Home' A Plus Magazine : August 2013 Contents Lease accounting
Candy Fong is a technical partner at Deloitte.
Type A leases
At the commencement of the lease:
Derecognize the leased asset;
Recognize a lease receivable for the lease payments and measure it at the present value of the
lease payments; and
Recognize a residual asset (that represents the lessor’s claim to the residual value of the leased
asset at the end of the lease term) and measure it using a specific formula, which is the sum of
the present value of a) the amount expected to be received at the end of the lease term and b)
expected variable lease payments, less any unearned profit.
In subsequent periods:
Measure the lease receivable at amortized cost (with the effective interest income being rec-
ognized over the lease term) – the lease receivable would be adjusted to reflect the unwinding
of discount; and
Measure the residual asset to reflect the unwinding of the discount, expected variable lease
payments and impairment.
In estimating the residual asset at initial recognition and subsequent reporting dates, lessors
would be required to take into account the expected variable lease payments (i.e . lessors would
inevitably need to estimate variable lease payments (although not required to do so in measur-
ing the lease receivable)).
Type B leases
Apply a model similar to the current operating lease (i.e . recognize lease payments as lease
income in profit or loss over the lease on either a straight-line basis or another systematic
Variable lease payments are recognized in profit or loss in the period in which the income is
Do not derecognize the underlying leased asset – continue to measure the underlying leased
asset under the applicable standards.
Options to extend
or terminate a lease
When the leased
the definition of
Include only variable lease payments that either depend on an index or
a rate or are in-substance fixed payments in the measurement of lease
liability or lease receivable.
Include extension options or termination options in determining the
lease term only when there is significant economic incentive to exercise
Require the right-of-use asset arising from the lease to be measured in
accordance with IAS 40 Investment Property (lessees).
This is a change from the current IAS 40 because the standard al-
lows, but does not require, a property held under an operating lease to
be classified as an investment proper ty. The standard allows a property
under an operating lease to be classified as an investment property pro-
vided that the property meets the definition of an investment property
and the fair value model is adopted. Such a classification alternative
under IAS 40 is available on a property-by-property basis.
Require retrospective application with specific transitional reliefs on
measurement (but not on classification).
Extensive disclosures would be required.
Table B - Proposed lessor accounting
Table C - Other key proposals under the revised draft
What is the proposed
accounting for lessors
under the revised draft?
The proposals shown in Table C may signifi-
cantly affect the financial statement metrics
of both lessees and lessors. For example,
the recognition of the right-of-use assets and
lease liabilities in the statement of financial
position (for lessees) and the application of
the receivable and residual approach (for
lessors of Type A leases) may significantly
affect gearing ratios, debt covenant ratios
and other key performance ratios. Also, in
applying the proposal, significant judgment
and estimates would inevitably be required
(e.g. whether leases should be categorized
as Type A or Type B, whether options to
renew or terminate should be included in
determining the lease term and estimates of
residual assets under the receivable and re-
sidual approach for lessors). If you have any
comments on the revised exposure draft,
please send your comments to the Institute
or the IASB by mid September.
The lessor accounting currently under IAS 17
depends on whether the lease is classified
as an operating or a finance lease. Lessors
under operating leases do not derecog-
nize the leased assets; lease income from
operating leases is recognized as income on
a systematic basis. Lessors under finance
leases recognize a receivable and recognize
finance income on the receivable over the
Under the revised draft, similar to the pro-
posed lessee accounting, the proposed lessor
accounting would depend on the nature of
the underlying leased asset (Type A or Type B
leases), except for short-term leases. Please
see Table B for details.
For short-term leases, lessors would be
given an accounting policy choice: either
the proposal set out in the revised draft or
an approach similar to the current operat-
ing lease model (i.e. recognize the lease
payments in profit or loss on a straight-line
basis over the lease term).
52 August 2013
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