COMPARISON OF IAS 17 and IFRS 16

Old vs. New Standard on Leases

IAS 17 IFRS 16
LESSEE ACCOUNTING
Impact of changes in standard Large impact

Classification of Lease The lessee has two options: All leases shall be accounted for by the lessee as a finance lease.
1. Operating lease
2. Finance lease EXCEPTION:
A lessee is permitted to apply operating lease accounting in two optional exemptions:
 Short-term lease – a lease that has a term of 12 months or less at the
commencement date of the lease.
 Low value lease

Treatment of executory costs Expense as incurred

(i.e., property taxes, repairs &
maintenance, and insurance)

Discount rate 1. Lessor’s implicit interest rate

2. Lessee’s incremental borrowing rate, if the above rate is not determinable.

Depreciation of leased property 1. There is a reasonable certainty that the lessee will obtain ownership by the end of the lease term, the lessee records depreciation on the leased asset USING THE
LESSEE’S NORMAL DEPRECIATION POLICY BASED ON THE ECONOMIC LIFE OF THE ASSET. (Depreciable cost = Cost – salvage valueend of life)

2. There is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the leased asset must be depreciated over the SHORTER of the
[lease term vs. economic life of the asset]. (Depreciable cost = Cost – guaranteed residual value)

LESSOR ACCOUNTING
IAS 17 IFRS 16
Impact of changes in standard Almost no changes

Classification of Lease A lessor shall classify leases as either:

1. An operating lease
2. A finance lease

Items to consider in operating 1. Lease bonus paid by the lessee should be recognized as a revenue over the lease term.
lease 2. Lease bonus granted by the lessor is treated as a deduction from rent revenue over the lease term.
3. Contingent rentals are added to rent revenue in the period in which they arise.
4. Lease income/expense should be recognized on a straight-line basis over the lease term (recognized revenues/expenses annually should be the same even
periodic payments are not the same.)
5. Initial direct costs (finder’s fee and legal expenses) shall be capitalized as a component of the carrying amount of the leased asset and recognized as an expense
(part of depreciation expense) over the lease term on the same basis as lease revenue.
6. Executory costs (property taxes, repairs & maintenance, and insurance) are expensed when incurred.
7. In cases the lessor granted free rent, rent expense/revenue are recorded in the books of the lessee/lessor in spite of zero rental payments.

Treatment of executory costs Expense as incurred

(i.e., property taxes, repairs &
maintenance, and insurance)
Discount rate 1. Lessor’s implicit interest rate
2. Lessee’s incremental borrowing rate, if the above rate is not determinable.

Classification of finance lease 1. Direct financing lease

2. Sales-type lease

Considerations in direct - No gross profit from the lease transaction.

financing lease - Gross investment (FLR) – Net investment (A-for-L) = Unearned Interest Revenue (UIR), is amortized over the term of the lease (Eff. Int. method).
- In cases when the title to the property is not expected to be transferred to the lessee, the asset’s residual value (Guaranteed or Unguaranteed) at the end of lease
term is included in the balance of FLR account (or Gross investment).
- To the lessor, it does NOT matter whether the residual value is guaranteed or unguaranteed.
- Initial direct costs (IDL) incurred by the LESSOR (always) is deducted from UIR (added to the net investment in the lease) and amortized over the life of the lease.

Considerations in sales-type - The lessor records the lease as a sale of inventory on a deferred payment contract.
lease - The lessor recognizes (in full) an immediate profit (manufacturer’s profit) at the commencement of the lease.
- Sales price = FMV, the PV of MLP.
- Executory costs are charged to expense when incurred.
- Cost of negotiating and arranging a lease (Initial direct cost) is charged to expense when incurred (Addition to CGS [normal] or charge to Selling expense).
- CV of leased asset is recognized as CGS.
- Gross investment also includes the unguaranteed residual value however, the PV of URV reduces the CGS.
- If GRV, its PV increases the selling price.
- If URV, its PV reduces the CGS.
- Whether GRV or URV, gross profit will be the same.
- BPO is treated same as GRV.

SALE AND LEASEBACK

Impact of changes in standard Large impact

Items to consider If sales and leaseback transaction results in a: [SELLER-LESEE]

1. FINANCE LEASE Measurement of lease liability
 Sales proceeds – carrying amount  not be immediately recognized as  The seller-lessee shall account for the leaseback as a finance lease.
gain but deferred and amortized over the lease term.  The lease liability is measured at the present value of lease payments.
o Gain from sale  deferred and amortized over the lease term.  If the sale price does not equal the fair value of the underlying asset, the seller-
o Loss on sale  recognized immediately. lessee shall make adjustment to measure the sale price at fair value.

2. OPERATING LEASE Sale price above fair value

 Established at fair value (FV = Sales price)  Any excess sale price over fair value shall be accounted for as additional
o G/L on sale and leaseback shall be recognized immediately. financing provided by the buyer-lessor to seller-lessee.
 FV > Sales price  The excess of sale price over fair value shall be deducted from the initial
o G/L shall be recognized immediately except that if the loss is measurement of lease liability for purposes of establishing the allocation
compensated by future lease rental at below market value, the fraction.
loss is deferred and amortized in proportion to the lease
payments over the period for which the asset is expected to Sale price below fair value
be used.  If the sale price is below fair value, the difference is accounted for as
 FV < Sales price prepayment of lease payment.
 The excess of fair value over sale price shall be added to the initial measurement
of lease liability for purposes of establishing the allocation fraction.
 o Sales price – FV  deferred and amortized over the period for
which the asset is expected to be used. (deferred gain); FV – Measurement of right of use asset
CV  Gain recognized immediately.  The seller-lessee shall measure the RUA arising from the leaseback at the
o If FV < CV, loss is recognized immediately. proportion of the previous carrying amount of the asset that relates to the right
of use retained by the seller-lessee.
Note: If FV < CV, write-down first the CV to its impaired FV and recognize impairment
loss. Gain or loss to be recognized
 G/L that pertains to the right retained by the seller-lessee is not recognized.
 The G/L that pertains to the right transferred to the buyer-lessor is
recognized.

[BUYER-LESSOR]
The buyer-lessor shall account for the purchase of the asset applying the lessor
accounting standard.

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Prepared by:
Brian Christian S. Villaluz, CPA