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OVERVIEW
 Introduction
 IAS 17 almost history
 Scope
 Identifying whether we have a lease
 Separating the lease component in a contract
 Combining contracts
 Recognition exemptions

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What is a leasing agreement?
A leasing agreement is an agreement whereby
one party ,the lessee, pays lease rentals to
another party the lessor in order to gain the use of
an asset over a period of time

IFRS 16 Leases defines a lease as an agreement

whereby the lessor conveys to the lessee, in return
for a payment or series of payments, the right to
use an asset for an agreed period of time.

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IAS 17 ALMOST HISTORY
Under the old IAS 17, the lessee must decide
whether the contract entered into is an
OPERATING LEASE or FINANCE LEASE

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FINANCE LEASE
Is a lease that transfers substantially all
the risks and rewards incidental to
ownership of an asset to the lessee (it is
assumed that the lessee buys an assets
and recognise both the ASSET AND
LIABILITY in his SOFP.

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OPERATING LEASE
Any lease other than a finance lease. It
arises when the lessor gives the lessee
the use of property in exchange for rental
payments and at the same time retain the
usual risks and rewards of ownership of
the leased property. In this case, the
Lessee only recognise the expense in the
P/L only (The lease recognise off
balance sheet)

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NEW IFRS 16 ( ISSUED IN 2016)

The leesee must recognise the Lease by Recognising

 a right of use asset and the
 Lease liability
( Both the right of use asset and the lease liability will
appear in the lessee's statement of financial position.

In other words, the lease is no longer required to

separate between OPERATING LEASE AND FINANCE
LEASE.

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SCOPE
IFRS 16 applies to leases except
1. The exploration or use of non-
regenerative resources ( eg oil and gas)
2. Biological assets (IAS 41)
3. Service concession arrangements
4. Licences of intellectual properties (IFRS
15)
5. Rights agreements under IAS 38

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1. IDENTIFYING WHETHER WE HAVE A LEASE
before we apply IFRS 16, we must be sure that the
lease exists?

1. Does it meet the definition of a contract?

A Lease is defined as a contract or part of a
contract that conveys the right to use an asset for a
period of time in exchange for consideration
2. The asset must be an identified asset explicitly or
implicitly

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3. Do we have the right to control the use of the
identified asset?
The right to control the use of the asset exists if
the entity has the following 2 rights
1. Right to obtain substantially all the economic
benefits
2. Right to direct how and what purpose the asset
is used

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The entity ( customer) has the right to direct the use of the
asset if the entity
 Can decide how and for what purpose the asset is used OR
 Cannot decide this because the “how and what for” is
predetermined but can operate the asset OR
 Cannot decide this because the “ how and what for” is
predetermined but the entity designed the asset and it is
this design that is the reason why the “ how and the what
for” is predetermined

GAAP PAGE 781

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OPTIONAL SIMPLIFIED APPROACH

Recognition exemption
IFRS 16 offers an optional simplified approach to
lessees involved in Short –term leases and
leases of Low –value assets
Any entities that chooses the simplified
approach does not recognise an asset and
liability but simply expenses the lease on
straight line basis in the Profit and loss. (old
IAS 17).

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 Low value of asset is assessed when
the asset is new
 Any asset assumed low value cannot
qualify for the simplified approach if it is
SUBLET.

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RECOGNITION AND MEASUREMENT

Two options are considered under recognition and

measurement
1. General approach – On balance sheet
2. Simplified approach – off balance sheet

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 Few definitions
1. Lease term is defined as
 the non-cancellable period for which a lessee has
the right to use an underlying asset
 together with the period covered by
- an option to extend the lease if the lessee is
reasonably certain to exercise that option
- an option to terminate the lease if the lessee is
reasonably certain not to exercise that option.

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The lease term is calculated as the total of the
following

Non- cancellable period xxx

Extension periods if certain xxx
Cancellation period if it wont cancel xxx

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DEFINITIONS CONTINUED
2. Lease payments
From the lessee perspective the
definition of a lease payment refers to 5
possible categories of payments which
may or may not be included in the lease
payments
 Fixed payments- Payments made by a
lessee to a lessor for the right to use an
asset during the lease term

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 Variable lease payments – the portion of
payments that varies with the index on rate
agreed
 Exercise price for a purchase option

 Penalties for termination option

 Amounts expected to be paid in terms of residual
value guarantees.

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DEFINITIONS CONTINUED

3. Interest rate implicit in the lease

4. Lessee’s incremental borrowing rate
5. Unguaranteed residual value
6. Initial direct costs

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RECOGNITION AND MEASUREMENT
SIMPLIFIED APPROACH

EXPENSE LEASE PAYMENTS OVER THE LEASE

TERM ( Old IAS 17)

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ACCOUNTING FOR SHORT TERM LEASE (LESSEE)

1. Simple rental agreement

2. Lease payments excluding executory costs
should be expensed on a straight line basis over
the lease period
3. If rental payments are not made on a straight line
basis ,rental expenses should be recognised on a
straight line basis
4. An asset is not recognised in the SOFP
5. The difference between amounts charged and
amounts paid will be prepayments or accruals

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SHORT TERM LEASE IN THE BOOKS OF LESSEE
Example:
Lease terms for manufacturing
equipment were N$ 50,000 a year on a
year to year basis. What are the
accounting entries required to record the
transactions?
 
Dr Rent Expense: N$ 50,000.
Cr Bank : N$ 50,000.

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 Rental payments are frequently made in
advance.
 If lease period does not coincide with
fiscal year or if the lessee prepares
interim reports , a Prepaid rent account
would be necessary to record advance
portion of the rent at the year end.
 Prepaid rent account should be adjusted
at end of each period.

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Short term leases with varying rental payments
Some short term leases specify rental terms that
provide for varying rental payments over the
lease term.
When recording rent expenses under this
agreement:
Rent payable or prepaid rent = rental expense-
Actual payment.

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EXAMPLE
Assume that the terms of lease for computer
facilities by the computer company provide for
payments of N$ 50,000 a year for the first two
years of the lease and N$120,000 per year for the
next three years.
Required:
Record the transactions in each of the five years.

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SOLUTION
Total lease payment for the five years is :
First two years – 50 000 x 2 = 100 000
Next three years -120 000 x 3 = 360 000
Total 460 000

Since rental expense will be recognised on a

straight line method : rental expense will be
460 000 = N$92 000
5

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Year 1 = Dr Cr
Rent expense 92 000
Bank 50 000
Rent payable 42 000

Year 2 = Rent expense 92 000

Bank 50 000
Rent payable 42 000
Year 3 = Rent expense 92 000
Rent payable 28000

Bank 120 000

Year 4 = Rent expense 92 000
Rent payable 28 000
Bank 120 000
Year 5 = Rent expense 92 000
Rent payable 28 000
Bank 120 000

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TEST YOUR UNDERSTANDING
Vet incorporation leases equipment on a five year lease . The
lease payment are to be made in advance as shown below:
January 1st 2011 100000
January 1st 2012 100000
January 1st 2013 140 000
January 1st 2014 170 000
January 1St 2015 210 000

The equipment is to be used evenly over 5 year period and it is

classified as an operating lease
Required:
Give entries that should be made at the time the payment is
made to allocate the proper share of rent expense to each period.

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TAX IMPLICATIONS- OPERATING LEASES
 short term leases attract value added tax (VAT )
if the lessor is a registered vendor.
 Rent is a taxable supply , chargeable to VAT at
the rate of 15%
 Pre-prepaid rent leads to deferred tax (Liability)
in the books of the lessee and deferred tax
( Asset ) in the books of the lessor.

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EXAMPLE – TAX IMPLICATIONS
Assume that the terms of the lease for
computer facilities CO Limited ( a registered
vendor) provide for payments of N$ 50
000(excluding 15% VAT) a year for the first
two years of the lease and N$138 000 per year
(including VAT at 15% for the next three
years.
Required:
Record the lease transactions in each of the
five years.

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SOLUTION
Lease payments for the five years
Rent VAT Total
First two years (57500x 2) 100000 15000 115000
Next three years(138000x 3) 360000 54 000 414 000
Total 460000 69 000 529000

For the next three years, VAT is inclusive. Therefore Rent

will be
Rent = 138000 x 100/115 = 120000
VAT = 138000 x 15/115 = 18 000

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Since Rental expense must be recognised on a straight line
basis, the rental expense will be
460000 = N$ 92 000
5
THE JOURNAL ENTRIES FOR 5 YEARS
Dr Cr
Year 1 : Rent expense 92 000
VAT 7500
Bank 57 500
Rent payable 42 000
Recording Lease expense for the first year.

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Year 2 . Dr Cr
Rent expense 92 000
VAT 7 500
Bank 57 500
Rent Payable 42 000
Record of lease expense for the second year
Year 3.
Rent expense 92000
Rent payable 28 000
VAT 18 000
Bank 138 000

4th and 5th YEAR TREATED AS 3 rd Year

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TEST YOUR UNDERSTANDING
Vet incorporation leases equipment on a five year lease. The lease
payments are VAT (15%) inclusive and are to be made in advance as
shown in the following table:
N$
January 1st 2012 115 000
January 1st 2013 115 000
January 1st 2014 161 000
January 1st 2015 195 500
January 1st 2016 241 500
Total 828 000
The equipment is to be used evenly over the 5 year period and it is
classified as an operating lease.
Required:
Give entries that should be made at the time the payment is made
to allocate the proper share of rent expense to each period.

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MEASUREMENT AND RECOGNITION
The general approach
Initial recognition
The entity should recognise the
 Right of use asset and
 The lease liability

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 Initial measurement of the lease liability is the PV of
Lease payments discounted at either the implicit interest
rate and if not readily determinable, the incremental
borrowing costs

initial measurement of right of use asset

 Lease liability
 Initial direct costs
 Prepaid lease payments
 PV of estimated future costs
 Less lease incentives received.

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Journals
Initial measurement of liability

Right of use asset xxx

Lease liability xxx

Prepaid lease payments

Right of use asset xxx
Bank xxx

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Initial direct costs
Right of use asset XXX
bank/payable xxx

Future costs
Right of use asset xxx
Provision for future costs xxx

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Lease incentives ( receipts and refunds)

Bank / receivables xxx

Right of use asset xxx

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SUBSEQUENT MEASUREMENT

Lease liability- is accounted for under the

effective interest rate method which means that
it is increased by an amount recognised as
interest and decreased by the lease payments

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 Example 2: .
  Roma trading company leases equipment from leasing
international company with the following terms:
Lease period: 5 years beginning Jan 2010
Lease payments: N$ 60 000 payable annually in advance
Estimated economic life : 5 Years
Expected residual value : Zero
The implicit interest rate : 10%
Present value factor is : 4.1699

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SOLUTION
SOLUTION:
o PV of Lease = 60,000 x 4.1699 = 250,194.

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LEASE OBLIGATION AMORTISATION SCHEDULE
YEAR OPENING INTERES CLOSING
T
BALANC PAYMENT @ 10% PRINCIPA
E L BALANC
E
01/01/10 250 194 60 000 0 60 000 190,194

31/12/10 190,194 60 000 19 019 40981 149213

31/12/11 149213 60000 14921 45079 104134

31/12/12 104134 60000 10413 49587 54 547

31/12/13 54547 60 000 5455 54545 (2)

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SUBSEQUENT MEASUREMENT – RIGHT OF USE
ASSETS

Normally uses the cost model but can use

revaluation method or fair value method
depending on circumstances.

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Subsequent measurement in terms of the
cost model =
Cost less accumulated depreciation less
impairment losses

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JOURNAL ENTRIES
1. Dec 31 2010
Obligation under finance lease 40 981
Interest expense 19 019
Bank 60 000

Payment of second instalment of lease

2. Dec 31 2011
Obligation under finance lease 45 079
Interest expense 14 921
Bank 60 000
Payment of third instalment of lease
3. Dec 2012
Obligation under Finance lease 49587
Interest expense 10413
Bank 60 000
Payment of fourth instalment

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4. Dec 31 2013
Obligation under capital lease 54 547
Interest expense 5453
Bank 60 000

Payment of last instalment

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DEPRECIATION ENTRY
Depreciation of leased equipment
250 194 = N$ 50 039
5
Therefore :
N$ N$
Dr Depreciation on leased equipment 50 039
Cr Accumulated depreciation 50 039

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ROMA TRADING-
STATEMENT OF FINANCIAL POSITION AS ON 31ST DECEMBER 2010

Non current assets. N$ N$

Leased equipment 250 194

Accumulated Dep: (50,039) 200155

Equity and Liabilities

Non-current liabilities
Obligation under finance lease 104 134
Current liabilities
Obligation under Finance lease (current portion) 45 079

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FINANCIAL STATEMENT PRESENTATION
1. Depreciation and interest expense will
be charged to the income statement
2. Leased equipment to be shown as asset
in SOFP less its depreciation
3. Lease obligation will be shown as non
current liabilities excluding the portion
that will be paid in the following year
shown as current liability.

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CONTINGENT RENTALS
 These are rentals paid above the
normal operating lease (rent) to cover
certain excesses( e.g, over use of leased
asset, escalation in inflation, etc)
 Such rentals are not included in the
calculation of the minimum lease
payments and are therefore not to be
included in the straight- lining of the
lessee’s rent.

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EXAMPLE
NUST limited ( lessee) entered into a 2 year operating lease with Wes bank
Ltd( lessor) on 1 January 2014, over a mining (excavation) equipment.
1. The following is the lease payment schedule as per the lease- agreement
• 31 December 2014 N$ 115 000
• 31 December 2015 N$ 172 500
• Contingent rent N$ 17.25
2. All the above amounts are inclusive of VAT at 15% and both parties are
registered vendors
3. The income tax rate is 30%
4. NUST Plans to use the asset evenly over the lease period
5. The following is NUST Ltd related production schedule
year Production units
2014 5000
2015 2000
Required:
Prepare journal entries in NUST Ltd’s books to record the operating lease in
both years

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SOLUTION TOTAL VAT NET
2014 115 000 15000 100 000

2015 172 500 22 500 150 000

250
000

250 000/ 2 = 125 000

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 Dr Cr
Rent expense 125 000
VAT 15 000
Bank 115 000
Rent payable 25 000

Settlement lease instalment as per agreement

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December 2015:
Dr Cr
Rent expense 125 000
VAT 22 500
BANK 172 500
Rent payable 25 000

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December 2014: Contingent rent.
Dr Cr

Rent expense 75 000

VAT 11250
Bank 86 250

Amount paid for contingent rent( 5000 units x 17.25)

Note: The amounts are inclusive of VAT so we need to
separate the VAT component)

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Contingent rent
Dr Cr
Rent expense 30 000
VAT 4 500
BANK 34 500

Payment for contingent rent: 2000 units x 17.25)

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IMPACT OF DEFERRED TAX
As mentioned earlier , accrued rent expense
results in deferred tax ( asset)in the books of the
lessee and deferred tax (liability) in the books of
the lessor.
prepaid rent leads to deferred tax (liability) in the
books of the lessee and deferred tax ( asset)in
the books of the lessor.

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 Dr Cr
Deferred tax 7500
Income tax expense 7 500

Deferred tax ( asset) arising during the first of 2

year contract

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 Dr Cr
Income tax expense 7 500
Deferred tax 7500

Reversal of deferred tax ( asset) as a result of

end of 2 year lease period.

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GROSSING UP THE IMPLICIT OR BORROWING
RATE
 If rent is paid in advance the rate needs to be grossed
to reflect the fact that interest is going to start
accruing in one years time.

Example:
The implicit rate in the lease is 14% per annum and the
present value of N$ 1 per annum for five years is 3.4331.
and Instalments are 60 000

Solution :
60 000 x 3.4331 x 1.14 = 234,824

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TEST YOUR UNDERSTANDING (MANGO LTD )

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 FINANCE LEASE IN THE BOOKS OF THE
LESSOR
 
o The agreement is treated as a sale of the asset and a loan to
the lessee on which finance is earned.
o Lease payments received is accounted for as part repayment
of principal and part of finance income.
o Initial direct costs (e.g. legal fees) are either charged against
income immediately or allocated over the lease term.
o The asset investment in finance lease is recognized at an
amount equal to the net investment in the lease.
 
 
 
 

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 SUMMARY OF ACCOUNTING ENTERIES:
1. At the inception of the lease:
Dr. Gross Investment in Lease
Cr: Non Current Asset.
 
With the present value of the minimum lease
payments/Fair value of the Leased Asset.

64
 

2. As each rental is received:

Dr: Bank A/C

Cr: Gross investment in lease.
with rental paid

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 Dr: Unearned Interest Income
Cr: Interest Income
 
with the interest charged.

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EXAMPLE:
Fan Limited leased a new item of plant of usage Ltd on January 1 st
2011 for five years. Fan limited incurred legal fees of N$ 5000(Paid in
cash) in arranging the lease. Fan limited is not a manufacturer of
plant. Five lease instalment of N$90 000 each are payable annually
in advance.
In addition Usage Ltd has guaranteed a residual value of N$ 100
000(i.e at the end of the lease ,Usage limited will pay N$ 100 000 for
the plant to Fan Limited. At the end of the lease term ownership of
the plant will transfer to usage Ltd.
The cost of the asset to Fan Limited was N$400 000 which is also
the fair value. The plant has an expected economic life of 6 years.
Both companies have 31 December year ends. The interest rate is
14.5509%

Task: Prepare a interest allocation schedule and post all the journal
entries for the five years of the lease.

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SOLUTION.
1. This is a finance lease.

2.Total lease payments = 90 000 x 5 + 100 000= 550000

Fair value of the plant to Fan Ltd 400000
The difference represents finance income 150 000

There fore the finance income must be reported in each

of the five years period because it accrues over the lease
term.

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INTEREST ALLOCATION SCHEDULE
SOLUTION PROVIDED IN CLASS

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