Lessor - Slides

IFRS 16
Leases
Lessor
LESSOR
Lessor shall classify each of its leases as a finance lease or an

operating lease p.61
Finance lease: A lease that transfers substantially all of the

risks and rewards incidental to ownership of the underlying
asset
Operating lease: A lease that does not transfer substantially all

of the risks and rewards incidental with ownership of an
underlying asset
LESSOR
Lease determination is made at inception date (p.66) and is

based on the substance of the arrangement. Examples (p.63):
• The lease transfers ownership of the underlying asset to lessee;
• The lessee has the option to purchase the underlying asset at a price
that is expected to be sufficiently lower than FV at exercise date so that
it is reasonably certain, at inception, that option will be exercised;
• The lease term is for the major part of economic life;
• At inception date, PV of lease payments approximate FV of the asset;
• Specialised asset. Example 1.

LESSOR
Additional indicators (p.64):

• If the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee;
• Gains or losses from the fluctuation in the fair value of the residual
accrue to the lessee; and
• The lessee has the ability to continue the lease for a secondary period
at a rent that is substantially lower than market rent.
LESSOR
FINANCE LEASE
Derecognise entire asset (carrying amount)
Present receivable at amount equal to net investment in the

lease
• Present value of lease payments +
• Initial direct costs.
Gross investment in lease and unearned finance income = net

investment in lease (Appendix A)
LESSOR
LEASE PAYMENTS
Lease payments comprise:
For lessee:
• Fixed payments less lease incentive;
• Variable lease payments that depend on an index or a rate;
• The exercise price of a purchase option;
• Payments of penalties for terminating the lease; AND
For lessor:
• Guaranteed residual values

LESSOR
LEASE PAYMENTS
Gross investment in the lease = Lease payments +
Unguaranteed residual value
LESSOR
Recognise finance income over the lease term – effective

interest rate p.75
Apply any payments against the gross investment in the lease:

Dr: Bank
Cr: Gross investment in lease [SFP]
And realise the portion of the unrealised finance income which

is now realised:
Dr: Unearned finance income [SFP]
Cr: Finance income [P/L] Examples 8 & 9

LESSOR
Manufacturer or dealer lessor: Ex 7 (awareness)
Only applies to a finance lease p.86:

Finance lease p.71:
• Revenue based on the fair value of the underlying asset, or if lower, the
present value of the lease payments using a market interest rate;
• The cost of sale is the carrying amount of the underlying asset less the
present value of the unguaranteed residual value; and
• Selling profit (difference between revenue and COS).
• Initial direct costs expensed as transaction cost immediately.

TAX LESSOR
Finance lease:
• SARS sees the agreement as if operating lease;
• SARS taxes income received;
• Lessor exchanged underlying asset (say PPE) for investment in lease

asset (no tax deductions);
• Lessor still however, gets wear and tear on underlying asset;
• VAT in receivable does not result in future taxable income so consider

tax base = CA
Example 11 & 19
LESSOR
OPERATING LEASE
Lessor to recognise lease payments from operating leases as
lease income on a straight line basis or another systematic
basis. Another systematic basis is used if it is more
representative of the pattern in which benefits from the
underlying asset is consumed.
Initial direct costs are capitalised to the underlying asset and

recognised on the same basis as the lease income.
Example 14
TAX LESSOR
Operating lease:
• Lessor still has the asset and wear and tear allowances;
• Straight-lined income might result in revenue received in advance or

accrued income asset;
• SARS recognises income based on actual payments
• VAT is based on the invoiced amount.
Example 15 & 20
PRESENTATION
Lessor:
• For assets leased out under operating leases, present according to the
nature of the underlying asset ie. PPE, Investment property, etc p.88
• Remember that assets leased out under finance leases would be

derecognised but a related lease receivable will be recognised. This
lease receivable is a financial instrument and so must be presented in
terms of IFRS 9.
DISCLOSURE
Lessor:
For finance leases in tabular format (p.90):

• Selling profit or loss;
• Finance income on the net investment in the lease;
• Income relating to variable lease payments not included in the net

investment in the lease.
For operating leases in tabular format (p.90):

• Lease income separately disclosing income relating to variable lease
payments that do not depend on an index or a rate.
DISCLOSURE
Lessor:
In particular for finance leases (p.94):

• A maturity analysis of the lease payments receivable, showing 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. Plus a reconciliation of the undiscounted lease
payments to the net investment in the lease, showing the unearned
finance income and discounted unguaranteed residual value.
Examples 8 & 9 Parts C

DISCLOSURE
Lessor:
In particular for operating leases (p.95 - 97):

• When doing the disclosure in IAS 16, disaggregate each class of asset
into those subject to operating leases and not; and
• A maturity analysis of lease payments, showing 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.
Example 16

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IFRS 16

Lessor shall classify each of its leases as a finance lease or an

Finance lease: A lease that transfers substantially all of the

Operating lease: A lease that does not transfer substantially all

Lease determination is made at inception date (p.66) and is

• The lease term is for the major part of economic life;

• At inception date, PV of lease payments approximate FV of the asset;

• Specialised asset. Example 1.

Additional indicators (p.64):

Present receivable at amount equal to net investment in the

• Initial direct costs.

Gross investment in lease and unearned finance income = net

• Fixed payments less lease incentive;

• Variable lease payments that depend on an index or a rate;

• The exercise price of a purchase option;

• Payments of penalties for terminating the lease; AND

• Guaranteed residual values

Recognise finance income over the lease term – effective

Apply any payments against the gross investment in the lease:

Cr: Gross investment in lease [SFP]

And realise the portion of the unrealised finance income which

Cr: Finance income [P/L] Examples 8 & 9

Manufacturer or dealer lessor: Ex 7 (awareness)

Only applies to a finance lease p.86:

• Selling profit (difference between revenue and COS).

• Initial direct costs expensed as transaction cost immediately.

• SARS taxes income received;

• Lessor exchanged underlying asset (say PPE) for investment in lease

• Lessor still however, gets wear and tear on underlying asset;

• VAT in receivable does not result in future taxable income so consider

Initial direct costs are capitalised to the underlying asset and

• Straight-lined income might result in revenue received in advance or

• SARS recognises income based on actual payments

• VAT is based on the invoiced amount.

• Remember that assets leased out under finance leases would be

For finance leases in tabular format (p.90):

• Finance income on the net investment in the lease;

• Income relating to variable lease payments not included in the net

For operating leases in tabular format (p.90):

In particular for finance leases (p.94):

Examples 8 & 9 Parts C

In particular for operating leases (p.95 - 97):

• A maturity analysis of lease payments, showing the undiscounted lease

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