TOPIC 3

LEASES

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 1

 Learning Outcomes
At the end of this chapter, you should be able to :
 Define and identify leases
 Conduct initial measurement for leases from the
perspective of lessee and lessor
 Conduct subsequent measurement for leases
from the perspective of lessee and lessor
 Identify the circumstances for derecognition of
leases and the accounting treatment
 Discuss the disclosure requirements for lease
variations
 Analyze, critically evaluate and interpret issues in
accounting for leases

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 2

 Introduction to Leases
Lease is agreement, whereby a lessor conveys to the
lessee the right to control the use of an identified asset for
an agreed period of time in exchange for consideration
return for payment or a series of payments.
• Lessee is the one who gets to control the use the
assets by paying rents.
• Lessor is the owner of the assets who rents out the
assets in exchange for consideration received.
In accounting for lease, MFRS 16 takes effect from 1
January 2019

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 3

 Introduction to Leases
Advantages of Leases
• For lessor
• a periodic receipt provides interest revenue.
• ability to retain ownership of the asset
• boost their sales revenue.
• For lessee
• flexibility in using assets.
• less costly financing

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 4

 Introduction to Leases
Commonly found in information technology,
transportation, construction and agriculture.
• Information technology assets - allows a company
to quickly adapt to changes in technology.
• Transportation assets - require huge financial
commitments. Leases are a great financing
option.
• For construction and agriculture - minimizes the
possibility that some assets might become idle at
certain periods of time.

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 5

 Definition of Lease
According to MFRS 16—Leases :
• A lease is a contract, or part of a contract, that conveys
the right to control the use of an identified asset for a
period of time in exchange for consideration.
• The right to control the use of an asset exists by obtaining
substantially all of the economic benefits from the use of
the asset and direct the use of the asset such as on how
the asset is used.
• The identified (underlying) asset is the subject of the lease,
for which the right to use that asset has been provided.
• The ‘period of time’ refers to the time or can also be the
amount of use such as the number of production units.

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 6

 Identification of Lease
Considerations in identifying whether a lease exists.
• Whether there exist an identified asset with the right to use?
• An identified asset can be explicitly or implicitly specified in the
contract.
• Whether customer has the right to obtain substantially all of
the economic benefits from the use of the identified asset
throughout the period of use?
• either directly, such as by having exclusive use of the asset throughout
the period, or indirectly, such as by having a right to sub-lease the
asset.
• Whether customer has the right to direct the use of the
identified asset throughout the period of use?
• to direct how and for what purpose the asset is used can be assessed
through decision making rights

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 7

 Identification of Lease

CLASS EXERCISE :
EXAMPLE 7.1, FAR 2
PAGE 216

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 8

 Accounting Treatment by Lessee
Lessee :
• the party who gets to use the assets and pay the
rents.
• In MFRS 16 - a single lessee accounting model is
applied.
• lessee is required to recognize assets and
liabilities for all leases, with recognition
exemption for short term leases and leases with
underlying asset that is of low value.

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 9

 Accounting Treatment by Lessee
Accounting treatment :
• Initial recognition at the commencement date.
• What is commencement date?
• Initial Recognition and Measurement
• Recognize the right-of-use asset at cost
• What is cost?
• Recognize the lease liability at the present
value of the lease payments that are not paid
at the commencement date.
• What is PVMLP?

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 10

 Accounting Treatment by Lessee
Accounting treatment :
• Subsequent measurements:
• For the right-of-use asset
• Subsequently measured using the cost model
• Can also be fair value model in MFRS 140, revaluation
model in MFRS 116
• Depreciation (for assets with definite useful life)
• Impairment as prescribed by MFRS 136
• For the lease liability
• Periodic payment of the lease installment.
• Principal payment and interest charge, and adjustments
upon any reassessment of lease modifications or revisions
in in-substance fixed lease payments.

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 11

 Accounting Treatment by Lessee
Recognition exemption in paragraph 22-49 of MFRS 16 :
• Applies to
• short term leases
• leases involving underlying assets with low value
• If lessee choose to apply the recognition exemption,
the accounting for the lease will mainly involves
items in Statement of Profit and Loss and Other
Comprehensive Income (NOT CAPITALIZED)

CLASS EXERCISE : EXAMPLE 7.2, FAR 2 PAGE 219

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 12

 Accounting Treatment by Lessor
Lessor:
• is the entity that provides the rights to use an underlying
asset for a period of time in exchange for consideration.
• The accounting treatment by lessor depends on whether
the lease is classified as a finance or operating lease.
• A finance lease arises in the contract where risks and
rewards incidental to ownership of an underlying asset are
substantially transferred to lessee.
• An operating lease arises in the contract where risks and
rewards incidental to ownership of an underlying asset are
not substantially transferred to the lessee.

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 13

 Accounting Treatment by Lessor
Finance Lease:
• Initial recognition at the commencement date.
• Initial Recognition and measurement :
• Recognize lease receivable at an amount
equals the net investment in the lease.
• What is the net investment in the lease?
• Subsequent measurements:
• Recognize periodic lease installment when
the payment is receivable
• What is the periodic lease installment ?

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 14

 Accounting Treatment by Lessor
Operating Lease:
• Lessor shall continue to :
• subsequently measure the asset that has been
leased in accordance with the nature of the
asset
• costs incurred in earning the lease income are
recognized as an expense. E.g. depreciation
expense.
• To recognize lease income on a straight-line basis
over the lease term
CLASS EXERCISE : EXAMPLE 7.3, FAR 2 PAGE 223

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 15

 Disclosure Requirement
Some examples of disclosure requirement :
• General descriptions of the leasing arrangement.
• For example, the basis on which the rent is determined, terms for renewal or
purchase options, and any restrictions in the lease arrangements.
• Details pertaining lease
• For lessee - maturity analysis of lease liabilities, as those of MFRS 7 – Financial
Instruments, separately from the maturity analyses of other financial
liabilities.
• For lessor - the maturity analysis is to show the undiscounted lease payments
to be received on an annual basis for a minimum of each of the first five years
and a total of the amounts for the remaining years
CLASS EXERCISE : EXAMPLE 7.4, FAR 2 PAGE 227

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 16

 Variations in Lease Arrangements
Identifying and Separating Lease
• The right to use an underlying asset is a separate lease component if
• customer can benefit from the use of the underlying asset on its own (or with other
resources readily available to customer), and
• the underlying asset is neither highly dependent nor highly interrelated to other
underlying assets in the contract.
• Some contracts may have both lease and non-lease components.
• Any examples?
• Some contracts may have several leases in one contract.
• Any examples?
• However, for practical expedient, a lessee may elect not to separate non-
lease components from lease components and instead account for all
components as a lease.
• Lessor, however, has none of this option and shall allocate consideration in
accordance with MFRS 15 Revenue from Contracts with Customers.

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 17

 Variations in Lease Arrangements
Manufacturer or Dealer Lessor to recognize:
• Revenue from the sales—the lower of the fair value of the
underlying asset or present value of lease payments accruing to
the lessor that is discounted using a market interest rate.
• (Cost of sales—cost, or carrying amount, less the present value
of unguaranteed residual value
• (Selling profit/loss – the difference between (a) and (b) in
accordance with MFRS 15 - Revenue from Contract with
Customers for outright sales.
• Lease receivable—net investment in the lease.
CLASS EXERCISE : EXAMPLE 7.6, FAR 2 PAGE 231

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 18

 Variations in Lease Arrangements
Sales and Leaseback:

CLASS EXERCISE : EXAMPLE 7.7, FAR 2 PAGE 234 (Note : The lease
period was for four years at an annual rental of RM40,000. The company paid RM40,000 immediately and
three further yearly installments of RM40,000 each, beginning 1 January 2020. The machinery has a useful life of
four years).

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 19

 Basis of Preparation

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 20

 Accounting Policies

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 21

 Cont...Accounting Policies

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 22

 Cont...Accounting Policies

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 23

 Prepaid Lease Rentals – Note 19

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 24

 Lease Liabilities – Note 41

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 25

 Note 41 – Lease Liabilities

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 26

 Note 19 – Prepaid Lease Rentals

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 27

 Amortisation of prepaid lease
rentals

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 28

 END OF
LECTURE

SEMESTER 1 SESSION 2020/2021 ACT 3102 FINANCIAL ACCOUNTING AND REPORTING 2 29