to the lessee by the end of the lease term, if the lessee has the option to purchase the asset at a lower price, or if the lease term represents a major part of the asset's economic life. For finance leases, the lessor derecognizes the underlying asset and recognizes the net investment in the lease, which includes unearned finance income. Subsequent accounting involves amortizing the unearned finance income over the lease term and reducing the gross investment as payments are received.

Uploaded by

Zance Jordaan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Lessor

Definitions
The lease payments receivable by the lessor under
a finance lease, and any unguaranteed residual
Gross investment value accruing to the lessor.
NB: The lessee does not include the URV in the
calculation of the lease liability.
The gross investment in the lease discounted at the
Net investment
interest rate implicit in the lease.
The difference between the gross investment in the
Unearned finance income
lease and the net investment in the lease
For the purposes of IFRS 16- it is the amount for
which an asset could be exchanged, or a liability
Fair value
settled between knowledgeable, willing parties in
an arm’s length transaction.
Incremental costs of obtaining a lease that would
not have been incurred if the lease had not been
Initial direct costs obtained except for such cost incurred by a
manufacturer/dealer lessor in relation to a finance
lease.
 The rate of interest that a lessee would have to
pay
 to borrow over a similar term and with similar
Lessee’s incremental borrowing rate: security,
 the funds necessary to obtain an asset of a
similar value to the right-of-use asset
 in a similar economic environment.

1. CLASSIFICATION

Where do the significant risks and rewards relating to the asset


lie, lessee or lessor Finance lease
vs
NB: Under a finance lease, a lessor does not depreciate the asset Operating lease
– lessee recognizes right of use.

A lease can be classified as a FINANCE LEASE if individually or in combination, the following is applicable:

→ Ownership of the underlying asset is transferred at the end of the lease term.
The lessee has the option to purchase the underlying asset at an amount sufficiently lower than the fair
value on the date that the option is exercisable.
→ And at inception date, it is reasonably certain that the option will be exercised.
→ The lease term is for a major part of the economic life of the underlying asset.
At the inception date, the present value of the minimum lease payments is equal to at least substantially
all of the fair value of the underlying asset (guideline 90%)
→ The leased asset is of such a specialised nature that only the lessee is able to use it without major
modifications.
→ The list is not exhaustive. If any of the above is met, it is normally a finance lease
NB: Not all conditions need to be met.
→ ANY other lease agreement that does not satisfy any of the above criteria is an OPERATING LEASE.

FINANCE LEASES
Initial recognition and measurement
1. On the date of the commencement of the lease term, remove (derecognise) the asset from the books of
the lessor (because the lessee recognises)
2. Recognise a separate asset (debtor) equal to the net investment in the lease (net investment method).
3. Include initial direct costs in the net investment in the lease (PV)

Gross investment (lease payments receivable


Unguaranteed residual value (URV) from lessee + unguaranteed residual value)
Estimated selling price at end of lease discounted at implicit interest rate to PV
term to lessee or 3rd party – hence if
there is an URV implication is that
lessee will return asset at the end of
lease term.

Dr Gross investment in finance lease xxx


Cr Unearned finance income (-A) – difference GI-NI (xxx) Net investment

Dr Accumulated depreciation xxx


Cr Asset- Cost (xxx) Derecognition of
Dr/Cr Profit or loss on lease (xxx) the asset

(Recognition of investment in finance lease and derecognition of leased asset)

If there is initial direct cost incurred by lessor


Dr Gross investment in finance lease xxx

Cr Unearned finance income (-A) – difference GI-NI (xxx)


Dr Accumulated depreciation xxx
Cr Asset- Cost (xxx)
Cr Bank (initial direct costs) xxx
Dr/Cr Profit or loss on lease xxx

(Recognition of investment in finance lease and derecognition of leased asset)


Lease
GROSS INVESTMENT payments Unguaranteed
(GI) IN FINANCE LEASE including
guaranteed RV
RV

GI discounted
NET INVESTMENT (NI)
IN FINANCE LEASE at Implicit
interest rate

UNEARNED FINANCE NI
INCOME GI

Subsequent measurement
Dr Unearned Finance income (-A) xxx Amortisation schedule
Cr Finance Income (p/l) xxx
Recognition of interest income accrued for the reporting period

Dr Bank xxx
Actual payment received
Cr Gross investment in finance lease xxx
Recognition of payment received in respect of the finance lease

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