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LEASES - A PROJECT UPDATE
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Example 2 - uneven lease payments
A lease contains the following key terms:
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Lease term: 6 years
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Lessee incremental borrowing rate: 4%
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Lease payments: annually, made at the end of each year.
Periods
Lease payment
1 37.5
2 52.5
3 67.5
4 82.5
5 97.5
6 112.5
The effect on the lessee’s statements of financial position comprehensive income is as follows:
Periods 0 1 2 3 4 5 6 Total expenses
FINANCE APPROACH
Balance sheet
Right-of-use assets 384 (1) 320 (5) 256 192 128 64 0
Liability to make lease payments 384 (1) 362 (4) 324 269 198 108 0
Income statement
Interest on lease obligation (2) 15 14 13 11 8 4
Amortisation expense (3) 64 64 64 64 64 64
Total lease expense 79 78 77 75 72 68 450
STRAIGHT-LINE APPROACH
Balance sheet
Right-of-use assets 384 (1) 325 (7) 264 202 138 71 0
Liability to make lease payments 384 (1) 362 (4) 324 269 198 108 0
Income statement
Accretion interest (included in
total lease expense below) (6) 15 14 13 11 8 4
Total lease expense 75 75 75 75 75 75 450
Total lease expense by approach
Finance Approach 79 79 77 75 72 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 384-(37.5-15)=362.
(5) 384-64=320.
(6) The right-of-use asset amortisation charge is a balancing number so that the total expense (including accretion of
interest on the liability) will be 75 in each period.
(7) Difference between the accreted interest and the lease payment (384-(75-15)).