20/10/2025
IFRS 16 - Accounting for leases by lessors
Classification of leases
A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
An operating lease is a lease other than a finance lease.
Situations that would normally lead to a lease being classified as a finance lease:
1. The lease transfers ownership of the asset to the lessee by the end of the lease term.
2. The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date of the option exercisability. It is reasonably certain, at the inception of the lease, that the option will be exercised.
3. The lease term is for a major part of the economic life of the asset even if the title is not transferred.
4. At the inception of the lease the present value of the lease payments amounts to at least substantially all of the fair value of the leased asset.
5. The leased assets are of such a specialized nature that only the lessee can use them without major modifications.
Finance lease: Initial measurement
Recognize lease receivable in the amount equal to the net investment in the lease
Net investment (lease receivable) in the lease equals to the payments not paid at the commencement date discounted to present value plus the initial direct costs of lessor.
Net investment (lease receivable) in the lease are payments not paid at the commencement date of the lease which include the discounted value of the following: fixed payments less any lease incentives, variable lease payments (that depend on an index or a rate), residual value guarantees, exercise price of purchase option (if the lessee is reasonably certain to exercise the option), penalties for terminating the lease (if the lease term reflects the lessee exercising an option to terminate the lease).
"Residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the assets were already of the age and in the condition expected at the end of its useful life.
(IAS 16)"
Residual value guarantee - a guarantee made to a lessor by a party unrelated (lessee) to the lessor that the value (or part of the value) of an underlying asset at the end of a lease will be at least a specified amount (part of lease payments). (IFRS 16)
Unguaranteed residual value - that portion of an underlying asset, the realization of which by a lessor is not assured or is guaranteed solely by a party related to the lessor.
Interest rate implicit in the lease (IRIL)
The rate of interest that causes the PRESENT VALUE of a) the minimum leased payments and the b) unguaranteed residual value to equal the sum of
a) the fair value of the underlying asset (the leased asset) plus b) any initial direct costs of the lessor
Note: If discounted rate is not implicit in the lease contract, use the incremental borrowing rate.
Initial direct costs - incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, except for such costs incurred by a manufacturer or dealer lessor in connection with a finance lease.
Lease incentives - payments made by a lessor to a lessee associated with a lease, or the reimbursement or assumption by a lessor of costs of a lessee.
"The journal entry is as follows: (the discounted value)
Debit Lease receivable
Credit PPE (underlying asset)"
Finance lease: Subsequent measurement
Lease modifications - a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual ease term).
Recognize finance income on the lease receivable and reduction of the lease receivable by the cash received.
"Accounting entry 1: (the interest income, using constant periodic rate of return)
Debit Lease receivable
Credit Profit or loss – Finance income
"
"Accounting entry 2: (the periodic payments)
Debit Bank account (Cash)
Credit Lease receivable"
