Topic 1 Leases

MFRS16
PHAF & ARH_PMM

TOPIC 1:
MFRS16 LEASES

CONTENT:
1. DEFINITION
2. ACCOUNT FOR RIGHT OF USE ASSETS AND
LEASE LIABILITIES IN THE RECORDS OF THE
LEASSESS
3. DISCLOSURE THE PRESENTATION OF LEASES

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DEFINITION LEASES

1. MFRS 16 – Leases was issued by the Malaysian Accounting Standards
Board (MASB) in April, 2016. The Standard is applicable for annual
periods beginning on or after 1 January, 2019.

2. Leases are contracts involving the right to control the use of an asset and
the series of payments in return for that right.

3. Lease is a contract, or part of a contract, that conveys the right to control
the use of an identified asset (the underlying asset) for a period of time
in exchange for consideration. (MFRS16)

4. The agreement involves 2 parties:
 Lessor
- Finance lease
- Operating lease
 Lessee
- Finance lease (Except short term lease and low value asset)

5. Lessor gives the lessee the right to control the use of its asset for a specific
period, in return lessee agrees to commit to a specified series of payments
to the lessor.

6. Leases are different from services (or service contract) since the customer
obtains control of the right to use an asset from the beginning. In a
service contract, the supplier retains control of the use of any resources
needed to deliver the service.

7. MFRS 16 prescribes that a lease exists when the customer controls the
use of the identified asset throughout the period of use. This means when
the customer has the right to:
 Obtain substantially all of the economic benefits from the use of
the identified asset throughout the period of use; and
 Direct the use of the identified asset throughout that period.

8. MFRS16 gives rise to several considerations in identifying whether a
lease exists or not.
 Whether there exist and identified asset with the right to use
 Whether a customer has the right to obtain substantially all of the
economics benefits from the use of the identified asset throughout
the period of use

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 Whether a customer has the right to direct the use of the identified
asset throughout the period of use.

9. Identified Asset:
 A contract contains a lease only if it relates to an identified asset.
 An Asset can be either explicitly specified in a contract or implicitly
specified at the time it is made available for use by the lessee.
 However, a lessee does not control the use of an identified asset if
the lessor has a substantive right to substitutes the asset for an
alternative asset during the lease term.

10. Directing the right to use:
 A lessee has the right to direct use and identified asset when:
o The lessee has the right to operate the asset (or to direct
others to operate the asset) throughout the period of use.
o The relevant decisions about how and for what purpose the
asset is used are predetermined

11. Example 1: Suzi Bhd and Shila Bhd

A contract between Suzi Bhd and a freight carrier (Shila Bhd) provides Suzi
Bhd with the use of 10 rail cars of a particular type for five years.

The contract specifies the rail cars; the cars are owned by Shila Bhd. Suzi
Bhd determines when, where and which goods are to be transported using
the cars.

When the cars are not in use, they are kept at Suzi Bhd’s premises. Suzi
Bhd can use the cars for another purpose (for example, storage) if it so
chooses.

However, the contract specifies that Suzi Bhd cannot transport particular
types of cargo (for example, explosives). If a particular car needs to be
serviced or repaired, Shila Bhd is required to substitute a car of the same
type. Otherwise, and other than on default by Suzi Bhd, Shila Bhd cannot
retrieve the cars during the five-year period.

The contract also requires Shila Bhd to provide an engine and a driver when
requested by Suzi Bhd. Shila Bhd keeps the engines at its premises and
provides instructions to the driver detailing Suzi Bhd’s requests to transport
goods.

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Shila Bhd can choose to use any one of a number of engines to fulfil each
of Suzi Bhd’s requests, and one engine could be used to transport not only
Suzi Bhd’s goods, but also the goods of other customers (ie if other
customers require the transportation of goods to destinations close to the
destination requested by Suzi Bhd and within a similar timeframe, Shila
Bhd can choose to attach up to 100 rail cars to the engine).

Required:
Determine the contracts contain lease or not?

(MASB Case Study)

Answer:
The contract contains leases of rail cars. Suzi Bhd has the right to use 10 rail
cars for five years.

There are 10 identified cars. The cars are explicitly specified in the contract.
Once delivered to Suzi Bhd, the cars can be substituted only when they need
to be serviced or repaired.

The engine used to transport the rail cars is not an identified asset because
it is neither explicitly specified nor implicitly specified in the contract.
Suzi Bhd has the right to control the use of the 10 rail cars throughout the five-
year period of use because:

i. Suzi Bhd has the right to obtain substantially all of the economic benefits
from use of the cars over the five-year period of use. Suzi Bhd has
exclusive use of the cars throughout the period of use, including when
they are not being used to transport Suzi Bhd’s goods.

ii. Suzi Bhd has the right to direct the use of the cars because the conditions
in paragraph B24(a) exist. The contractual restrictions on the cargo that
can be transported by the cars are protective rights of Supplier and define
the scope of Customer’s right to use the cars.

iii. Within the scope of its right of use defined in the contract, Suzi Bhd
makes the relevant decisions about how and for what purpose the cars
are used by being able to decide when and where the rail cars will be
used and which goods are transported using the cars.

iv. Suzi Bhd also determines whether and how the cars will be used when
not being used to transport its goods (for example, whether and when
they will be used for storage).

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v. Suzi Bhd has the right to change these decisions during the five-year
period of use.

vi. Although having an engine and driver (controlled by Shila Bhd) to
transport the rail cars is essential to the efficient use of the cars, Shila
Bhd’s decisions in this regard do not give it the right to direct how and
for what purpose the rail cars are used. Consequently, Shila Bhd does
not control the use of the cars during the period of use.

12. Example 2: Hamam Bhd and Hidayat Bhd

The contract between Hamam Bhd and Hidayat Bhd requires Hidayat Bhd
to transport a specified quantity of goods by using a specified type of rail
car in accordance with a stated timetable for a period of five years.
The timetable and quantity of goods specified are equivalent to Hamam Bhd
having the use of 10 rail cars for five years.

Hidayat Bhd provides the rail cars, driver and engine as part of the contract.
The contract states the nature and quantity of the goods to be transported
(and the type of rail car to be used to transport the goods).
Hidayat Bhd has a large pool of similar cars that can be used to fulfil the
requirements of the contract.

Similarly, Hidayat Bhd can choose to use any one of a number of engines to
fulfil each of Hamam Bhd’s requests, and one engine could be used to
transport not only Hamam Bhd’s goods, but also the goods of other
customers.

The cars and engines are stored at Hidayat Bhd’s premises when not being
used to transport goods.

Required:
Determine the contracts contain lease or not?

(MASB Case Study)

Answer:

The contract does not contain a lease of rail cars or of an engine. The rail
cars and the engines used to transport Hamam’s goods are not identified
assets. Hidayat Bhd has the substantive right to substitute the rail cars and
engine because:

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i. Hidayat Bhd has the practical ability to substitute each car and the
engine throughout the period of use. Alternative cars and engines are
readily available to Hidayat Bhd and Hidayat Bhd can substitute each
car and the engine without Hamam’s approval.

ii. Hidayat Bhd would benefit economically from substituting each car and
the engine. There would be minimal, if any, cost associated with
substituting each car or the engine because the cars and engines are
stored at Hidayat Bhd’s premises and Hidayat Bhd has a large pool of
similar cars and engines.

iii. Hidayat Bhd benefits from substituting each car or the engine in
contracts of this nature because substitution allows Hidayat Bhd to, for
example, (i) use cars or an engine to fulfil a task for which the cars or
engine are already positioned to perform (for example, a task at a rail
yard close to the point of origin) or (ii) use cars or an engine that would
otherwise be sitting idle because they are not being used by a Hamam
Bhd.

iv. Accordingly, Hamam Bhd does not direct the use, nor have the right to
obtain substantially all of the economic benefits from use, of an identified
car or an engine.

v. Hidayat Bhd directs the use of the rail cars and engine by selecting which
cars and engine are used for each particular delivery and obtains
substantially all of the economic benefits from use of the rail cars and
engine. Hidayat Bhd is only providing freight capacity.

13. Recognition Exemption
 A lessee may elect to account for lease payments as an expense on
a straights- line basis for the following types of leases:
a) Leases with a lease term of 12 months or LESS and containing
no purchase option – this election is made by class underlying
asset; and
b) Leases where the underlying assets has a low value when a new
(such as personal computers or small item of office furniture) –
this election can be made on a lease-by-lease basis.

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ACCOUNTING FOR LESSEE

A single lessee accounting model:

• Assets and liabilities are recorded for all leases with a term of more than 12
months, unless the underlying asset is of low value.
• Depreciation of lease assets is shown separately from interest on lease
liabilities in the SOPL.

Separating Lease and Non-lease Components

 For a contract that contains a lease components and additional
lease and non- lease components, such as the lease of an asset and
the provision of a maintenance service, leases shall allocate the
consideration payable on the basis of the relative stand-alone
prices, which shall be estimated if observable prices are not readily
available.

 As a practical expedient, a lessee may elect by class of underlying
asset, not to separate non-lease components from the lease
components and instead account for all components as a lease.

 Lessors shall allocate consideration in accordance with MFRS 15
Revenue from Contracts with Customers

Example 3:

Lessee Emani Khalisa Berhad enters into a contract to lease a warehouse
on 1 Jan 2015 for 4 years. The annual rental payments are RM 200,000
including the cleaning services, all payable at the end of the year. The rental
for similar warehouse without cleaning services is RM180,000 per annum
and the cost of cleaning services RM40,000 per annum. Implicit interest
rate is 6%. The estimated useful life for the warehouse is 20 years. Financial
year end is 31 December every year.

Question: How would you account this contract under MFRS 16

*** No classification (operating lease or financing lease) is necessary under
MFRS 16 as one accounting model applies to all leases.

Step 1:
Determine if it is a lease under MFRS 16

- Yes

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Step 2:
Is there some element other than lease element?

- Yes, cleaning services

Lease payment = Annual rental payment X Total Lease Payment

Total Lease Payment + Other element Payment

= (200,000 X (180,000 / (180,000+ 40,000))

= RM 163,636.36
= RM 163,636

Lease element = Annual rental payment X Lease Element Payment

Total Lease Payment + Other element Payment

= (200,000 X (40,000 / (180,000+ 40,000))

= RM36,363.64
= RM36,364

Step 3:
Record it, based on MFRS 16

a) At the commencement
- Recognize right to use a warehouse in the amount equal to the
lease liability plus some other items like initial direct costs.
- Calculate lease liability at PV of lease payments over the lease
term

RM 163,636.36 PV for 4 years, 6% interest rate
(refer table for PV at the last page of this topic)

= RM 163,636 X 3.48511
= RM570,289.46
= RM570,289

- Accounting entry 570,289
Dr Right-of-use Assets 570,289
Cr Lease liability

b) When a payment is made and/or at the end of reporting period.

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Workings:

- Depreciation of the Right-of-use asset:

RM570,289 / 4 years = RM142,572.25
= RM142,572

- Recognition remeasurement of the lease liability to include
interest, exclude amount paid and take any lease modifications
into account.

Interest = RM570,289 X 6%
= RM34,217.34
= RM34,217

Dr Depreciation Expenses RM142,572
Cr Accumulated Depreciation RM142,572
(To record the RoU depreciation)

Dr Finance Charge RM 34,217

Cr Lease liability RM 34,217

(To record the interest of the RoU)

Dr Lease Liability RM 163,636
Cleaning services RM36,364
Cr Bank
RM200,000

Emani Khalisa Berhad
Statement of Profit & Loss (extract)

(RM)

(-) Expenses: 142,572
Depreciation 34,217
Interest 36,364
Cleaning service 213,153

RIGHT-OF-USE ASSET
Upon lease commencement a lessee recognize:

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a) Right-of-use – the right-of-use asset is initially measured the amount
of the lease liability pus any initial DIRECT COST incurred by the
lessee

b) A lease liability – adjustment may also be required for lease incentives,
payments at or prior to commencement and restoration obligation or
similar

On Commencement date

Initial measurement of the RoU Assets:

The COST should comprise:
- The amount of the initial measurement of the lease liability
- Any lease payments made at or before the commencement date
less any lease incentives received
- Any initial direct costs incurred by the lease
- An estimate of costs to be incurred by the lessee in dismantling
and removing the underlying assets, restoring the asset to the
condition required by the terms and conditions of the lessee,
unless those cost are incurred to produce inventories.

Subsequent Years
- After lease commencement, a lessee shall measure the right-of-
use asset using the COST MODEL, UNLESS;
a) The right-of-use asset is an investment property and the
lessee fair values its investment property under MFRS40, or
b) The right-of use assets relates to class of PPE to which the
lessee applies MFRS 16’s revaluation model, in which case
all right-of-use assets relating to that class PPE can be
revalued.

LEASE LIABILITY
Commencement date

- The lease liability initially measured:
a) At the PV of the lease payments that are not paid at the date
b) Discounted using the interest rate implicit in the lease that can be
readily determined. If that rate cannot be readily determined, the
lessee shall use their incremental borrowing rate.

Determining lease payments:

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- Lease payment included in the measurement lease liability shall
comprise the following payments that are not paid at the
commencement date:

a) Fixed payment LESS any lease incentives receivable
b) Variable lease payments that depend on an index or a rate, initially

measured using the index or rate as at the commencement date
c) Amounts expected to be payable by the lessee under residual value

gurantees
d) The exercise price of a purchase option if the lease is reasonably certain

to exercise that option
e) Payments of penalties for terminating the lease, if the lease term reflects

the lessee exercising an option to terminate the lessee

SUBSEQUENT YEAR

- The lease liability is subsequently remeasured to reflect changes in:
a) The lease term (using revised discount rate)
b) The assessment of a purchase option (using a revised discount rate);
c) The amounts expected to be payable under residual value guarantees
(using an unchanged discount rate), or
d) Future lease payments resulting from a change in an index or a rate
used to determine those payments (using an unchanged discount rate)

- The remeasurement are treated as adjustments to the right-of-use asset.
- Lease modifications may also prompt remeasurement of the lease liability

unless they are to be treated as separate leases.
- Payment in arrears

a) Payments is made at the end of the year
b) Balance b/f + Finance cost (balance b/f X WACC) – Instalment paid

= Balance c/f
 Current Liability = Balance c/f – balance c/f of the next period
 Non-current liability = Balance c/f of the next period

** WACC – Weighted Average Cost Capital

Example 4

For Lessee

Ali entered into a lease on 1 January 2016. The leases has a term of 4 years
and the present value minimum lease payment is RM14,275 . Rental expense
is RM5,000 per year. WACC at 15%.

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YEAR 1

Recognize asset and liability of the asset

Dr Right-of-use 14,275
Cr Liability 14,275

Subsequent measurement

Asset

Dr Profit and loss (Amortisation expenses)
Cr Accumulated Amortisation

Liability

Dr Profit and loss (Finance cost)
Lease liability (Lease rental payment)
Cr Lease liability
Cash payment (lease rental payment)

ASSET

Year Cost of asset Account CV
(right-of-use) Amortisation at end of the
Year 1
Year 2 14,275 3,569 year
Year 3 (14275/4) 10706
Year 4 (14275-3569)
7138 7137
(3569+3569) (14275-7138)
3568
10,707 (14275-10,707)
(7138+3569)
-
14,276
(10,707+3569)

LIABILITY

Year Cost of asset Account Instalment CV

(right-of-use) Amortisation at end of the year

Year 1 14,275 2141 5,000 11,416
(14275 X 0.15) (14275+2141-5K)

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Year 2 11,416 1712 5,000 8129
Year 3 8,129 (11416 X 0.15) 5,000 (11416+1712-5K)
Year 4 4348 5,000
1,219 4348
(8,129 X 0.15) (8129+1219-5K)

652 0
(4348 X 0.15) (4348+652-5K)

DEPRECIATION OF RIGHT-OF-USE ASSET

- Follow MFRS 116 – depreciation method reflects the pattern in which the
ROU asset is consume

- The method use is straight line method
- The depreciation should start take in account in the date of the lease

commencement
- The depreciation period:

a) If ownership of the underlying asset is transferred to the lease, or the
lessee is reasonably certain to exercise a purchase option, depreciation
period is the end of the estimated useful life of the underlying asset.

b) Otherwise, depreciation period is the earlier of the end of the useful life
of the ROU asset or the end of the lease term

Example 5

Lessee X enters into a non-cancellable, non-renewable 5 year lease with Lessor
L for a machine that will be used in X’s manufacturing process. The useful life
of the underlying machine is 10 years and ownership remains with L.

You are required to determine the depreciation period

Answer: 5 years, because in the contract did not mention the purchase option at
the end of the lease term, and the ownership is remain to the lessor not lessee

Example 6

Pak Man Sdn Bhd enters to a lease non-cancellable lease contract, non-
renewable 8 years with Liverpah Sdn Bhd for a machine will use in production
of cookies. The useful life for the machine is 15 years and Pak Man Sdn Bhd
have the purchase option for the asset at the end of the end of the lease term.
The ownership of the asset is transferred to Pak Man Sdn Bhd.

You are required to determine the depreciation period:

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Answer: 15 years. Reasons;
1) Pak Man Sdn Bhd as a lessee has a purchase option at the end of accounting
period,
2) the ownership of the asset is transferred to Pak Man Sdn. Bhd. on the
commencement date.

IMPAIRMENT of RoU Asset

- Applies to MFRS136 Impairment of Asset to determine whether an RoU asset
is impaired and account for any impairment
- After the recognition of the impairment loss, future depreciation charges are
adjusted to reflect the revise Capital Allowance (CA)

Example 7

Lessee Y leases a machine for its manufacturing process over a non-cancellable
10 years period. The initial carrying amount of the right-of-use assets is
RM100,000, which is subsequently measured at cost and depreciated on a
straight line basis over 10 years. At the end of the year 5, the cash generating
unit that includes the right-of-use asset is impaired. An impairment charge of
RM20,000 is allocated to the right-of-use asset.

You are required to:

Determine the carrying amount to the right-of-use asset after impairment and
the future depreciation charge.

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Example 8: Payment in arrears

Maxim Bhd enters into 5 years lease of plant on 1 January 2017. The annual
rentals is RM11.5million, with the first instalment paid on 31 December
2017. The present value of minimum lease payments are RM50 million and the
interest rate implicit in the lease is 5% per annum.

You are required to:

a) Explain how the above lease would be accounted for the year ending 31
December 2018
-prepare a schedule of lease payment

b) Prepare an extract of the statement of profit or loss statement of financial
position for 2018

STEP 1: Recognize the Right-of-use asset at cost

STEP 2: Recognize lease liability

Dr Right-of-use Asset 50,000,000
Cr Lease Liability 50,000,000

(To record right-of use at PV)

STEP 3: Depreciation the Right-of-use Asset

- The lease term is 5 years. The useful economic life of the asset is 5
years. Therefore, the right of use asset is to be depreciated over 5 years.
If the lease term is different with useful life, choose the shorther.

Dr Depreciation expense 10,000,000

(RM50M/5 years)

Cr Right-of-use asset 10,0000,0000

(To record the depreciation of the right-of-use asset)

STEP 4: Subsequent Measurement of Lease Liability

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**The lease payment is made on 31 December every year. It remains as
payment in arrears before 31 December. Thus, the lease instalment should
not be deducted in order to calculate finance charge every year.

31 December 2018 (second year of the lease term)

Dr Finance Cost – SOPL 2,050,000
Cr Lease liability –SOFP 2,050,000

(To record the finance cost)

Dr Leases Liability – SOFP 11,500,000

Cr Bank 11,500,000

(To record the payment of lease instalment)

STEP 5: Prepare SOPL & SOFP

Maxim Berhad
Statement of Profit & Loss (extract)

Date Bal b/d (’000) (a) Interest -5% TotalLease Lease Instalment Bal c/d
(c–d) = (e)
(RM’000) (b) Liability (‘000) (d)
(a+b) = (c) (‘000)

(‘000) 41,000

31.12.2017 50,000 2,500 52,500 (11,500) 31,550
21,628
31.12.2018 41,000 (5000 X0.05) 11,209
31.12.2019 31,550
31.12.2020 21,628 2,050 43,050 (11,500) 0
31.12.2021 11,209
1,578 33,128 (11,500)

1,081 22,709 (11,500)

291 11,500 (11,500)

For the year ended 31 December 2018

(RM)

(-) Expenses: 2,050,000
Finance cost 10,000,000
Depreciation

Maxim Berhad
Statement of Financial Position (extract)
For the year ended 31 December 2018

(RM)

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Non-current Asset 40,000,000
Right-of-use asset 21,268,000
(50m-10m)

Non-current liabilities
Lease liabilities

Current Liabilities 9,922,000
Lease liability
(31,550k – 21,628k)

Example 9: Payment in advance

On 1st January 2012, Tini Bhd took out a 5 year finance lease on a new
equipment with a fair value RM362,400. The asset ownership remain to the
lessor. Tini berhad have no option to purchase the asset at the end of the lease
term. The assets useful life is 10 years. The lease agreement provided for the
first two annual payments of RM80,000 and the final three annual payments
of RM90,000 each. The first payment was to be made on 1st January 2012
The implicit interest rate was 9% per year.

You are required to:

a) Explain how the above lease would be accounted for the year ending 31
December 2014. Prepare a schedule of the lease payment.

b) Prepare an extract statement of profit and loss and statement of financial
position as at 31 December 2014

STEP 1: Recognize the Right-of-use asset at cost
STEP 2: Recognize lease liability

Dr Right-of-use of an asset 362,400
Cr Lease liability 362,400
(To record right of use at PV)

STEP 3: Depreciation the Right-of-use Asset

- The lease term is 5 years. The useful economic life of the asset is 10
years. The ownership of the asset is remain to the lessor and lessee
has no purchase option at the end of the lease term. Therefore, the

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right-of-use asset is to be depreciated over 5 years. If the lease term is
different with useful life, choose the shorter.

Dr Depreciation expense 72,480

(RM362,400/5 years)

Cr Right-of-use asset 72,480

(To record the depreciation of the right-of-use asset)

STEP 4: Subsequent Measurement of Lease Liability

**The payment of lease payment is made on 1st January every year.
There is the instalment payment in advance, because the payment made
on 1 January every year. Thus, the lease instalment should be deducted
in order to calculate finance charge every year.

Dr Finance cost – SOPL 14,249
Cr Lease Liability – SOPL 14,249
(To record the finance cost)

Dr Lease Liability – SOFP 90,000
Cr Bank 90,000

STEP 5: Prepare SOPL & SOFP

Tini Berhad
Statement of Profit & Loss (extract)
For the year ended 31 December 2015

(RM)

Date Bal b/d (a) Instalment Outstanding Finance Charge (9%) Balance c/f
(b) (a-b) (c) (a-b+c)
31.12.2012 362,400 307,816
(80,000) 282,400 25,416
31.12.2013 307,816 (362400-80k) X0.09 248,319
31.12.2014 248,319 (80,000) 227,816 172,568
31.12.2015 172,568 (90,000) 158,319 20503 90,000
31.12.2016 90,000 (90,000) 82,568
(90,000) 14,249 -
-
7,432

-

(-) Expenses: MFRS16
Finance cost PHAF & ARH_PMM
Depreciation
14,249
72,480

Tini Berhad
Statement of Financial Position (extract)
For the year ended 31 December 2015

(RM)

Non-current Asset 144,960
Right-of-use asset
(362,400 –(72,480 X 3)

Non-current liabilities 82,568
Lease liabilities

Current Liabilities 90,000
Lease liability

ACCOUNTING FOR LEASES BY LESSORS

1. Lessors shall classify each lease as an operation lease or a finance lease.
2. A lease is classified as a finance lease if it transfers substantially all the

risks and rewards incidental to ownership of an underlying asset.
Otherwise a lease is classified as an operating lease.
3. Upon lease commencement, a lessor shall recognise assets held under a
finance lease as a receivable at an amount equal to the net investment
in the lease.
4. A lessor recognises finance income over the lease term of a finance lease,
based on a pattern reflecting a constant periodic rate of return on the net
investment,
5. At the commencement date, a manufacturer or dealer lessor recognises
selling profit or loss in accordance with its policy for outright sales to
which MFRS 15 applies.
6. A lessor recognises operating lease payments as income on straight line
basis or, if more representative of the pattern in which benefit from use
of the underlying asset is diminished, another systematic basis.

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Finance Leases Operating Leases

 Derecognise the right-of-use  Retain the right-of-use asset in
asset (1) and recognise instead capacity as lessee and continue
a lease receivable equal to use to recognize depreciation
net investment in the sub lease thereon;

 Recognize the different between  Retain the lease liability in
(1) and (2) as a gain or loss in capacity as lessee and continue
the income statement to recognize interest expense
thereon
 Retain the previously /
recognised lease liability in  Recognize lease income from
capacity of lessee and recognise the sub-lease in capacity as
interest expense thereon; and operating lessor

 Recognize interest income on
the lease receivable in capacity
as finance lessor.

Finance Lease Indicators

1. Examples of situation that individually or in combination would normally
lead to a lease being classified as a finance lease are:

a) The lease transferred ownership of the asset to the lessee by the end of
the lease term

b) The lessee has the option to purchase the asset at the price which is
expected to be sufficiently lower than fair value at the date the option
become exercisable that, at the inception of the lease, it is reasonably
certain that the option will exercised

c) The lease term is for the major part of the economic life of the asset, even
if the tittle is not transferred

d) At the inception of the lease, the present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset

e) The lease assets are specialised nature such that only the lessee can use
them without major modifications being made

f) Lessor still retain the title of the leased asset
g) Thus, lessor derecognise the asset and presents it as receivables
h) The receivables are recorded at an amount equal to:

- Net investment in the lessee (FV the inception date) or
- Gross investment in the lessee (aggregate MLP + unguaranteed RV)

less unearned finance

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PHAF & ARH_PMM

Operating Lease by LESSORS

1. Lease payment by lessee shall be recognize by rental income by lessor.
2. Depreciation is to be provided, consistent with normal depreciation

policy.

Example 10:

Assume Maju Berhad, a lessor enters into a 10 years lease of equipment with
lessee. The equipment is not specialised in nature and is expected to have
alternative use to Lessor at the end of the 10 year lease term. Under the lease:

 Lessor receives annual lease payments of RM15,000, payable at the
end of the year

 Lessor expects the residual value of the equipment to be RM50,000 at
the end of the 10 year lease term

 Lessee provides a residual value guarantee that protects Lessor from
the first RM30,000 of loss for a sale at a price below the estimated
residual value at the end of the lease term (i.e RM50,000)

 The equipment has an estimated remaining economic life of 15 years,
a carrying amount of the RM100,000 and a fair value of RM111,000

 The lease does not transfer ownership of the underlying asset to lessee
at the of the lease term or contain an option to purchase the
underlying asset

 The interest rate implicit in the lease is 10.078%

SOLUTION
On the commencement date:

 Lessor classifies the leases as a finance lease because the sum of the
present value of the lease payment amounts to substantially all of the
fair value of the underlying asset.

 At lease commencement, lessor account for the lease, as follows:

Dr Net investment in the lease 111,000 (a)
Cost of goods sold 92,344 (b)
Cr Revenue
Property held for lease 103,344(c)
100,000(d)

a) The net investment in the lease consists of:

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PHAF & ARH_PMM

i- The present value of the 10 annual payments of RM15,000 plus
the guaranteed residual value of RM30,000 both discounted at
the interest rate implicit in the lease, which equals RM103,344
(i.e the lease payment) and

ii- the present value of unguaranteed residual asset of RM20,000
which equal RM7656

Note that the net investment in the lease is subject to the same
considerations as other asses on classifications as current or
non-current assets in a classified balance sheet.

b) Cost of goods sold is the carrying amount of the equipment of
RM100,000 less the present value of the unguaranteed residual
asset of RM7656

c) Revenue equals the lease receivable
d) The carrying amount of the underlying asset

At the commencement of the lease contract, lessor recognises selling
profit of RM11,000 which is calculated as the lease payment of
RM103,344 less the carrying amount of the asset RM100,000 net of
any unguaranteed residual asset (RM7656) which equals RM92,344

Subsequent Year:
Year 1 journal entries for a finance lease

Dr Cash RM15,000 (e)

Cr Net investment in the lease RM3813 (f)

Interest income RM11,187 (g)

e) Receipt of annual lease payments at the end of the year
f) Reduction of the net investment in the lease for lease payments

received of RM15,000 net of interest income RM11,187
g) Interest income is the amount that produces a constant periodic

discount rate on the remaining balance of the net investment in the
lease. See the computation below.

MFRS16
PHAF & ARH_PMM

MFRS16
PHAF & ARH_PMM

EXERCISE

Question 1

The contract between Eliya Berhad and Emir Bhd requires Emir Bhd to
transport a specified quantity of goods by using a specified type of lorry in
accordance with a stated timetable for a period of five years.
The timetable and quantity of goods specified are equivalent to Eliya Bhd
having the use of 10 lorry for six years.
Emir Bhd provides the lorry, driver and engine as part of the contract. The
contract states the nature and quantity of the goods to be transported (and the
type lorry to be used to transport the goods).
Emir Bhd has a large pool of similar lorry that can be used to fulfil the
requirements of the contract.
Similarly, Emir Bhd can choose to use any one of a number of engines to fulfil
each of Eliya Bhd’s requests, and one engine could be used to transport not
only Eliya Bhd’s goods, but also the goods of other customers.
The lorry and engines are stored at Emir Bhd’s premises when not being used
to transport goods.

Required:
Determine the contracts contain lease or not?

Question 2

Ameera Sdn Bhd is a company that produces equipment for construction firms.
The cost of producing one equipment is RM100 million. The market price is
RM150 million. The expected useful life of the equipment is 30 years.

Manis Sadeeja Sdn Bhd, a developer in Kuala Lumpur, entered into an
agreement to lease the equipment from Ameera Sdn Bhd. According to the
agreement, Manis Sadeeja Sdn Bhd will lease the equipment for 12 years at an
annual rental of RM5 million payable on 1 January. The interest rate implicit
to the lease is 10%. At the end of the 12 years, Manis Sadeeja will return the
equipment to Ameera Sdn Bhd. This means that the tittle to the equipment will
not be transferred. Ameera Sdn Bhd will be responsible for repairing and
maintaining the machine during the lease period.

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PHAF & ARH_PMM

You are required to explain and justify whether the contract contains a lease
or not.

Question 3

Lessee Elyas Khalish Berhad enters into a contract to lease a warehouse on 1
Jan 2016 for 8 years. The annual rental payments are RM 5,000,000 including
the cleaning services, all payable at the end of the year. The rental for similar
warehouse without cleaning services is RM4,500,000 per annum and the cost
of cleaning services RM700,000 per annum. Implicit interest rate is 4%. The
estimated useful life for the warehouse is 40 years. Financial year end is 31
December every year.

Question: How would you account this contract under MFRS 16

*** No classification (operating lease or financing lease) is necessary under
MFRS 16 as one accounting model applies to all leases.

Question 4

Rashid Bhd enters into 6 years lease of plant on 1 January 2013. The annual
rentals is RM22.3million, with the first instalment paid on 31 December
2013. The present value of minimum lease payments are RM50 million and the
interest rate implicit in the lease is 5% per annum.

You are required to:

a) Explain how the above lease would be accounted for the year ending 31
December 2015
-prepare a schedule of lease payment

b) Prepare an extract of the statement of profit or loss statement of financial
position for 2015

Question 5

On 1st January 2014, Hafizah Bhd took out a 7 year finance lease on a new
equipment with a fair value RMXXX. The asset ownership remain to the lessor.
Hafizah berhad have no option to purchase the asset at the end of the lease
term. The assets useful life is 10 years. The lease agreement provided for the
first two annual payments of RM75,000. The first payment was to be made
on 1st January 2014 The implicit interest rate was 9% per year.

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PHAF & ARH_PMM

You are required to:

a) Explain how the above lease would be accounted for the year ending 31
December 2013. Prepare a schedule of the lease payment.

b) Prepare an extract statement of profit and loss and statement of financial
position as at 31 December 2013

Question 6

On 1st January 2015, Khairmy Bhd took out a 4 year finance lease on a new
equipment with a fair value RM XXX. The asset ownership remain to the lessor.
Khairmy Berhad have no option to purchase the asset at the end of the lease
term. The assets useful life is 10 years. The lease agreement provided for the
first two annual payments of RM85,000. The first payment was to be made
on 1st January 2015 The implicit interest rate was 9% per year.

You are required to:

a) Explain how the above lease would be accounted for the year ending 31
December 2018. Prepare a schedule of the lease payment.

b) Prepare an extract statement of profit and loss and statement of financial
position as at 31 December 2018

Question 7

Incredible 4E Sdn Bhd makes plastic toys in Merlimau. Its financial year ends
31 December 2020. In attempts to penetrate Malaysian market, on January 1
2020, the company entered into an lease contract with Eco Duo Sdn Bhd to
lease 5 machine for 5 years in order to increase production. Incredible 4E Sdn
Bhd is required to pay Eco Duo Sdn Bhd rental of RM100,000 per annum. The
fair value of the 5 machines is RM800,000. It is estimated that the machines
have a useful life of 10 years. It is also stated in the contract that the lessor
Eco Duo Sdn Bhd, is responsible for maintaining the machine during the lease
period.

You are required to:

Prepare the journal entries to record the leasing transactions in the book of
lessee and lessor.

Question 8

MFRS16
PHAF & ARH_PMM

Habibah Jewels Sdn Bhd entered a lease agreement for a machine with
renowned leasing company in Kuala Lumpur on 1 January 2020.

The contract has the following terms and condition:

a) The lessee required to pay 5 years instalments of RM120,000
b) The first instalment commence on 1 January 2020
c) The machine has a fair value of RM600,000 on 1 January 2020
d) Habibah Jewels Sdn Bhd is required to bear all maintenance costs
e) The lease is not cancellable; and
f) The increamental borrowing rate is 10% per annum.

You are required to:

Calculate the amount that Habibah Sdn Bhd should record at the inception of
the lease and prepare the journal entry of the transaction.

Question 9

Afizah Sdn Bhd is a retailer in Ipoh selling household products. On 1 January
2020, the company entered into a lease contract for a equipment with a leasing
company in Kuala Lumpur. Afizah Sdn Bhd is required to pay eight yearly
instalments of RM20,000 per year. The first rental fee is payable in advance on
1 January 2020. The last payment will be on 1 January 2021. The fair value of
the equipment as at 31 January 2020 is equal to the fair value of the machine.

Based on the contract, the end of the lease period, the title for the equipment
will be transferred to Afizah Sdn Bhd for nominal sum of RM1. It is quite certain
that the company will exercise the purchase option at the end of the lease
period the useful life of the machine is 10 years with residual value of RM500.
The incremental borrowing rate is 15% per annum.

You are required to:

a) Prepare the journal entry in the lessee’s account to record the transaction
at the inception of the lease

b) Compute the depreciation of the lease for 2020
c) Compute the allocation of finance charge in each period by using straight

line method
d) Show the journal entries for 2021, assuming the allocation of finance

charge based on depreciation straight line method.

MFRS16
PHAF & ARH_PMM

Question 10

Casia Leasing Sdn Berhad entered into an agreement to provide RM407,230 to
Wildan Sdn Bhd to purchase an expensive imported machine on 1 January
2020. Based on the agreement, Wildan Sdn Bhd is required to pay a deposit of
RM100,000 on 1January 2020. It is also required to pay 10 instalments of
RM50,000 from 1 January 2021 to 1 Jan 2030. The interest rate implicit
throughout the lease term is 8% per annum.

Based on the contract, the tittle to the asset will be transferred to Wildan Sdn
Bhd at the end of the lease period. Besides, the contract stipulate that Wildan
Sdn Bhd is responsible for repairing and maintaining the leased asset. The
estimated useful life of the asset is 15 years with a scrap value of RM5000. To
facilate the contract, Casia Leasing Sdn Bhd has engaged a lawyer and legal
fees RM5,000 was incurred.

You are required to:

Prepare the journal entries in the book of the leassor, related to the lease
transaction, for the year 2020.

MFRS16
PHAF & ARH_PMM

PHAF & ARH /PMM_DPA40093