TOPIC 7: LEASES

Summary of Leases

Lessee Accounting Lessor Accounting

Introduction
 MFRS 16 retains the “right-of-use” model which would  MFRS 16 does not change the fundamental approach to the lessor
require a lessee to recognize assets and the related lease accounting model in the former MFRS 117.
liability in the Statement of Financial Position.  It continues to require a lessor to apply the “risk and reward”
 With MFRS 16, there will no longer be a distinction of finance model in the former MFRS 117 to classify a lease arrangement as
lease and operating leases for lessee accounting. a finance lease and operating lease.
 Two types of lease are exempted from recognition of “right-  A lease is classified as a finance lease if it transfers
of-use” asset: substantially all risks and rewards incidental to ownership of
i. Short-term lease (less than 1 year) an underlying asset.
ii. Leases involving underlying assets with low value (less  A lease is classified as an operating lease if it does not transfer
than RM25,000) substantially all risks and rewards incidental to ownership of
 If lessee chooses to apply the recognition exemption, lessee an underlying asset.
needs to recognize the lease payments as an expense in the  Para 63-64 of MFRS 16 has identified the following examples
Statement of Profit or Loss and Other Comprehensive situations, which whether individually or in combination, lead to
Income. a lease being classified as a finance lease:
a) Ownership – the lease transfer ownership of the underlying
asset to the lessee by the end of the lease term.
b) Options to purchase – bargain purchase option.
c) Lease term – the major part of the economic life (>75%) of
the underlying asset, even if the title is not transferred.
d) PVLP – at the inception of the lease, PVLP at least
substantially, all of the FV of the underlying asset (>90%).
e) Specialized asset – a specialized in nature such that only the
lessee can use them without major modifications.
Accounting Treatment by Lessee: Right-of-use Model Accounting Treatment by Lessor: Finance Lease
Example 1a: (Lease payment at the beginning of year or accounting year).
On 1 January, 2022, ABC Bhd leases an office equipment from XYZ Bhd. The lease arrangements are as follows:
i. The lease term is 5 years and non-cancellable.
ii. ABC Bhd is to make annual payments of RM12,000, beginning 1 January, 2022.
 iii. The title of an office equipment will be passed to ABC Bhd at the end of lease term.
iv. The fair value of equipment is RM60,000 and an estimated economic life of 5 years.
v. The implicit rate of the lease is 8%.

ABC Bhd – Lessee: XYZ Bhd – Lessor:

1.1.22: Dr Right-of-use Asset RM51,745 1.1.22: Dr Cash RM12,000
Cr Lease liability RM39,745 Lease receivable RM39,745
Cash RM12,000 Cr Equipment RM51,745
Lease liability = PV of unpaid lease payments Lease receivable = PV of payments not received
= RM12,000 x (PVIFA4, 8%) = RM12,000 x (PVIFA4, 8%)
= RM12,000 x 3.3121 = RM39,745 = RM12,000 x 3.3121 = RM39,745
PVLP = 12,000 + 39,745 = 51,745
PVLP (51,745) < FV (60,000)
31.12.22: Dr Lease receivable RM3,180
31.12.22: Dr Interest expense (8% x 39,745) RM3,180
Cr Interest revenue (8% x 39,745) RM3,180
Cr Lease liability RM3,180
31.12.22: No entry
31.12.22: Dr Depreciation expense (51,745/5) RM10,349
Cr Accumulated depreciation RM10,349

Example 1b: (Lease payment at the end of year or accounting year)

Same as an Example 1a, assume that the ABC Bhd is to make annual payments of RM12,000 at the end of each year beginning on 31
December 2022.

ABC Bhd – Lessee: XYZ Bhd – Lessor:

1.1.22: Dr Right-of-use Asset RM47,912 1.1.22: Dr Lease receivable RM47,912
Cr Lease liability RM47,912 Cr Equipment RM47,912
Lease liability = PV of unpaid lease payments = PVLP Lease receivable = PV of payments not received = PVLP
= RM12,000 x (PVIFA5, 8%) = RM12,000 x (PVIFA5, 8%)
= RM12,000 x 3.9927 = RM47,912 = RM12,000 x 3.9927 = RM47,912
PVLP (47,912) < FV (60,000) PVLP (47,912) < FV (60,000)
31.12.22: Dr Lease liability RM12,000 31.12.22: Dr Cash RM12,000
Cr Cash RM12,000 Cr Lease receivable RM12,000
Dr Interest expense (8% x 47,912) RM3,833 Dr Lease receivable RM3,833
Cr Lease liability RM3,833 Cr Interest revenue (8% x 39,745) RM3,833

31.12.22: Dr Depreciation expense (47,912/5) RM9,582 31.12.22: No entry

Cr Accumulated depreciation RM9,582

Accounting Treatment by Lessee: Short-Term or Low Value Accounting Treatment by Lessor: Operating Lease
Example 2:
On 1 January, 2022, KL Bhd leases an office furniture from KT Bhd. The lease arrangements are as follows:
i. The lease term is 3 years and non-cancellable.
ii. ABC Bhd is to make annual payments of RM3,000, beginning 1 January, 2022.
iii. The title of an office furniture will be passed to KT Bhd at the end of lease term.
iv. The carrying amount of equipment in the book of KT Bhd on 1 January, 2022 is RM15,000 and an estimated its remaining
economic life is 6 years.
v. The implicit rate of the lease is 10%.

KL Bhd – Lessee: KT Bhd – Lessor:

1.1.22: Dr Lease expense RM3,000 1.1.22: Dr Cash RM3,000
Cr Cash RM3,000 Cr Lease revenue RM3,000

31.12.22: No subsequent recognition of lease liability and 31.12.22: Dr Depreciation expense RM2,500
depreciation expense. Cr Accumulated depreciation RM2,500
(RM15,000/6 yrs = RM2,500)

Accounting Treatment by Buyer Lessee Accounting Treatment by Manufacturer or Dealer Lessor

 At the commencement date, buyer lessee is to recognize  At the commencement date, manufacturer or dealer lessor is
right-of-use asset and lease liability. required to recognize:
 For subsequent recognition, buyer lessee should recognize: a) Revenue from the sales – the LOWER of FV of the underlying
a) Interest expense asset OR PVLP.
 b) Depreciation expense b) Cost of sales – cost or carrying amount LESS PV of
unguaranteed residual value.
c) Selling profit or loss – the difference between (a) and (b)in
accordance with MFRS 15 Revenue from Contract with
Customers for outright sales.
d) Lease receivable – net investment in the lease.
 For subsequent recognition, manufacturer or dealer lessor
should recognize an interest revenue and no recognition of
depreciation expense.

Example 3:
MT Trailers Bhd is a manufacturer of truck trailers. On 1 January 2022, MT Trailers Bhd lease a truck trailer to PT Transport Bhd under
a 6-year lease agreement that cannot be cancelled. The information about the lease is a follows:
i. PT Transport Bhd will pay an annual lease payment of RM108,158 on 31 December each year with an 8% return on nett
investment.
ii. The fair value and cost of truck trailer are RM500,000 and RM450,000 respectively.
iii. The title of truck trailer will be passed to PT Transport Bhd at the end of the lease period.
iv. The truck trailer has an expected useful life of 7 years.

PT Transport Bhd – Buyer Lessee:  Manufacturer or dealer lessor should recognize the lease
1.1.22: Dr Right-of-use Asset RM500,000 agreement as a finance lease because title of the truck trailer
Cr Lease liability RM500,000 will be passed to PT Transport Bhd at the end of the lease period,
lease term is the major part (86%) & PVLP is substantially all of
the FV of the asset (100%).
PVLP = RM108,158 x (PVIFA6, 8%)
= RM108,158 x 4.6229 = RM500,000 MT Trailers Bhd – Manufacturer or Dealer Lessor:
PVLP (500,000) = FV (500,000) 1.1.22: Dr Lease receivable RM500,000
Cost of goods sold RM450,000
31.12.22: Dr Lease liability RM108,158 Cr Sales revenue RM500,000
Cr Cash RM108,158 Inventory RM450,000
Dr Interest expense RM40,000 PVLP = RM108,158 x (PVIFA6, 8%)
Cr Lease liability (8% x 500,000) RM40,000 = RM108,158 x 4.6229 = RM500,000
31.12.22: Dr Depreciation expense (500,000/7) RM71,429 PVLP (500,000) = FV (500,000)
Cr Accumulated depreciation RM71,429
Notes: 31.12.22: Dr Cash RM108,158
 The right-of-use asset should be depreciated over its useful Cr Lease receivable RM108,158
life. Dr Lease receivable RM40,000
 If there is no reasonable certainty that the lessee will obtain Cr Interest revenue (8% x 500,000) RM40,000
ownership of the asset at the end of the lease term, the right-
of-use asset should be depreciated over the period of the 31.12.22: No entry for depreciation expense because of finance
lease, if that is shorter. lease.

Accounting Treatment by Seller-Lessee (Sale & Leaseback) Accounting Treatment for Buyer-Lessor (Sale & Leaseback)
 The accounting treatments for seller-lessee in sale and  The accounting treatments for buyer-lessor in sale and leaseback
leaseback transactions depend on whether the transfer of the transactions depend on whether the transfer of the asset is
asset is considered as a sale of that asset accordance with considered as a sale of that asset accordance with MFRS 15 –
MFRS 15 – Revenue from Contracts with Customers or not a Revenue from Contracts with Customers or not a sale.
sale.  If the buyer-lessor has control of the asset, the transfer of the
 If the seller-lessee retains control of the asset, the transfer asset is a sale transaction. Thus, the buyer-lessor is required to
of the asset is not a sale transaction. account for the leaseback as an operating lease.
 Seller-lessee retains control of the asset if:  Conversely, if the buyer-lessor has not control of the asset
a) The lease term is the major part of the remaining (seller-lessee retains control of the asset), the buyer-lessor is
economic life of the asset (>75%) required to account for the leaseback as a finance lease.
b) PVLP is substantially all of the FV of the asset (>90%)  Buyer-lessor has control of the asset if:
 If transfer of asset is considered as a sale, seller lessee a) The lease term is not the major part of the remaining
should recognize: economic life of the asset (<75%)
a) For sales – the amount of any gain/loss related to the b) PVLP is not substantially all of the FV of the asset (<90%)
rights transferred to the buyer-lessor.  If transfer of asset is considered as a sale, buyer-lessor should
b) For lease – right-of-use asset at the proportion of the recognize:
previous carrying amount of the asset that relates to the a) For purchase – purchase of asset in accordance with
right-of-use retained by seller lessee. applicable standards.
 If transfer of asset is not a sale, seller-lessee should b) For lease - lease in accordance with MFRS 16.
recognize:  If transfer of asset is not a sale, buyer-lessor should recognize:
a) The transfer proceeds as financial liabilities which shall be c) The transfer proceeds as financial assets which shall be
accounted in accordance with MFRS 9. accounted in accordance with MFRS 9.
 b) Shall continue to recognize the transferred asset. d) Shall not recognize the transferred asset.

Example 4a: (Transfer of asset is a sale – FV cash consideration is equal to FV of asset)

On 1 January 2019, PP Bhd purchased a digital machine costing RM600,000 and depreciated it on a straight-line basis over six years.
On 1 January 2022, PP Bhd arranged a sale and leaseback with GG Bhd. The machine was sold for RM500,000, which was the fair value.
PP Bhd leased it back for three years at annual rental of RM150,000, payable in arrears. The interest rate implicit is 3%. The title of
machine will revert to GG Bhd at the end of lease term. The transfer of the machine satisfies the requirement of MFRS 15 to accounted
as a sale.

PP Bhd – Seller Lessee:  Buyer-lessor has control of the machine; the transfer of the
1.1.22: Dr Cash RM500,000 machine is a sale transaction.
Accumulated depreciation RM300,000  Thus, the buyer-lessor is required to account for the leaseback as
Right-of-use asset RM254,574 an operating lease.
Cr Machine RM600,000
Lease liability RM424,290 GG Bhd – Buyer Lessor:
Gain on disposal RM30,284 1.1.22: Dr Machinery RM500,000
Cr Cash RM500,000
PVLP = lease liability = RM150,000 x (PVIFA3, 3%)
= RM150,000 x 2.8286 = RM424,290
Right-of-use asset = PVLP x Carrying amount
FV
= RM424,290 x RM300,000 31.12.22: Dr Cash RM150,000
RM500,000 Cr Lease revenue RM150,000
= RM254,574
31.12.22: Dr Depreciation expense (500,000/3) RM166,667
31.12.22: Dr Lease liability RM150,000 Cr Accumulated depreciation RM166,667
Cr Cash RM150,000
Dr Interest expense RM12,729
Cr Lease liability (3% x 424,290) RM12,729

31.12.22: Dr Depreciation expense (254,574/3) RM84,858

Cr Accumulated depreciation RM84,858
Example 4b: (Transfer of asset is a sale – FV of cash consideration is below than FV of asset)
Use the same example as an example 4a, assume that the machine was sold for RM380,000, which was lower than the fair value of the
asset of RM500,000. The annual lease payment is reduced to RM120,000. The other terms remain the same. In this case, the
adjustment of RM120,000 as a prepaid lease payment is based on the difference between the fair value of cash consideration
(RM380,000) and the fair value of the asset (RM500,000), which is more readily determinable.

PP Bhd – Seller Lessee: GG Bhd – Buyer Lessor:

1.1.22: Dr Cash RM380,000 1.1.22: Dr Machinery RM500,000
Prepaid lease payment RM120,000 Cr Cash RM380,000
Accumulated depreciation RM300,000 Deferred revenue–advance lease payment 120,000
Right-of-use asset RM203,659
Cr Machine RM600,000 Notes:
Lease liability RM339,432 The deferred revenue is subsequently recognized as lease revenue
Gain on disposal RM64,227 in the Statement Profit or Loss and Other Comprehensive Income
Notes: over the three-year lease term together with the lease payment
Prepaid lease payment is subsequently amortized as expense in received on the straight-line basis.
the Statement Profit or Loss and Other Comprehensive Income
over the three-year lease term on the straight-line basis. 31.12.22: Dr Cash RM120,000
Cr Lease revenue RM120,000
PVLP = lease liability = RM120,000 x (PVIFA3, 3%)
= RM120,000 x 2.8286 = RM339,432 Dr Deferred revenue RM40,000
Cr Lease revenue RM40,000
Right-of-use asset = PVLP x Carrying amount
(RM120,000/3 yrs = RM40,000)
FV
= RM339,432 x RM300,000
31.12.22: Dr Depreciation expense (500,000/3) RM166,667
RM500,000
Cr Accumulated depreciation RM166,667
= RM203,659

31.12.22: Dr Lease liability RM120,000

Cr Cash RM120,000
 Dr Interest expense RM10,183
Cr Lease liability (3% x 339,432) RM10,183

Dr Interest expense RM40,000

Cr Prepaid lease payment RM40,000
(RM120,000/3 yrs = RM40,000)

31.12.22: Dr Depreciation expense (203,659/3) RM67,886

Cr Accumulated depreciation RM67,868

Example 4c: (Transfer of asset is a sale – FV of cash consideration is higher than FV of asset)
Use the same example as an example 4a, assume that the machine was sold for RM580,000, which was higher than the fair value of the
asset of RM500,000. The annual lease payment is increased to RM170,000. The other terms remain the same.
PP Bhd – Seller Lessee: GG Bhd – Buyer Lessor:
1.1.22: Dr Cash RM580,000 1.1.22: Dr Machinery RM500,000
Accumulated depreciation RM300,000 Deferred asset RM80,000
Right-of-use asset RM288,517 Cr Cash RM580,000
Cr Machine RM600,000
Lease liability RM480,862 Notes:
Gain on disposal RM7,655 The deferred asset is subsequently recognized as lease expense in
Liability for additional financing the Statement Profit or Loss and Other Comprehensive Income over
-deferred income RM80,000 three-year lease term, together with the lease payment received on
the straight-line basis.
Notes:
Deferred income should be amortized as revenue in the 31.12.22: Dr Cash RM170,000
Statement Profit or Loss and Other Comprehensive Income over Cr Lease revenue RM170,000
three-year lease term on the straight-line basis.
Dr Lease expense (80,000/3) RM26,667
PVLP = lease liability = RM170,000 x (PVIFA3, 3%)
Cr Deferred asset RM26,667
= RM170,000 x 2.8286 = RM480,862
Right-of-use asset = PVLP x Carrying amount 31.12.22: Dr Depreciation expense (500,000/3) RM166,667
FV Cr Accumulated depreciation RM166,667
 = RM480,862 x RM300,000
RM500,000
= RM288,517

31.12.22: Dr Lease liability RM170,000

Cr Cash RM170,000
Dr Interest expense RM14,426
Cr Lease liability (3% x 480,862) RM14,426

Dr Deferred revenue RM26,667

Cr Lease revenue (80,000/3) RM26,667

31.12.22: Dr Depreciation expense (288,517/3) RM96,172

Cr Accumulated depreciation RM96,172

Example 4d: (Transfer of asset is not a sale)

At 1 January, 2022, KB Bhd owns a ship with carrying amount of RM30 million. The fair value of the ship on this date is RM40 million.
On this date, it sells the ship to a finance entity for cash consideration of RM40 million and immediately leases back the ship for a non-
cancellable lease period for the entire remaining economic life of the ship of 20 years and the lease payment is fixed at RM4,100,000
per year. The transfer of the ship is not a sale. The transaction merely represents an arrangement to obtain financing by the lessee. In
this case, there is no derecognition of the ship.

KB Bhd – Lessee: Finance Entity – Lessor:

1.1.22: Dr Cash RM40,000,000 1.1.22: Dr Financial asset (receivable) RM40,000,000
Cr Financial liability (borrowings) RM40,000,000 Cr Cash RM40,000,000
Amortization Schedule for Example 1a: Instalment at the beginning of each year:
Opening Instalment Outstanding Interest Closing
Year
Balance 1 Jan Balance (8%) Balance
2022 51,745 12,000 39,745 3,180 42,925
2023 42,925 12,000 30,925 2,474 33,399
2024 33,399 12,000 21,339 1,712 23,051
2025 23,051 12,000 11,051 949 12,000
2026 12,000 12,000 - - -

Amortization Schedule for Example 1b: Instalment at the end of each year:
Opening Interest Instalment Closing
Year
Balance (8%) at 31 Dec balance
2022 47,912 3,833 12,000 39,745
2023 39,745 3,180 12,000 30,925
2024 30,925 2,474 12,000 21,399
2025 21,399 1,712 12,000 11,111
2026 11,111 889 12,000 -

Amortization Schedule for Example 3: Instalment at the end of each year:

Opening Interest Instalment Closing
Year
Balance (8%) at 31 Dec balance
2022 500,000 40,000 108,158 431,842
2023 431,842 34,547 108,158 358,231
2024 358,231 28,658 108,158 278,731
2025 278,731 22,298 108,158 192,871
2026 192,871 15,430 108,158 100,143
2027 100,143 8,015 108,158 -
Amortization Schedule for Example 4a: Instalment at the end of each year:
Opening Interest Instalment Closing
Year
Balance (3%) at 31 Dec balance
2022 424,290 12,729 150,000 287,019
2023 287,019 8,611 150,000 145,630
2024 145,630 4,370 150,000 -

Amortization Schedule for Example 4b: Instalment at the end of each year:
Opening Interest Instalment Closing
Year
Balance (3%) at 31 Dec balance
2022 339,432 10,183 120,000 229,615
2023 229,615 6,888 120,000 116,503
2024 116,503 3,497 120,000 -

Amortization Schedule for Example 4c: Instalment at the end of each year:
Opening Interest Instalment Closing
Year
Balance (3%) at 31 Dec balance
2022 480,862 14,426 170,000 325,288
2023 325,288 9,759 170,000 165,047
2024 165,047 4,953 170,000 -