Lessor needs to classify lease as finance         Lessee can use a single accounting or operating.                                                                        model. Don’t need to classify leases.

  1. Identify Lease
  • Is a lease contract if:
    • Right to Control Underlying Asset for a period of time in exchange for consideration
    • On Inception date: earlier of lease/ commitment
  • Separate Components: Lease/ Non-lease via Stand Alone Price
    • Lessee can elect practical expedient
      • Don’t have to separate
      • Will say in question
      • Not available to lessor
  1. At commencement date: Lessee must recognise a right of use asset & lease liability

            DR                  Right of use Asset

            CR                  Lease Liability

EXCEPTION: Lessee can elect Not to apply no 2 where:

  • Short term lease: < 12 m
  • Underlying Asset is Low Value:
    • Low Value When:
      • Lessee can benefit from the asset on own or with resources they already have
      • Underlying Asset is NOT highly dependent on other Assets
    • Initial measurement of a right of use asset: (in books lessee)
      • Initial lease liability
      • Lease PMT’s made at or before commencement date: less lease incentives received
      • Initial Direct Costs incurred by lessee
      • Estimated Cost by lessee for dismantling & restoration of underlying asset (PV!!!)
  • Initial measurement of a lease liability: (in books lessee)
    • @ PV of lease PMT’s that are NOT paid at that date
      • Lease PMT’s include:
        • Fixed payments (incl in substance) less lease incentives receivable (Lessee by lessor)
        • Variable lease PMT’s that depends on an index or rate (if not dependant will be exp)
        • Amounts expected to be payable by lessee under residual value guarantees (at the end of lease)
        • Exercise Price of purchase option if reasonable certain will exercise
        • Penalties paid for terminating a lease if reasonable certain that lessee will exercise this option

Elaborating Residual Value Guarantees:

  • On commencement date Lessor & Lessee agree on residual amount (worth at end)
  • Fair Value estimated at end can differ from residual = need to compare:
    • FV < R then lessee will need to pay difference as final PMT to lessor
    • This amount is the expected payable residual value guarantee (FV) NB
  • If FV > R lessor can decide to sell Asset to 3rd party for this higher amount. Lessee doesn’t need to payback more only gives back asset at residual agreed.

Elaborating on Discounting Rate for purpose calculating PV

  • Rate causes PV of lease PMT’s and the unguaranteed residual value to equal the sum of the fair value of underlying asset and any initial direct costs of lessor.
  • Calculate the interest rate implicit in the lease (ito lessor)
    • PV: fair value of underlying asset at commencement date + initial direct costs incurred by lessor
    • N: lease term
    • PMT: annual payments
    • FV: again from perspective of LESSOR: amount payable under residual value guaranteed by lessee + RVG from initial (on commencement) + Unguaranteed amount residual (JUST THINK ALL THAT LESSOR GETS)
    • I: ???
  • Will use the I rate above to calculate PV of lease liability that is recognised by the LESSEE
    • NB in this cal FV: what the lessee pays!!!!! So if FV< R!!!!

IF lessee did not have knowledge required?

  • Cannot calculate discount rate then use lessees incremental borrowing rate
  • Thus in calc 2 as above calc the lease liability PV: use the incremental borrowing rate also as I
  1. Subsequent Measurement of Right of use Asset
    • Cost Model PPE
      1. CA = Cost – Acc Dep (and impairment loss & adj for re-measurement of lease liability)
      2. Depreciation:
        1. If lease transfers ownership or has a purchase option at end of lease term that is reasonable certain to be exercised. Then dep from commencement date to end useful life.
        2. Else, dep to earlier of end of useful life and end of lease term.
  • Revaluation Model
    1. If Right of Use asset is in a class of PPE that uses revaluation model. Lessee can elect to not use it.
    2. IF the lessee doesn’t own any other assets in the same class of right of use asset. Then MUST use the cost model.
  1. Subsequent Measurement of Lease Liability
    • Increase CA reflects interest on lease liability
    • Decrease CA reflects lease PMT’s made
    • Re-measure CA from re-assessment & modification

Must accrue for interest if YE & PMT are not the same


  1. Statement of Financial Position

20X17            20X16


            Non-Current Assets

Right of use Asset

Equity & Liabilities

            Non-current Liabilities

            Lease Liability

Current Liabilities

Short-term portion of lease liability

  1. Statement of Profit or Loss

20X17            20X16

            Other expenses

            (including depreciation on RUA &

Any non-lease component exp)

            Net Finance Cost

(20X17: AMRT 2)

(20X16: AMRT 1)


  1. Notes for year ended

            Lease contracts in which the company is the lessee

            Right of use asset

Office equipment

20X17            20X16

Carrying Amount at the beginning of year



Re-measurement of the Lease Liability

Carrying Amount at the end of the year

Income & expenses related to leases

20X17            20X16


Depreciation- Office Building

Maintenance Expense