Leases
= finance lease if it transfers substantially all the risks and rewards incidental to ownership. A
lease is classified as an operating lease if it does not transfer substantially all the risks and
rewards incidental to ownership
Primary indicators (only one needs to be met, it to be a finance lease)
The lease transfers ownership of the asset to the lessee by the end of the lease term
The lessee has the option to purchase the asset at a price that is expected to be
substantially lower than the FV at the date the option becomes exercisable for it to be
reasonably certain at the inception of the lease that the option will be exercised
The lease term is for the major part of the economic life of the asset even if the title is
not transferred
At the inception of the lease the PV of the minimum lease pmt’s amt’s to at least
substantially all of the FV of the leased asset
The leased assets are of such a specialized nature that only the lessee can use them
w/o major modifications
Secondary indicators
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 fluctuations in the residual value of the leased asset accrue to
the lessee
The lessee has the ability to continue the lease for the secondary period at a rent that
is substantially lower than the market rent
Lease classification is made at inception and does not change during the lease term
Year Beginning of Interest Payments End of year
year
20x0 PV of lease Xxx * int. rate (pmt’s) O/B + interest
expense –
payments
20x19 xx xx xx 0
, Finance lease- lessor’s perspective Finance lease- lessee’s perspective
Initial Recognition: Initial Recognition:
-Assets – SOFP – receivable = gross investment -any direct costs of lessee added to cost of asset
-‘owns’ asset but has given risks and rewards to lessee -lessee shall depr. Asset
-Must be derecognized from lessors F/S, and show right -If there is no reasonable certainty that the lessee will
to pmt’ obtain ownership at the end of the lease term the asset
shall be fully depreciated over the shorter of the lease
term and its useful life
Current tax: Current tax:
Profit before tax Profit before tax
Wear and tear Depreciation
Gain on disposal of asset (if sold at asset) Plus interest paid (finance cost)
Less Interest income Less installment paid (deductible )
Plus Instalment received Lessee owns asset in Accn. Therefore depr. SARS does
Lessor does not own thus no depre. But SARS sees not see as owner thus no Wear and Tear
lessor as owning thus, wear and tear, SARS does not see SARS does not see a financing transaction thus only tax,
a sold asset, thus taxes on instalment and not int. Installment paid
income Finance Lease Asset CA= CA (after depre. Accounted
FLR, TB= 0, no future deductions CA= CA= closing for) to date TB=0 SARS allows no deductions
balance on amorti. Table
Finance lease liability (after interest and pmt incurred-
Asset e.g PPE, CA=0 (lessee recognizes asset), SARS final amt’ in amorti. table), TB =0
sees own, thus TB= Wear and Tear
Journals: Journals:
Initial Recognition: Initial Recognition:
(costs directly attributable to negotiating and arranging Dr. asset
lease are incl. in cost, and reduce income) Cr finance lease lliability
-Dr. Asset
Cr. Bank Subsequent measurement:
Dr. finance Cost
Dr. Finance Lease Receivable (is nil at end lease term) Dr. finance lease liability
Cr. Asset Cr. Bank
Subsequent measurement : Dr. Depr.
-Dr. Cash (pmts) Cr. Accumulated Depr.
Cr. Finance income (as calc.)
Cr. Finance receivable (diff.)- FLR
Statement of financial position
Asset xxx (carrying value)
Long term borrowings ( next year final amort.
Amt’)
Current portion of long term borrowings (Next
year less current year amorti amt’)
Statement of Comprehensive
income
Finance costs
= finance lease if it transfers substantially all the risks and rewards incidental to ownership. A
lease is classified as an operating lease if it does not transfer substantially all the risks and
rewards incidental to ownership
Primary indicators (only one needs to be met, it to be a finance lease)
The lease transfers ownership of the asset to the lessee by the end of the lease term
The lessee has the option to purchase the asset at a price that is expected to be
substantially lower than the FV at the date the option becomes exercisable for it to be
reasonably certain at the inception of the lease that the option will be exercised
The lease term is for the major part of the economic life of the asset even if the title is
not transferred
At the inception of the lease the PV of the minimum lease pmt’s amt’s to at least
substantially all of the FV of the leased asset
The leased assets are of such a specialized nature that only the lessee can use them
w/o major modifications
Secondary indicators
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 fluctuations in the residual value of the leased asset accrue to
the lessee
The lessee has the ability to continue the lease for the secondary period at a rent that
is substantially lower than the market rent
Lease classification is made at inception and does not change during the lease term
Year Beginning of Interest Payments End of year
year
20x0 PV of lease Xxx * int. rate (pmt’s) O/B + interest
expense –
payments
20x19 xx xx xx 0
, Finance lease- lessor’s perspective Finance lease- lessee’s perspective
Initial Recognition: Initial Recognition:
-Assets – SOFP – receivable = gross investment -any direct costs of lessee added to cost of asset
-‘owns’ asset but has given risks and rewards to lessee -lessee shall depr. Asset
-Must be derecognized from lessors F/S, and show right -If there is no reasonable certainty that the lessee will
to pmt’ obtain ownership at the end of the lease term the asset
shall be fully depreciated over the shorter of the lease
term and its useful life
Current tax: Current tax:
Profit before tax Profit before tax
Wear and tear Depreciation
Gain on disposal of asset (if sold at asset) Plus interest paid (finance cost)
Less Interest income Less installment paid (deductible )
Plus Instalment received Lessee owns asset in Accn. Therefore depr. SARS does
Lessor does not own thus no depre. But SARS sees not see as owner thus no Wear and Tear
lessor as owning thus, wear and tear, SARS does not see SARS does not see a financing transaction thus only tax,
a sold asset, thus taxes on instalment and not int. Installment paid
income Finance Lease Asset CA= CA (after depre. Accounted
FLR, TB= 0, no future deductions CA= CA= closing for) to date TB=0 SARS allows no deductions
balance on amorti. Table
Finance lease liability (after interest and pmt incurred-
Asset e.g PPE, CA=0 (lessee recognizes asset), SARS final amt’ in amorti. table), TB =0
sees own, thus TB= Wear and Tear
Journals: Journals:
Initial Recognition: Initial Recognition:
(costs directly attributable to negotiating and arranging Dr. asset
lease are incl. in cost, and reduce income) Cr finance lease lliability
-Dr. Asset
Cr. Bank Subsequent measurement:
Dr. finance Cost
Dr. Finance Lease Receivable (is nil at end lease term) Dr. finance lease liability
Cr. Asset Cr. Bank
Subsequent measurement : Dr. Depr.
-Dr. Cash (pmts) Cr. Accumulated Depr.
Cr. Finance income (as calc.)
Cr. Finance receivable (diff.)- FLR
Statement of financial position
Asset xxx (carrying value)
Long term borrowings ( next year final amort.
Amt’)
Current portion of long term borrowings (Next
year less current year amorti amt’)
Statement of Comprehensive
income
Finance costs
