IFRS 16
Lessor accounting
Lecture 1
J Sturdy
Lessor Accounting
Specific outcome:
You should be able to account for and disclose all aspects relating to finance leases
in the books of the lessor.
Assessment criteria:
In order to achieve the specific outcome, you should be able to:
➢ explain and interpret the definitions of IFRS 16;
➢ be able to measure, record, present and disclose finance leases in the annual
financial statements of a lessor;
➢ record journal entries for finance leases relating to a lessor;
➢ calculate the finance income and unearned finance income in respect of finance
leases, in accordance with the effective interest rate method;
➢ account for the deferred tax relating to finance leases for the lessor; and
➢ apply the disclosure requirements of IFRS 16 in respect of finance leases for the
lessor in practical situations, by presenting the relevant information correctly in
a set of financial statements.
Welcome to lecture 1 of the IFRS 16 Leases Lessor Accounting.
In this module we will introduce lessor accounting and the recognition and
measurement rules of a finance lease contract in the books of a lessor.
Lessor notes and
class examples
handout
01 Introduction to lessor accounting
02
Understanding a finance lease
03 Initial recognition and
measurement of finance leases
Introduction to Lessor Accounting
In accordance with IFRS 16, the classification model for lessees and lessors is different.
Therefore, the recognition and measurement of leases are different depending on the
types of leases identified. A brief overview for lessors is introduced below.
How do you account for a
lease under IFRS 16?
RoUA & Lease LESSOR Dual model approach
LESSEE LESSOR
liability
Single SFP approach Dual model approach
Finance lease Operating lease
Initial Operating
Measurement Finance lease
lease
Except:
Simplified Initial Measurement
accounting Subsequent Initial Not within
Measurement Measurement scope of
approach?
this
Subsequent Measurement
Subsequent
module
Measurement
Finance lease
A finance lease:
A lease whereby the lessor transfers substantially all the risks and
rewards incidental to ownership of an underlying asset.
The substance of the transaction is that the lessor disposes of the
rights associated with ownership of the asset, to receive rentals from
the lessee.
Finance lease
Mr M Mr B
Beneficial owner Right of use
Lessee
Lessor $
For a period of time
Risks and rewards
transfer = FINANCE LEASE
Lessor will thus:
1 2
Recognise receivable for
De- recognise asset @ CA net investment in lease
Initial Measurement
1
De- recognise asset @ CA
The carrying amount of the leased asset is derecognised in the statement of financial
position and the difference between the net investment in the lease and carrying amount
is recognised as a profit or loss in the statement of profit and loss and other
comprehensive income.
2
Recognise receivable for
net investment in lease
Under a finance lease, the lessor recognises a receivable in the statement of financial
position at an amount equal to the net investment in the lease.
Net Gross Unearned
investment in
the lease
= investment in
the lease
- finance
income
Initial Measurement
Net Gross Unearned
investment in = investment in - finance
the lease the lease income
Gross investment - lessor
+ unguaranteed
Residual value
Residual
guarantee
value
Penalty for gaurantee residual value
terminating ( if
reasonably
certain)
LESS
incentives Variable
PAYABLE payments (e.g.
CPI/rate)
Fixed
payments
Gross
investment
Exercise price
of purchase RVG treated
options
differently for lessee
Includes in (reasonably
certain) and lessor!
substance
fixed
payments Lessee = Shortfall
Lessor = full RVG
Quiz
King Ltd (lessee) will pay R60 000 per annum for five years. King Ltd
guaranteed a residual value of at least R120 000 for the machinery but
expects that it will only need to make a payment of R40 000. Springbok Ltd
(lessor) expects that the machinery can be sold for R135 000 at the end of
the lease term.
1. What is the guaranteed residual value?
R120 000
2. What is the unguaranteed residual value?
R135 000 - R120 000 = R15 000
Quiz
King Ltd (lessee) will pay R60 000 per annum for five years. King Ltd
guaranteed a residual value of at least R120 000 for the machinery but
expects that it will only need to make a payment of R40 000. Springbok Ltd
(lessor) expects that the machinery can be sold for R135 000 at the end of
the lease term.
1. What is the guaranteed residual value? R120 000
2. What is the unguaranteed residual value? R15 000
3. What is the gross investment (lessor)?
Lessor: (60 000 x 5) + R120 000 = R420 000 + R15 000
= R435 000
Initial recognition – Lease Investment
WHEN is the investment recognised? Statement of Financial R
@ the commencement date? Position
Non-current assets …
When the lessor makes the Property, plant & equipment …
underlying asset available to
Investment in finance lease XXX
the lessee. Net
Current assets … investment
in the lease
Finance lease debtor XXX
HOW is the investment recognised at
Total assets …
initial recognition?
De- recognise asset @ CA Creditors …
Other liabilities …
Recognise receivable for
net investment in lease Total liabilities …
Equity …
Total liabilities and equity …
Net Gross Unearned
investment in
the lease = investment in
the lease - finance
income
Net
Dr Gross Investment in the lease (SFP) investment
Journal entry Cr Unearned Finance Income (SFP) in the lease
Cr Asset (SFP)
Initial measurement – Lease Investment summary
1. Calc Gross inv
Dr Gross Investment in the lease (SFP)
Net Investment in the lease
Cr Unearned Finance Income (SFP)
3. Calc Unearned FI Measurement at initial recognition
Cr Asset @ CA (SFP)
That are Unguaranteed =
receivable lessor only
Gross Investment
in the lease = Lease payments + unguaranteed
residual value
- Gross Investment
Net Investment in in the lease
the lease = discounted at the
IIL
2. Calc IIL
= Unearned finance income
Discount rate (IIL)
L
E
S
PV
S
O
PV of lease
Net +
investment
payments
Unguaranteed
in the lease
Residual
R
Value
Rate implicit in the lease =
➢ Lessor rate
Initial direct
Fair value
+ cost of the
? of the asset
lessor
Negotiation costs and costs to arrange lease
➢ Included in initial lease investment
➢ Recognised over the lease term by reduction
in finance income
Discount rate – calculator?
PMT FV
PV
FV (GRV)
PV of lease
payments + Unguaranteed
Residual
Value
Rate implicit in the lease =
➢ Lessor rate
Initial direct
Fair value
of the asset + cost of the
lessor
i=?
PV PV
Signs of
inputs in
calculator?
Initial direct cost example
PV I = 10%
Fair value = -R100 000
Period = 3 years n
Instalment = R40 211 pmt
Direct initial cost
What is the effect on the interest
(for the lessor) = R5 000 when we capitalise the IDC
Amortisation table – no capitalisation of initial direct cost
Period Installment Interest Capital Balance
100 000
20X4 40 211 10 000 30 211 69 789
20X5 40 211 6 978 33 233 36 556
20X6 40 211 3 656 36 556 NIL
20 633 100 000
Initial direct cost
Interest rate
Lessor implicit
Fair value = R100 000
Period = 3 years PV = - R105 000
Instalment = R40 211 N = 3 years
Interest rate = 10% pmt = R40 211
Direct initial cost compute i = 7.274%
(for the lessor) = R5 000
Gross Inv = (40 211 x 3) = 120 633
Amortisation table – including initial direct
cost Period Installment Interest Capital Balance
105 000
20X4 40 211 7 638 32 573 72 427
20X5 40 211 5 268 34 943 37 484
20X6 40 211 2 727 37 484 NIL
15 633 105 000
R20 633 – R15 633 = R5 000 In summary, Initial Direct Costs will be
capitalized to the PV.
Quiz
King Ltd will pay R60 000 per annum for five years. King Ltd guaranteed
a residual value of at least R120 000 for the machinery and expects that it
will only need to make a payment of R40 000. Springbok Ltd (lessor)
expects that the machinery can be sold for R135 000 at the end of the
lease term. The machinery was valued at R310 000 (fair value) for
purposes of the lease contract and valuation fee of R4 000 was paid by
Springbok Limited. King Ltd paid R2 000 to external legal advisor to
review the lease contract.
Calculate the interest rate implicit in the lease? (lessor perspective)
Initial measurement difference between a lessee and lessor
• Fair value = R100 000
• Term = 3 years
• Annual instalment = R32 000
• Guaranteed residual value by lessee = R10 000
• Amount expected payable by lessee under the residual value guarantee = R 5 000
• Initial direct Costs for Lessor = R2 000
• Lessor expects asset to be sold for R30 000
Interest rate implicit
in the lease
Lease liability
(lessee)
Net Investment
(lessor)
Initial measurement difference between a lessee and lessor
• Fair value and CA = R100 000
• Term = 3 years
• Annual instalment = R32 000
• Guaranteed residual value by lessee = R10 000
• Amount expected payable by lessee under the residual value guarantee = R 5 000
• Initial direct Costs for Lessor = R2 000
• Lessor expects asset to be sold for R30 000
Gross investment
Net Investment
(lessor)
Subsequent Measurement
Lease receivable:
Subsequent to initial measurement, the lease receivable is recognised based on the
effective interest rate method at the net amount including accumulated interest on
the initial receivable, less lease payments received and taking into account any
reassessment or lease modifications.
Interest income:
The interest income on the lease contract is presented separately in the statement of
profit or loss and other comprehensive income within finance income.
AMORTISATION TABLE
Assume following amortisation table:
Instal Int Capital 100
20.7 47 20 27 73
20.8 47 14 33 40
20.9 47 7 40 nil
141 41 100
Gross investment?
UFI?
SFP- SFP-
ITEM BOOKS OF LESSOR
ITEM
GROSS INVESTMENT UNEARNED FIN. INCOME
PPE 100 Bank 47 FinInc 20 GInvest 41
UFinInc 41 Bank 47 FinInc 14
Bank 47 FinInc 7
141 141 41 41
BANK FINANCE INCOME
GInvest 47 UFinInc 20
GInvest 47 UFinInc 14
GInvest 47 UFinInc 7
PPE P/L-
PPE 100 ITEM