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16 LEASES - A PROJECT UPDATE LESSOR ACCOUNTING Recognition and measurement The proposals will contain two approaches to lessor accounting: –– The ‘receivable and residual’ approach and –– An approach similar to operating lease accounting. The distinction between the two approaches would be based on the same criteria used for lessee accounting (the extent of consumption of the leased asset during the lease term) with the same practical expedient if the underlying asset is property (land and/or a building or part of a building). The receivable and residual approach would apply to leases under which the lessee acquires and consumes more than an insignificant portion of the underlying asset over the lease term. Leases of investment property measured at fair value and short term leases would be outside the scope of the new leases standard, and the lessor would continue to recognise the underlying asset and recognise lease income over the lease term. Receivable and residual approach The lessor would apply the following approach: –– Initially measure a receivable for the right to receive lease payments at the present value of the lease payments, discounted using the rate the lessor charges the lessee, plus direct costs. The receivable would subsequently be measured at amortised cost using the effective interest method –– Initially measure the residual asset as an allocation of the carrying amount of the underlying asset. The initial measurement of the residual asset would comprise two amounts: (a) The gross residual asset, measured at the present value of the estimated residual value at the end of the lease term discounted using the rate the lessor charges the lessee; and (b) The deferred profit (that is, the element of any difference between the fair value and book value of the leased asset that relates to the retained, residual, asset), measured as the difference between the gross residual asset and the allocation of the carrying amount of the underlying asset. –– Subsequently measure the gross residual asset by accreting this to the estimated residual value at the end of the lease term using the rate the lessor charges the lessee. –– Defer recognition in profit or loss of the profit relating to the residual asset until the point at which that asset is sold or released. –– Present the gross residual asset and the deferred profit together as a net residual asset. –– Apply IAS 36 Impairment of Assets, when assessing whether the residual asset is impaired.
LEASES - A PROJECT UPDATE 17 Example A lease contains the following key terms: –– Lease term: 4 years –– Expected life of the leased asset: 10 years –– Lease payments: CU502, annually, made at the end of each year –– Interest rate charged to the lessee: 2.84% –– Fair value of leased asset on commencement of the lease: CU4,040 –– Carrying amount of the leased asset on commencement of the lease: CU3,840 –– Expected carrying amount of the leased asset at the end of the lease term: CU4,040*6/10=CU2,424. The effect on the lessor’s statements of financial position and comprehensive income is as follows: Periods 0 1 2 3 4 Balance sheet Lease receivable 1,873 (1) 1,424 (8) 963 488 0 Gross residual asset 2,167 (2) 2,229 (7) 2,292 2,357 2,424 Deferred profit (107) (5) (107) (107) (107) (107) Net residual asset 2,060 (3) 2,121 2,185 2,250 2,317 Income statement Day 1 profit 93 (4) Interest income (6) 53 (6) 40 27 14 Accretion income 62 (7) 63 65 67 Total income 93 115 103 92 81 (1) Present value of lease payments (n=4, payment=502, I=2.84%). Subsequently measured by using the effective interest method. (2) Represents the Expected carrying amount at the end of lease term at present value discounted by the incremental interest rate. (3) Carrying amount of asset less derecognised part of asset (3,840-1,780=2,060). The part of the asset that is derecognised in the lease is calculated by multiplying the carrying amount of the asset by the ratio between the present value of the lease payment (e.g. the fair value of the derecognised part) and the all asset’s fair value (3,840x1,873/4040=1,780). (4) Profit on partial derecognition is measured as the difference between the present value of lease payments (1,873) and the derecognised part of the asset (1,780). (5) Deferred profit is the difference between the gross residual asset (2,167) and the net residual asset (2,060) at lease’s commencement. (6) Lease receivable at beginning of a period multiplied by the interest rate (1,873x2.84%=38). (7) Subsequently the gross residual asset is measured in a manner similar to effective interest rate. The carrying amount at beginning of the period is multiplied by (1+ interest rate) (2,167x1.0284=2,229). The accretion income is 2.84%x2,167=62. (8) Calculated by using the effective interest method (1,873x1.0284–502=1,424).
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