PFRS #16 Leases

• lease - is a contract, or a part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
• the following are the parties to a lease contract:

  1. lessee - right to control the use of asset. the entity that obtains the right to use an underlying asset for the period of time and exchange for consideration
  2. lessor - right to use of asset. the entity that provides the right to use an underlying asset for the period of time in exchange for consideration
• three essential elements of a lease:

  1. identified asset
  2. right to obtain substantially all of the economic benefits
  3. right to direct the use
• identified asset is an asset that can be identified asset by being explicitly stated in the contract or by being implicitly specified at the time the asset is made available for use by the customer
• • the asset is explicitly identified if it is readily available at the inception of the contract

  • the asset is implicitly identified if it is not yet available at the inception of the contract but the lessor promises to have it ready for the lessee's use at the commencement of the lease
• a portion of an asset is identified asset if:

  1. it is physically distinct
  2. if not physically distinct, the portion is not an identified asset
• lease term is the non-cancellable period of a lease, plus (or minus) any lease extension, if reasonably certain to be exercised
• a lessor classifies each of its leases as either a finance lease or an operating lease
• 1. finance lease (capital lease) is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
  2. operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
• finance lease is the lessor transfers substantially all the risks and rewards incidental to ownership over the leased asset to the lessee