need to know / leases - project update - BDO International

12 LEASES - A PROJECT UPDATE
Example 1 – illustration with equal lease payments in each period
A lease contains the following key terms:
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Lease term: 6 years
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Lease payments: Annual payments, made at the end of each year, of CU75
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Lessee incremental borrowing rate: 4%.
The effect on the lessee’s statements of financial position and comprehensive income is as follows:
Periods 0 1 2 3 4 5 6 Total expenses
FINANCE APPROACH
Balance sheet
Right-of-use assets 393 (1) 328 (5) 262 197 131 66 0
Liability to make lease payments 393 (1) 334 (4) 272 208 141 72 0
Income statement
Interest on lease obligation (2) 16 13 11 8 6 3
Amortisation expense (3) 65.5 65.5 65.5 65.5 65.5 65.5 393
Total lease expense 82 79 76 74 71 68 450
STRAIGHT-LINE APPROACH
Balance sheet
Right-of-use assets 393 (1) 334 272 208 141 72 0
Liability to make lease payments 393 (1) 334 (4) 272 208 141 72 0
Income statement
Total lease expense 75 (6) 75 75 75 75 75 450
Total lease expense by approach
Finance Approach 82 79 76 74 71 68 450
Straight-line approach 75 75 75 75 75 75 450
(1) The present value of the lease payments discounted by the incremental borrowing rate.
(2) The present value of the liability to make lease payments at beginning of the period multiplied by the incremental
interest rate.
(3) In the finance approach the right-of-use asset’s amortisation expense is calculated by dividing the right-of-use asset
carrying amount on commencement of the lease by the lease term of six years.
(4) The present value of the liability to make lease payments at beginning of the period less the ‘principal’ part of each
lease payment 393-(75-16)=334.
(5) 393-65.5=328.
(6) Accretion of interest on the liability of 16 plus amortisation of the right-of-use asset at a ‘balancing figure’ amount
of 59 (which is also used as the ‘principal’ part of the lease payment) to give a total charge of 75.