MFRS 16 Leases - Lessor Accounting and Sale and Leaseback

A collection of vocabulary terms and definitions regarding MFRS 16 lease accounting, focusing on lessor classification, finance and operating lease mechanics, sale and leaseback criteria, and sub-leasing arrangements.

Finance Lease

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

Operating Lease

A lease classification used when the arrangement does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset to the lessee.

Net Investment in the Lease

The amount at which a lessor recognizes assets held under a finance lease as a receivable at lease commencement, equaling the sum of lease payments and any unguaranteed residual value discounted at the interest rate implicit in the lease.

Finance Income

Income recognized by a lessor over the lease term of a finance lease, based on a pattern reflecting a constant periodic rate of return on the net investment.

Manufacturer or Dealer Lessor

A lessor that recognizes selling profit or loss at the commencement date of a finance lease in accordance with its policy for outright sales to which MFRS 15 applies.

Fixed Payments

Lease payments, including in-substance fixed payments, less any lease incentives payable, that are included in the measurement of the net investment.

Residual Value Guarantees

Guarantees provided to the lessor by the lessee, a party related to the lessee, or a third party related to the lessor that is financially capable of discharging the obligations.

Termination Penalties

Payments included in lease payments if the lease term reflects the lessee exercising an option to terminate the lease.

Selling Profit (Manufacturer Lessor)

The difference between revenue (measured as the fair value or the present value of lease payments discounted at market rate) and the cost of sales (carrying amount of the asset less present value of unguaranteed residual value).

Sale and Leaseback

An arrangement involving the sale of an asset by the owner and the simultaneous leasing of the same asset back to that owner.

Control

Assessed using MFRS 15 guidance to determine if the transfer of an asset is a sale; it involves the ability to direct the use and obtain substantially all remaining benefits from the asset.

Right-of-Use Asset (Sale and Leaseback Retained)

For a seller-lessee in a sale transaction, the asset is measured at the proportion of the previous carrying amount that relates to the right of use retained.

Sub-lease

A transaction in which a lessee (intermediate lessor) grants a right to use the underlying asset to a third party while the head lease remains in effect.

Intermediate Lessor

The original lessee in a head lease who enters into a sub-lease agreement with a third party, accounting for the two leases as separate contracts.

Unearned Finance Income

The difference between the gross investment in the lease and the net investment in the lease.

Straight-line Basis

The standard method for a lessor to recognize operating lease payments as income unless another systematic basis is more representative of the benefit pattern.