LEASES

Part 1
(Computation)
FIXED PAYMENTS
less Lease Incentives
Example:
On Jan. 01, 2019, Entity X enters
into a 3-year lease of equipment for
annual rent of P100,000 payable at
the end of each year. The
equipment has a remaining useful
life of 10 years. Implicit rate is 10%,
while the lessee’s incremental
borrowing of 12%. Entity X uses
straight-line method of depreciation.
 FIXED PAYMENTS
Initial Measurement

Fixed Payments 100,000

Multiply by: PV of Ordinary 2.48685
Annuity = 3
Present Value of Lease 248,685
Payments
Jan. 01, 2019
Right-of-use Asset 248,685
Lease Liability 248,685
 FIXED PAYMENTS
Subsequent Measurement
(PV x (Pmt – Int) (PV – Amort) or
(PV less Pmt plus
EIR) Int)
Date Paymen Interest Amortizatio Present Value
ts n
1/1/19 - - - 248,685
12/31/1 100,0 24,869 75,131 173,554
9 00
12/31/2 100,0 17,355 82,645 90,909
0 00
12/31/2 100,0 9,091 90909 0
0 00
FIXED PAYMENTS
Subsequent Measurement

Dec. 31, 2019

Interest Expense 24,868
Lease Liability 75,132
Cash 248,685

Dec. 31, 2019

Depreciation Expense 82,895
Right-of-Use Asset 82,895
*248,685/3 = 82,895
VARIABLE PAYMENTS
based on Index
Example:
On Jan.01, 2019, ABC Company enters into a 4-
year lease of property with annual lease payment
of 100,000 payable at the beginning of each year.
The contract states that lease payments will
increase after 2 years based on increase in
consumer price index in the preceding 2 years.
The implicit rate in the lease is not readily
available. ABC’s incremental borrowing rate is
12%. ABC uses the straight line method of
depreciation. The CPI’S are as follows:
Jan.01,2019 125
Jan.01, 2021 150
 VARIABLE PAYMENTS
Initial Measurement (Lease Liability & Right-of-use Asset)

Annual Payments 100,000

Multiply by: PV of Annuity Due 3.40183
=4
Present Value of Lease 340,183
Payments
Jan. 01, 2019
Right-of-use Asset 340,183
Lease Liability 240,183
Cash 100,000
 VARIABLE PAYMENTS
Subsequent Measurement
(PV x (Pmt – Int) (PV – Amort) or
(PV less Pmt plus
EIR) Int)
Date Paymen Interest Amortizatio Present Value
ts n
1/1/19 - - - 340,183
1/1/19 100,0 - 100,000 240,183
00
1/1/20 100,0 28,822 71,178 169,005
00
1/1/21 100,0 20,281 79,719 89,286
00
1/1/22 100,0 10,714 89,286 0
00
VARIABLE PAYMENTS
Subsequent Measurement

Dec. 31, 2019

Depreciation Expense 85,046
Right-of-Use Asset 85,046
*340,183/4 = 85,046

Dec. 31, 2019

Interest Expense 28,822
Lease Liability 28,822
VARIABLE PAYMENTS
Subsequent Measurement
2020
Jan.01, 2020
Lease Liability 100,000
Cash 100,000

Dec. 31, 2020

Depreciation Expense 85,046
Right-of-Use Asset 85,046 *340,183/4 =
85,046

Dec. 31, 2020

Interest Expense 20,281
Lease Liability 20,281
VARIABLE PAYMENTS
Subsequent Measurement > Change in Index
2021

 Change in Accounting Estimate

 Calculate revised lease
payments and adjustments to
the lease liability and right-of-
use Payments
Original asset 100,000
Multiply by: Change in CPI 1.2
(150/125)
Revised Lease Payments 120,000
VARIABLE PAYMENTS
Subsequent Measurement > Change in Index
2021
Revised Lease Payments 120,000
Multiply by: PV of Annuity Due = 1.89286
2
Revised Carrying Amount of 227,143
LL
Carrying Amount of LL (189,286)
Adjustment (Increase)
IM of Right-of-Use Asset 37,858
340,183
Depreciation Expense charged to (170,092)
ROUA
Carrying Amount of ROUA 170,091
Adjustment (Increase) 37,858
Revised Carrying Amount of 207,949
 VARIABLE PAYMENTS
Subsequent Measurement > Change in Index
2021

(PV x (Pmt – Int) (PV – Amort) or

(PV less Pmt plus
EIR) Int)
Date Paymen Interest Amortizatio Present Value
ts n
1/1/21 - - - 227,143
1/1/21 120,0 - 120,000 107,143
00
1/1/22 120,0 12,857 107,143 0
00
VARIABLE PAYMENTS
Subsequent Measurement > Change in Index
2021
Jan. 01, 2021
Right-of-use Asset 37,858
Lease Liability 37,858

Jan.01, 2021
Lease Liability 120,000
Cash 120,000
VARIABLE PAYMENTS
Subsequent Measurement > Change in Index
2021
Dec. 31, 2021
Depreciation Expense 103,975
Right-of-Use Asset 103, 975
*207,949/2

Dec. 31, 2021

Interest Expense 12,857
Lease Liability 12,857
VARIABLE PAYMENTS
Subsequent Measurement > Change in Index
2022
Jan.01, 2022
Lease Liability 120,000
Cash 120,000

Dec. 31, 2022

Depreciation Expense 103,974
Right-of-Use Asset 103,974
*207,949/2
GUARANTEED RESIDUAL VALUE
Example:
On Jan. 01, 2019, ABC Co. Leased a machine.
Information on the lease follows:

Annual Rent 50,000

(payable at the beginning of each
year)
Lease Term 4 years
Useful Life 5 years
Implicit Interest Rate 12%
ABC Co. guarantees a residual value of P15,000, of
which ABC Co. expects to pay P10,000 on lease
expiration when the lease asset is reverted back to
the lessor.
GUARANTEED RESIDUAL VALUE
Initial Measurement

Description Lease PV Present

Paymen Factor Value
ts
Fixed 50,000 3.40183 170,092
Payments
Guaranteed 10,000 0.63552 6,355
RV
Jan. 01, 2019
Initial Measurement of LL and
Right-of-use Asset 176,447
176,447
ROUA
Cash 50,000
Lease Liability 126,447
GUARANTEED RESIDUAL VALUE
SM: at amortized cost (LL)

Date Payment Interes Amortizati Present

s t on Value
1/1/19 - - - 176,447
1/1/19 50,000 - 50,000 126,447
1/1/20 50,000 15,174 34,826 91,621
1/1/21 50,000 10,994 39,006 52,615
1/1/22 50,000 6,314 43,686 8,929
1/1/23 10,000 1,071 8,929 -
GUARANTEED RESIDUAL VALUE
SM: at amortized cost (LL); cost method (ROUA)

Dec. 31, 2019

Interest Expense 15,174
Lease Liability 15,174

Dec. 31, 2019

Depreciation Expense 44,112
Right-of-use Asset 44,112
*176,447/4

Jan. 01, 2020

Lease Liability 50,000
Cash 50,000
GUARANTEED RESIDUAL VALUE
Measurement at the end of Lease Term
Case 1: Expected Value = Actual Payment
FV at the end of Lease Term P5,000
Jan. 01, 2023
Lease Liability 10,000
Cash 10,000

Case 2: Expected Value ≠ Actual Payment

FV at the end of Lease Term P3,000
Jan. 01, 2023
Lease Liability 10,000
Loss on guarantee 2,000
Cash 12,000
GUARANTEED RESIDUAL VALUE
Reassessment of Lease Liability
Case 3: Change in Expected Payment
From 10,000 to 12, 000, on Dec. 31, 2020

Description Lease PV Present

Paymen Factor Value
ts (2
years)
Fixed 50,000 1.89286 94,643
Payments
Guaranteed 12,000 0.79719 9,566
RV
Revised Carrying Amount of LL 104,209
Carrying amount of LL (12/31/20) 102,615
GUARANTEED RESIDUAL VALUE
Reassessment of Lease Liability

IM of Right-of-Use Asset 176,447

Depreciation Expense charged to (88,223)
ROUA
Carrying Amount of ROUA , 88,224
12/31/20
Adjustment (Increase) 1,594
Dec. 31,Carrying
Revised 2020 Amount of 89,818
ROUA
Right-of-use Asset 1,594
Lease Liability 1,594
GUARANTEED RESIDUAL VALUE
Reassessment of Lease Liability
Date Payment Interes Amortizati Present
s t on Value
1/1/21 104,209
1/1/21 50,000 - 50,000 54,209
1/1/22 50,000 6,314 43,495 10,714
1/1/23 12,000 1,071 10,714 -
Jan.01, 2021
Lease Liability 50,000
Cash 50,000

Dec. 31, 2021

Depreciation Expense 44,909
Right-of-use Asset 44,909
*89,818/2
LEASE MODIFICATION
Change in Lease Term
On Jan. 01, 2019, Entity X enters into 3-year
lease of an office space. The annual rate is
100,000 payable in advance. Entity X has
an option to extend the lease for another 3
years at an annual rent of 120,000, which
Entity A is uncertain to exercise because it
believes there is no economic incentive to
do so. The implicit interest rate is 12%
On Dec. 31, 2020, due to a significant
change in circumstances Entity X is now
reasonably certain to extend the lease. The
revised implicit interest rate is 10%.
 LEASE MODIFICATION
Change in Lease Term
Initial Measurement
Fixed Payments 100,000
Multiply by: PV of Ordinary Annuity = 2.69005
3
Present Value of Lease 269,005
Payments
Subsequent Measurement
Date Paymen Interest Amortizati Present
ts (12%) on Value
1/1/1 269,005
9
1/1/1 100,000 - 100,000 169,005
9
1/1/2 100,000 20,281 79,719 89,286
LEASE MODIFICATION
Change in Lease Term
Reassessment of Lease Liability 12/31/20

Description Lease PV Present

Paymen Factor Value
ts (3
years)
Due on 100,000 1 100,000
1/1/21
Due on 120,000 2.48685 298,422
22,23,24
Revised Carrying Amount of LL 398,422
Carrying amount of LL (12/31/20) 100,000
Adjustment (Increase) 298,422
LEASE MODIFICATION
Change in Lease Term
Reassessment of Lease Liability 12/31/20
IM of Right-of-Use Asset 269,005
Depreciation Expense charged to (179,337)
ROUA
Carrying Amount of ROUA , 89,668
12/31/20
Adjustment (Increase) 298,422
Dec. 31, 2020
Revised Carrying Amount of 388,090
Right-of-use Asset
ROUA 298,422
Lease Liability 298,422
 LEASE MODIFICATION
Change in Lease Term
Revised Amortization Table
Date Paymen Interest Amortizati Present
ts (10%) on Value
12/31/ 398,422
20
1/1/2 100,000 - 100,000 298,422
1
1/1/2 120,000 29,842 90,158 208,264
2
1/1/2 120,000 20,826 99,174 109,091
3
1/1/2 120,000 10,909 109,091 -
4