Financial Accounting Theory and Analysis

Text and Cases

Fourteenth Edition
Richard G. Schroeder, Myrtle W. Clark, Jack M. Cathey

Chapter 13

Leases
Introduction
• Businesses generally acquire property rights in long-term assets through
purchases
• Leases provide lessees the right to use property
• GAAP enabled the lessee to engage in off-balance sheet financing because
certain leases were not reported as long-term debt on the balance sheet

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Advantages of Leasing
1. 100% financing at fixed rates
2. Permits alternative uses
3. Protection against obsolescence
4. Allows flexibility
5. Frequently less costly than other forms of financing the cost of the
acquisition of fixed assets
6. Offers tax advantages
7. Does not add debt to the balance sheet

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Management’s Choice Between Purchasing and Leasing
• Function of:
o Strategic investment and capital structure objectives
o Comparative costs
o Availability of tax benefits
• Question:
o When does the acquisition of rights to use property become an in-substance
property right?
• Some lease agreements are in-substance long-term installment purchases
of assets that have been structured to gain tax or other benefits to the
parties

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Accounting for Leases
• Two methods for allocating lease revenues and expenses to the periods
covered by the lease agreement have emerged in accounting practice
1. A capital lease is based on the view that the lease constitutes an agreement
through which the lessor finances the acquisition of assets by the lessee
2. An operating lease is based on the view that the lease constitutes a rental
agreement between the lessor and lessee
• Two basic questions have been associated with accounting for leases:
1. What characteristics of the lease agreement imply that a lease should be reported
in the balance sheet as an asset accompanied by an associated liability?
2. If none exits, should the lessee be allowed to report lease payments as rent
expense?

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Accounting for Leases Continued
• In 1964, the APB issued Opinion No. 5, “Reporting of Leases in Financial
Statements of Lessees” (superseded)
o APB Opinion No. 5 required leases that were in-substance purchases to be capitalized
on the financial statements of lessees
o Relatively few leases were capitalized under its provisions
• The APB also issued three other statements dealing with accounting for
leases by lessors and lessees:
1. APB Opinion No. 7, “Accounting for Leases in Financial Statement of Lessors”
(superseded)
2. APB Opinion No. 27, “Accounting for Lease Transactions by Manufacturers or Dealer
Lessors” (superseded)
3. APB Opinion No. 31, “Disclosure of Lease Transactions by Lessees” (superseded)
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Accounting for Leases Continued
• In November 1976, the FASB issued SFAS No. 13, “Accounting for Leases”
o A major purpose was to achieve a greater degree of symmetry of accounting between
lessees and lessors
• The conceptual foundation it was “a lease that transfers substantially all of
the benefits and risks inherent in the ownership of property should be
accounted for as the acquisition of an asset and the incurrence of an
obligation by the lessee and as a sale or financing lease by the lessor”
1. The characteristics indicating that substantially all the benefits and risks of ownership
have been transferred to the lessee must be identified
2. The same characteristics should apply to both the lessee and lessor
3. Those leases that do not meet the characteristics identified in (1) should be accounted
for as rental agreements
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Nontax Factors that Make Leasing More Attractive
1. The period of use is short relative to the overall life of the asset
2. The lessor has a comparative advantage over the lessee in reselling the asset
3. Corporate bond covenants of the lessee contain restrictions relating to financial
policies the firm must follow
4. Management compensation contracts contain provisions expressing compensation
as a function of return on invested capital
5. Lessee ownership is closely held, so that risk reduction is important
6. The lessor has market power and can thus generate higher profits by leasing the
asset than by selling the asset
7. The asset is not specialized to the firm
8. The asset’s value is not sensitive to use or abuse
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Criteria for Classifying Leases Under FASB ASC 840
• For lessees, if lease satisfied any of the following four criteria, it was recorded as a
capital lease:
1. Lease transfers ownership of the property to the lessee by the end of the lease term
2. Lease contains a bargain purchase option
3. Lease term is equal to 75% or more of the estimated remaining economic life of the leased
property
4. Present value of the minimum lease payments at the beginning of the lease term equals or
exceeds 90% of the fair value of the leased property less any related investment tax credit retained
by the lessor
• For lessors, if satisfied any of the Lessee criteria, plus both of the following additional
criteria, it was classified as either a sales type or direct financing lease:
o Collectibility of the minimum lease payments is reasonably predictable; and
o No important uncertainties surround the amount of unreimbursable costs yet to be incurred by the
lessor under the lease
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Accounting and Reporting by Lessees Under FASB ASC 840 (SFAS
No. 13)
• Historical accountants’ position: when, in substance, a lease agreement is an installment
purchase,
o Lessee should account for the “leased” property  as an asset and report a corresponding liability
• Lease arrangements that were not considered installment purchases constitute off-
balance sheet financing arrangements and should be properly disclosed in the footnotes
• Lease accounting evolved over time
• AICPA Research Study
o Property rights (right to use property) as opposed to
o Rights in property (ownership of equity interest in property)
• APB No. 5
o Some leases are in substance purchases
o Caused controversy
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APB Said that a Lease is in Substance a Purchase When
1. The property was acquired by the lessor to meet the special needs of the
lessee and will probably be usable only for that purpose and only by the
lessee
2. The term of the lease corresponds substantially to the estimated useful
life of the property, and the lessee is obligated to pay costs such as taxes,
insurance, and maintenance, which are usually considered incidental to
ownership
3. The lessee has guaranteed the obligations of the lessor with respect to
the leased property
4. The lessee has treated the lease as a purchase for tax purposes
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Capital Leases Under FASB ASC 840
• Lessees record at lower of
1. Present value of minimum lease payments, computed and capitalized at lessee’s
incremental borrowing rate
2. Fair value of leased property
• Minimum lease payments consist of:
1. Rental payments over life of the lease
2. Any bargain purchase option
3. Any guaranteed residual value of the property by the lessee
4. Any penalties for failure to renew the lease by the lessee
• Periodic expenses are interest expense and depreciation on leased asset

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Disclosure Requirements for Capital Leases
1. The gross amount of assets recorded under capital leases as of the date of
each balance sheet presented by major classes according to nature or
function
2. Future minimum lease payments as of the date of the latest balance sheet
presented, in the aggregate and for each of the five succeeding fiscal years
3. The total minimum sublease rentals to be received in the future under
noncancelable subleases as of the date of the latest balance sheet
presented
4. Total contingent rentals actually incurred for each period for which an
income statement was presented

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Operating Leases Under FASB ASC 840
• Operating leases are all leases which do not meet any of the four
capitalization criteria
• Periodic payments are recorded as rent expense

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Disclosure Requirements for Operating Leases
1. For operating leases having initial or remaining non-cancelable lease terms in excess
of one year:
a. Future minimum rental payments required as of the date of the latest balance sheet presented
b. The total of minimum rentals to be received in the future under non-cancelable subleases as of
the date of the latest balance sheet presented
2. For all operating leases
a. Rental expense for each period for which an income statement is presented
b. With separate amounts for minimum rentals, contingent rentals and sublease rentals
3. A general description of the lessee's leasing arrangements including, but not limited
to the following:
a. Basis on which contingent rental payments are determined
b. Existence and terms of renewals or purchase options and escalation clauses
c. Restrictions imposed by lease agreements
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Accounting and Reporting by Lessors Under FASB ASC 840
• The major concern in accounting for leases in the financial statements of
lessors is the appropriate allocation of revenues and expenses over the
period covered by the lease
• This concern contrasts with the lessee’s focus on the balance sheet
presentation of leases
• According to FASB ASC 840 (SFAS No. 13), capital leases are classified as
either:
o Sales-type
o Direct financing

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Sales-Type Leases Under FASB ASC 840
• The lessor reported a lease as a sales-type lease when…
o At least one of the capital lease criteria was met
o Both lessor certainty criteria were met
o There was a manufacturer’s or dealer’s profit (or loss)
• This implies that the leased asset is typically an item of inventory and that
the seller is earning a gross profit on the sale

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Accounting Steps for Direct Financing Leases Under FASB ASC 840

a) The difference between the

gross investment (a)
b) And the present value of the
gross investment (b)
c) Was to be recorded as unearned
interest income (c)
d) Equal to the present value of
the gross investment (b)

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Direct Financing Leases Under FASB ASC 840
• No profit is recorded at the inception of the lease
• Lessor is viewed as a lending institution financing the purchase of an asset
• Revenue = interest earned over life of the lease
• FASB adopted the approach of requiring lessors to record the total
minimum lease payments for direct financing leases as a gross receivable
on the date of the transaction and to treat the difference between that
amount and the asset cost as unearned income

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Accounting Steps for Direct Financing Leases Under FASB ASC 840

a) Gross investment determined

the same as in sales-type leases
b) Cost of the leased property
c) The difference between gross
investment and cost
d) Net investment
e) Initial direct cost

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Disclosure Requirements for Sales-Type and Direct Financing
Leases
1. Components of net investment in leases as of the date of each balance sheet presented
a. Future minimum lease payments to be received
b. Unguaranteed residual value
c. Unearned income
2. Future minimum lease payments to be received for each of the five succeeding fiscal
years as of the date of the latest balance sheet presented
3. Amount of unearned income included in income to offset initial direct costs charged
against income for each period for which an income statement is presented (For direct
financing leases only)
4. Total contingent rentals included in income for each period for which an income
statement is presented
5. General description of the lessor's leasing arrangements
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Lessor Operating Leases Under FASB ASC 840
• Leases that did not meet the FASB ASC 840 criteria for classification as
sales-type or direct financing leases were accounted for as operating leases
by the lessor
• The lessor’s cost of the leased property was reported with or near other
property, plant, and equipment on the lessor’s balance sheet and is
depreciated following the lessor’s normal depreciation policy
• Lease payments were recognized as rental revenue when they became
receivable unless the payments were not made on a straight-line basis

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Disclosures Required by Lessors for Operating Leases
1. The cost and carrying amount, if different, of property on lease or held for
leasing by major classes of property according to nature or function, and
the amount of accumulated depreciation in total as of the date of the
latest balance sheet presented
2. Minimum future rentals on noncancelable leases as of the date of the
latest balance sheet presented, in the aggregate and for each of the five
succeeding fiscal years
3. Total contingent rentals included in income for each period for which an
income statement is presented
4. A general description of the lessor’s leasing arrangements
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Sales and Leasebacks Under FASB ASC 840
• Owner sells property then immediately leases it back
• Usually treated as a single economic event
• With gain or loss on the sale amortized over the lease term

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Leveraged Leases
• A leveraged lease is a special
leasing arrangement involving
three different parties
• The parties are the equity holder
– the lessor; the asset user – the
lessee; and the debt holder – a
long-term financer

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Leveraged Leases Continued
• The major issue in accounting for leveraged leases is whether the
transaction should be recorded as a single economic event or as separate
transactions. All leveraged leases meet the criteria for direct financing
leases
• All leveraged leases meet the criteria for direct financing leases
• However, a leveraged lease might be accounted for as a lease with an
additional debt transaction or as a single transaction

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Leveraged Leases Continued
• The FASB determined that a leveraged lease should be accounted for as a single
transaction and provided the following guidelines
• The lessee would record the lease as a capital lease
• The lessor would record the lease as a direct financing lease
• The lessor’s investment in the lease would be the net result of several factors:
1. Rentals receivable, net of that portion of the rental applicable to principal and interest on
the nonrecourse debt
2. A receivable for the investment tax credit to be realized on the transaction
3. The estimated residual value of the leased asset
4. Unearned and deferred income consisting of the estimated pretax lease income (or loss),
after deducting initial direct costs remaining to be allocated to income over the lease term
and the investment tax credit remaining to be allocated to income over the lease term
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Subsequent Developments
• March 2009: FASB & IASB announced joint project on accounting for leases
• Lessee should:
o Initially measure both its right-of-use asset and lease obligations at present value of
expected lease payments
o Discount estimated lease payments using lessee’s incremental borrowing rate
• Lessor accounting was not covered in the original proposal; however, an
exposure draft was released in August 2010 that incorporated lessor
accounting

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Subsequent Developments Continued
• Lessor: Two different accounting models would apply to lessors:
1. Performance obligation approach; and
2. Derecognition approach
• Both models would require lessor to recognize a lease receivable for
estimated future lease payments

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The Performance Obligation Approach
• If lessor retains significant risks or benefits associated with the underlying
property
• Continue recognizing underlying property and a liability to deliver its use to
the lessee over the estimated lease term

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The Derecognition Approach
• If the lessor does not retain significant risks or benefits associated with the
underlying property
• Derecognize portion of property representing cost of right-of-use sold to
lessee;
• Reclassify remaining portion as a residual asset representing rights to
underlying property at end of lease term; and
• Recognize immediate profit/loss on transaction

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Subsequent Developments Continued
• July 2011: Boards announced proposed ASU to be re-exposed because
revised requirements were sufficiently different from requirements in
original exposure draft
o 2015: FASB and IASB announced completion of their re-deliberations on the lease
project after two meetings during which key decisions made
• Jan 2016: the IASB issued IFRS No. 16, “Leases”
• Feb 2016: the FASB issued ASU 2016‐02, “Leases” (FASB ASC 842)

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Subsequent Developments Continued
• Prior to release of ASU 2016‐02, the Boards had agreed on the following
definition of a lease:
o “A contract that conveys the right to use an asset (the underlying asset) for a period
of time in exchange for consideration”
• To be considered a lease, a contract must meet both of the following
criteria:
1. Fulfillment of the contract depends on the use of an identified asset
2. Contract conveys the right to control the use of the identified asset

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ASU 2016-02 (FASB ASC 842)
• Under ASU 2016-02 (FASB ASC 842), a
contract is or contains a lease if it
conveys the right to control the use of
identified asset for a period of time in
exchange for consideration
• A contract conveys the right to
control the use of an identified asset
if the customer has the right to:
1. Obtain substantially all of the economic
benefits from the use of the identified
2. Direct the use of the identified asset

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ASU 2016-02 (FASB ASC 842) Continued
• Once it has been determined that a contract is or contains a lease it is
necessary to identify the lease and nonlease components of the contracts
• Those components are the units of account that determine which GAAP
applies
• In addition to identifying the components of the contract, it is necessary to
determine the consideration in the contract
• n a contract includes more than one lease component, is necessary to
separate and allocate the consideration in the contract to those
components

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Lessee Accounting Under FASB ASC 842
• Key difference  recognition of a right‐to‐use asset (ROU) and lease
liability on the Statement of Financial Position for those leases previously
classified as operating leases under old guidance
• ASU 2016‐02 identifies two classifications of leases:
1. Finance leases (which replace capital leases)
2. Operating leases
• Classification as a finance lease based on criteria similar to those previously
used to determine capital leases but without explicit bright lines

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Lessee Accounting for Finance Leases Under FASB ASC 842
• Lessees required to recognize ROU asset and lease liability on the balance
sheet for virtually all of their leases
• Liability is measured at the present value of lease payments discounted at
the rate implicit in the lease (if known) or the lessee’s incremental
borrowing rate
• For finance leases, lessees will subsequently increase lease liability to
reflect interest and reduce lease liability by lease payments
o Related ROU asset amortized on straight‐line basis unless another systematic basis is
more representative of the pattern in which lessee expects to consume the asset’s
future economic benefits

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Lessee Accounting for Operating Leases Under FASB ASC 842
• A leased asset that does not meet any of the five finance lease criteria is
automatically deemed to be an operating lease
• The initial measurement of capitalized operating leases is equal to the
present value of the lease payments
• Subsequently, the lessee will report an annual lease cost in the income
statement
• FASB ASC 842 provides one exception to the rule that lessees must now
capitalize all ROU leased assets
o For short-term leases, lessees may make an accounting policy election not to
recognize the ROU asset and its liability in the balance sheet

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Disclosures of ROU Assets and Liabilities Under FASB ASC 842

a. Finance ROU assets and operating ROU assets separately from each other
and from other assets
b. Finance ROU liabilities and operating ROU liabilities separately from each
other and from other liabilities
c. If lessee does not present ROU assets and liabilities on balance sheet,
lessee must disclose which lines on balance sheet include those ROU
assets and liabilities

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Impact of ASU 2016-02 on the Financial Statements of Lessees
Finance Leases Operating Leases
Statement of financial Right-of-use asset Right-of-use asset
position Lease liability Lease liability, except for
short-term lease elections
Statement of operations Amortization expense of Single lease cost, generally
right-of-use asset on a straight-line basis
Interest expense
Statement of cash flows: Interest expense All cash payments
operating activities
Statement of cash flows: Principal payments on lease None
financing activities liability

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Lessor Accounting Under FASB ASC 842
• Lessors are required to allocate contract price to separate lease and non-
lease components in accordance with transaction price allocation guidance
in FASB ASC 606
• Lessors will account for leases using an approach that is substantially
equivalent to previously existing U.S. GAAP for sales‐type leases, direct
financing leases and operating leases, but updated to align with certain
changed definitions

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Lessor Lease Classification Under FASB ASC 842
• Classify as sales‐type lease if any one of the five criteria used to identify a
finance lease are met and if collection of payments is probable
• If not, direct financing or operating
• Direct financing if
o Present value of sum of lease payments and any residual value guaranteed equals or
exceeds substantially the fair value of the underlying asset
o Probable lessor will collect lease payments
• If a lease is not classified as a sales‐type or direct financing lease, it is an
operating lease

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Sales-Type Leases Under FASB ASC 842
• Since a direct financing lease occurs when none of the five finance lease
criteria are met, control is not transferred to the lessee
• The lessor is still expecting lease payments and has a net investment. which
is measured the same way as that of the sales-type lease
• The lessor derecognizes the ROU leased asset
• The net investment in both sales-type and financing leases is also subject to
impairment testing under the provisions of FASB ASC 310, Receivables

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Lessor Operating Leases Under FASB ASC 842
• Lessor accounting for operating leases under FASB ASC 842 is similar to the
requirements contained in FASB ASC 840
• The lessor recognizes any deferred rent as a deposit liability
• When earned, it becomes interest revenue

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Sale and Leaseback Transactions
• ASU 2016‐02 virtually eliminates sale‐leaseback accounting
• A sale‐leaseback transaction will qualify as a sale only if all the following
conditions are met:
1. Transaction meets sale guidance in new revenue recognition standard
2. Leaseback is not a finance or sales‐type lease
3. If there is a repurchase option, the exercise price is at the asset’s fair value at the
time of exercise, and alternative assets that are substantially the same as the
transferred asset are readily available in the marketplace

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Leveraged Leases
• ASU 2016‐02 eliminates leveraged lease accounting for all leases that
commence on or after its effective date
• A lessor with a leveraged lease that commences before the effective date of
the new standard will continue to apply leveraged lease accounting to that
lease unless it is modified on or after the effective date

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Lease Modifications
• A change to contractual terms and conditions of a contract that results in a
change in the scope of, or the consideration for, the lease
• Payments made in connection with a modification are accounted for similar
to the accounting for a new lease
• In certain circumstances, the lessee may be required to re-measure the
lease payments

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Disclosures
• Objective: provide financial statement users sufficient information to
assess the amount, timing and uncertainty of cash flows arising from leases
• To achieve this objective, both lessees and lessors will be required to
disclose both qualitative and quantitative information about lease
transactions
• ASU 2016‐02 was effective for U.S. GAAP public companies for fiscal years,
and interim periods within those fiscal years, beginning after December 15,
2018

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ASU 2018-20
• Subsequently, in December 2018 the FASB issued ASU 2018-20 “Leases
(Topic 842): Narrow-Scope Improvements for Lessors” to simplify three
parts of ASC 842 for lessors
• The amendments contained in ASU 2018-20 make targeted improvements
for lessors in three specific areas:
1. Sales taxes and other similar taxes collected from lessees
2. Certain lessor costs
3. Recognition of variable payments for contracts with lease and nonlease components

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Sales Taxes and Other Similar Taxes Collected from Lessees
• Prior to ASU 2018-20, FASB ASC 842 required lessors to analyze sales taxes
and other similar taxes on a jurisdiction-by-jurisdiction basis
• Under ASU 2018-20 lessors have an accounting policy election that:
1. Exclude sales and similar taxes from the consideration in the contract and from
variable payments not included in the consideration in the contract
2. Accounts for those costs as if they are lessee costs
3. Requires certain disclosures

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Certain Lessor Costs
• Prior to ASU 2018-20, FASB ASC 842 required lessors to report on a gross
basis in the income statement lessor costs paid by lessees
• ASU 2018-20 requires lessors to exclude from variable payments lessor
costs paid by lessees directly to third parties
o Not on income statement
• It also requires lessors to report costs paid by the lessor and reimbursed by
the lessee as variable payments

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Recognition of Variable Payments for Contracts with Lease and
Nonlease Components
• Prior to ASU 2018-20, FASB ASC 842 required lessors to recognize in the
income statement certain variable payments when the changes in facts and
circumstances on which the payment is based occurs
• ASU 2018-20 requires lessors to allocate (rather than recognize) those
variable payments to the lease and nonlease components when the
changes in facts and circumstances on which the payment is based occurs
• After that allocation, the lessor applies the recognition guidance in FASB
ASC 842 for the amounts allocated to the lease component

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ASU 2021-05
• In July 2021, the FASB issued ASU 2021-05, “Leases (Topic 842): Lessors—
Certain Leases with Variable Lease Payments”
• Under it, if a lease meets the criteria in FASB ASC 842 for classification as
either a sales-type or direct financing lease, and application of the financing
lease recognition guidance would result in recognition of a selling loss, the
amendments require the lessor to classify the lease as an operating lease
and a lessor does not recognize a day one loss

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Lease Agreements Affected BY ASU 2020-04 Reference Rate
Reform
• There are two categories of variable lease payments:
1. Payments that change based on an index or a rate
2. Payments based on all other changes
• Under current U.S. GAAP, leases are finance leases if any of four conditions
are met
• The fourth condition requires capitalization if the present value of
minimum lease payments (MLP) is greater than 90% of the fair value of the
asset
• Generally, contingent rent cause the lease to be accounted for as an
operating lease, but an exception exists for rate-based payments
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Lease Agreements Affected BY ASU 2020-04 Reference Rate
Reform Continued
• Under FASB ASC 842 , variable lease payments based on an index or a rate,
are included when measuring and classifying a lease
• Prior to the release of ASU 2020-04, questions arose concerning the effect
of reference rate reform on variable lease payments
• Under ASU 2020-04, if an entity elects the optional expedient for a
modification of a contract the entity shall not:
o Reassess the lease classification and the discount rate
o Remeasure lease payments
o Perform other reassessments or remeasurements that would otherwise be required
when a modification of a lease contract is not accounted for as a separate contract

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Financial Analysis of the Effects of Capitalizing Operating Leases

• Beginning in 2019, most companies were required to capitalize their

operating leases
• It was hypothesized that the impact of adopting ASU No. 2016-2 (FASB ASC
842) would be increased assets and liabilities on corporate balance sheet
• This could have a significant impact on key performance indicators such as
working capital, the current ratio, the long-term debt to assets ratio and
return on assets (ROA)
• The conversion of the leases to assets and liabilities would not affect the
company’s income statement

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The Hershey Company: Supplemental balance sheet information
related to leases

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Hershey, Inc Selected Balance Sheet Accounts (in Thousands)

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 Capitalizing Lease Impact
Ratio based on
Adjusted to Remove
12/31/2020 Capitalized % Increases
As Reported Operating Leases (Decreases)
Working capital $1,086,160 $1,128,738 (3.9)
Current ratio 1.57:1 1.61:1 (2.5)
Debt to assets 0.448 0.439 2.0
Return on assets 14.8% 15.2% (2.6)

Ratio based on 12/31/2020

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International Accounting Standards
1. IAS No. 17, “Accounting for Leases” (Superseded)
2. IAS No. 40, “Investment Property”
3. IFRS No. 16 “Leases”
4. “COVID-19-Related Rent Concessions (Amendment to IFRS No.16)”

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IAS No. 17
• Is applicable until IFRS No. 16 becomes effective or is adopted early by a
company
• Similar to current U. S. GAAP outlined in SFAS No. 13
• Improvements project added enhanced disclosure requirements
o A major change is that initial direct costs incurred by lessors must now be capitalized and
amortized over the lease term
o Alternative treatment in original IAS No. 17 to expense initial direct costs up front was
eliminated
• Difference in terminology from SFAS No. 13
o Financing leases rather than capital leases forsales-type and direct financing not used
lessee
o Terms for lessors
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IAS No. 40
• Defined investment property as property (land, building or part of a building, or both)
held (by the owner or by the lessee under a finance lease) to earn rentals or for capital
appreciation or both
• Under IAS No. 40 ,one of two models must be chosen:
1. A fair value model
2. A cost model as described in IAS No. 16, “Property, Plant, and Equipment”
• Fair value model:
o Investment property is measured at fair value
o Changes in fair value are recognized on the income statement
• Cost model as described in IAS No. 16, “Property, Plant, and Equipment”
o Investment property measured at depreciated cost, less any accumulated impairment losses
o An enterprise that chooses the cost model should disclose the fair value of its investment property
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IFRS No. 16
• Objective: ensure that lessees and lessors provide relevant information that
faithfully represents leasing arrangements
• Provides a single lessee accounting model, requiring lessees to recognize
assets and liabilities for all leases unless the lease term is 12 months or less,
or the underlying asset has a low value
o Lessors continue to classify leases as operating or financing, and IFRS No.16’s
approach to lessor accounting remains substantially unchanged from IAS No.17

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Identifying a Lease
• A contract is, or contains, a lease if it conveys the right to control the use of
an identified asset for a period of time in exchange for consideration
• Control is conveyed when the customer has both the right to direct the
identified asset’s use and the ability to obtain substantially all the economic
benefits from that use

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Separating the Components of a Contract
• When a contract contains both lease components and non-lease
components, lessee will allocate consideration payable on the basis of the
relative stand‐alone prices
o As a practical expedient, lessee may elect, by class of underlying asset, not to
separate non-lease components from lease components and instead, account for all
components as a lease
• Lessors are required to allocate consideration in accordance with the
provisions of IFRS No. 15

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Accounting by Lessees
• Lessee required to account for all leases as financing leases
o At inception of lease, lessee recognizes a right‐of‐use asset and a lease liability
o Subsequently, lessee will generally measure right‐of‐use asset using a cost model
• Certain factors may cause the lease liability to be re-measured
• Classify each lease as operating or finance lease
o Classified as financing lease if it transfers substantially all the risks and rewards incidental to
ownership of an underlying asset
o Otherwise, classified as operating lease
• Recognize financing lease income over lease term of financing lease, based on a
pattern reflecting a constant periodic rate of return on the net investment
• Recognize operating lease receipts as income on a straight‐line basis unless another
systematic basis is more representative of the pattern of use benefits
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Sale and Leaseback Transactions
• Use IFRS No. 15 criteria to determine when a performance obligation is
satisfied, to assess whether the transfer of an asset is accounted for as a
sale
• These requirements essentially eliminate sale and leaseback transactions as
off‐balance sheet financing arrangements

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Differences Between IFRS No. 16 and ASU 2015-01
• Began as a joint project
o Many of the requirements are the same
o Main difference  under IFRS No. 16, lessees account for all leases as financing
leases
• Lessee accounting model
• Measurement of right‐of‐use asset
• Variable lease payments
• Sale and leaseback transactions
• Statement of Cash Flows
• Disclosures
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Covid-19-Related Rent Concessions
• In many cases, rent concessions were provided to lessees because of the
pandemic
• Changes in lease terms could have a significant impact on the carrying
amount of lease assets and liabilities
• In May 2020, the IASB issue a practical expedient exception to IFRS No, 16
“COVID-19-Related Rent Concessions,” which amended IFRS No. 16
• This amendment provided companies an option that simplifies how a
lessee accounts for rent concessions that are a direct consequence of
COVID-19
o A lessee is not required to assess whether eligible rent concessions are lease
modifications
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Covid-19-Related Rent Concessions Continued
• A lessee applying the practical expedient accounts for a forgiveness or
waiver of lease payments as a variable lease payment
o Recognizing the concession in the period in which the event or condition that triggers
those payments occurs
• It only applied to rent concessions for which any reduction in lease
payments affects solely payments originally due on or before June 30, 2021
• In May 2021, the IASB extended the relief by one year to cover rent
concessions due on or before June 30, 2022
• The practical expedient does not apply to lessors

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