IFRS 16 - Leases (Lessor)


Lessor Classification

  • Two major factors for Lessors

    • Finance Lease

      • Transfers substantially all risks and rewards of ownership to lessee

        • irrespective of whether legal title is transferred or not

      • Primary Criteria:

        • Title transfers to lessee by the end of the lease term

        • BPO exists, ,and at the date the lease begins, it is reasonably certain that the lessee will exercise it

        • The lease term is of such a duration that the lessee will receive substantially all the economic benefits expected to be derived form the use of the lease property over its economic life

        • The PV of the lase payments amounts to substantially all the FV of the asset

        • The asset is specialized in nature and only the lessee can use it without major modifications

    • Operating Lease


Finance Leases

  • Manufacturer or Dealer lease

    • Offered by manufacturer or retailer as financing mechanism to facilitate sale of its own products


Lease Payments



INITIAL MEASUREMENT

  • Lessor records sale of asset

    • Sets up lease receivable for the PV of the payments due

  • Gross investment in the lease

    • Total of the lease payments receivable under a finance lease and any unguaranteed residual value accruing to the lessor

  • Net investment in the lease

    • PV of lease payment amounts and any unguaranteed residual value, each discounted by the interest rate implicit in the lease

  • Net investment in lease for manufacturer/dealer type leases:

    • PV of each lease payment, discounted back to inception of the lease using implicit rate in the lease; +

    • PV of unguaranteed residual value, discounted using the implicit rate in the lease; =

    • Net investment in lease

  • Leases offered by Financial Institutions

    • Lease payments calculated to provide lessor with market rate of return for investments of the risk level inherent in the lease

      • initial direct costs (lessor) of the lease contract are then capitalized and increase the net investment in the lease, the implicit rate in the lease is reduced and must be recalculated

      • Calculation:

        • FV of asset under lease; +

        • Initial direct costs; -

        • Lease payments made on or before the commencement date; =

        • Net investment in the lease at initial recognition

  • Manufacturer or dealers

    • JE:

      • DR Lease receivable, DR COGS; CR Revenue, CR Equipment (Inventory)




SUBSEQUENT MEASUREMENT

  • Measured at amortized cost

  • If payment is due at the beginning of the year:



DERECOGNITION

  • IFRS 9 when derecognizing the investment in the lease

  • IAS 16 when receiving PP&E back and disposing of the asset


Presentation and disclosure

  • Should include:

    • Lease income for the period arising from operating leases

    • Maturity analysis

  • For Finance leases:

    • lease income for the period

    • Maturity analysis

    • Reconciliation of total undiscounted payments


SALE-LEASEBACK TRANSACTION

  • Same as lessee accounting, just from the other side


  • If it is a sale, IFRS 15 - Revenue


Differences of IFRS and ASPE

  • ASPE term for “Finance Leasing - IFRS” is “Direct Financing or Sales-type lease”

  • Under ASPE

    • Direct Financing Lease

      • financing mechanism provided by finance company or other lender

    • Sales-type lease

      • Lease that transfers substantially all the risks and benefits of ownership to the lessee and, at commencement of the lease, the FV of the leased property is greater or less than the lessor’s carrying amount

  • Significant difference under ASPE, criteria for direct financing or sales-type lease:

    • Meets anyone of:

      • Reasonable assurance ownership transfers by the end of the term

      • Term covers substantially all economic benefits (generally >= 75% of asset’s useful life)

      • PV of minimum lease payments >= 90% of asset’s fair value

    • Credit risk is normal when compared to risk of collection of similar receivables

    • Amounts of any non-reimbursable costs that are likely to be incurred by the lessor under the lease can be reasonably estimated