[Music] hi guys welcome back to our channel so our topic for today will be all about leases so in this is standard C to it that will use a new standard or the new standard which is IFRS number 16 so the old standard regarding leases will no longer be applicable starting January 1 2019 okay so as defined no by the appendix a of IFRS number 16 lease is actually a contract or part of a contract that conveys the right to use once again the right to use the underlying asset for a period of time in exchange of course for a consideration one party which l once again this right lesi to use that property no then in exchange the lessi will pay consideration or will pay cash okay so sir para Pala rent transaction well in form yes it is a rent transaction but later on no in substance it is not just a rent transaction okay so once again Le under IFR 16 is a contract or part of a contract that conveys the right to use the underlying asset for a period of time in exchange for consideration okay so to be a leas now the contract must convey the right to control the use no of an identified asset all right so p right right to use or to control the use of an asset C lesi well according to IFRS number 16 right a contract conveys the right to control the use of an asset if throughout the period of use or throughout the Leist term the customer has the right to what number one the customer or the L he has the right to obtain substantially what obtain substantially all the economic benefits no economic benefits from the use again from the use of the identified asset okay so once again the first criteria right to control the use of an asset is that the lessi must obtain substantially all the economic benefits okay from the use of the Iden identify asset then number two what's the number two the Lei no the Lei has the right to direct the use of the identified okay so if the customer no or the lesie has the exclusive use or exclusive right to use the asset throughout the least term to it of use also if the L he has the right to direct right how and for what purpose the asset is used throughout the period or the list term to control the use of an asset once again to be a list a contract must convey the right to control the use of an identified asset without this two transaction are we good now operating then Finance list so sir operating list or at Finance list so operating list operating list this list once again this list does not does not transfer substantially all the what all the risk and rewards uh to ownership or o of ownership of an underlying and their lying asset once again operating list is the list that does not transfer no once again does not transfer substantially all the risk and rewards to ownership of an underlying asset it B being here in operating list who is the owner the owner will still be the lesser no once again the Lesser will still be the owner of the property we can conclude or we can safely conclude that operating list is just what is just a rent transaction because right or risk and rewards of ownership okay so Finance list this is a list no that transfers again this is a list that transfers substantially again substantially all the risk again all the risk and rewards of ownership in so even though in form once again even though in form Finance Le is just a rent transaction see to it that seems here under this classification of list uh the underlying asset will be transferred or the reent rewards of ownership will be transfer to the Lei see to it now that in substance it is actually what it is actually a sale transaction and apparently least payments are actually what are actually installment no these are considered to be installment payments okay once again here in accounting is it the form or is it the substance always remember that substance no always prevare PR Prevail over the form of the transaction so even though in form this is just a rent transaction see to it mind Finance list it is actually what it is actually a sale transaction meaning transfer right risk and rewards of ownership leie are we good so the next problem fin or operating well well fortunately paragraph 63 of IFRS number 16 is rules so according to paragraph 6 anyone would normally result to a conclusion that the leas contract is a finance lease once again anyone right would result to a conclusion Le contract is actually what is actually a finance normally the is just operating list okay so residual definition operating list will be Toms okay well letter T will be what letter T will be the transfer of ownership no again letter T will be the transfer of ownership enate letter O will be the option once again letter all oh will be the option to purchase once again option to purchase the asset all letter M will be what we call the material least term again material least term then last will be the substantial no again substantial present value of Leist payments okay transfer of ownership see to it that the if the lease no once again if the lease transfers ownership of the underlying asset to the Lei at the end of the least term at the end of the Le term it automatically Finance once again origin okay letter O will be the option to purchase the least asset so see to it that if the least right or the lessi has an option once again if the lessi has an option to purchase the asset at a price which is expected to be uh sufficiently lower than the fair value at the date the option becomes exercisable the leads will be considered to be a finance problem that at the at the Inception of the list once again at the Inception of the list it must be reasonably certain that the option will be exercised so if at the exemption of the leas option to purchase the asset on at thetion date ortion or contract so at the start of the contract or at the exemption date it must be reasonably certain that the option will be exercised okay next letter M that's the material L term so see to it that if the least term is for a major part no of the economic life of the underlying asset see to it no Finance material term well we can say least term if at least no once again at least least term is 75% of the useful life of the asset okay 12 years once again if 12 years useful life years so 75% okay then letter s will be the substantial present value once again present value po substantial present value of lease payment meaning if the present value of the lease payments amounts to substantially all of the fair value of the underlying asset at the exemption of the lease the lease will be classified as Finance lease substantial it is considered substantial if at least once again at least the present value of leas payment is what is at least 90% of the fair value of the asset so if you present value of lease payment is at least 90% of the fair value Asset will be uh revert or reverted again it will be reverted to the L at the end of the ter once again letter T or letter o m s theet will be what will be reverted back to the leret s orif transaction as a finance list because once again here in accounting get so even though right transfer of ownership no even though the asset will be reverted back to the Lesser if the lease term is at least 75% of the useful life or the present value of lease payment is at least 90% of the fair value Finance right of I say first two then last two part will be the point of view of the less all right so automatically as a general rule operating okay so operating again start operating L point of view L okay so actually Focus discussion okay so once again right according to IFRS 16 paragraph 61 lesser shall classify leases as either operating lease or Finance lease so less shall recognize no least payment under an operating list once again the least payments under an operating list will be recognized as what this will be recognized as income or should I say rent income because operating list so all Le payments now that are received once again that are received by the Lesser will just be recognized as income per these are recogniz as income on a straight line basis once again straight line basis or standard other or another systematic basis if that other systematic basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished but if the problem is silent straight inome once again rent income every period again every period must be what must be the same okay so sir every year let's say first year 100,000 second year is 120,000 and then 150,000 income well if this will be the case toal so 100 + 120 + 150 is actually equal to 370,000 p 110 100 + 110+ 150 is actually equal to 3 60,000 so divide by 3 years once again divide by 3 years annual rent income so 120,000 now will be our annual rent income straight line BAS first year second year third year okay so cash received from the Lesser i l rather then rent income and that's why lastet or liability okay so first 100000 100 20,000 12,000 income 100 receive we have to recognize 20,000 what 20,000 rent receivable for the first year or at the end of first year okay 15 110 okay now 10050 that's equal to 250,000 total rent income 120 * 24 4,000 24000 rent liability or rent payable okay then third year total 100 + 150 + 110 or that's 360,000 and since 360,000 total income see to it that at the end of least term there will be no rent receivable or rent payable that will be recognized so recognize right uh during the least term but at the end of the Le ter okay so since payment or rable that ler shall recognize Le payment from operating Les income either on a straight line basis problem or another systematic basis if this is more or or if this another systematic basis is more Representative no of the pattern in which the benefit from the use of the asset is diminished okay straight are we still good operating owner will still be the lesser the Lesser will be the one who will recognize what the Lesser will be the one who will recognize depreciation expense so lesser recogn depreciation expense and depreciation expense is computed normally depreciation expense okay consideration or concepts all right operating list because rent ini direct cost again initial direct cost paid once again paid by the L sir what if paid by the Lei paid by thei P l so ler will never once again ler will never recognize the initial direct cost paid by the Lei will be the initial direct cost paid by him okay so see to it initial direct cost will be what will be added no again these are added to the carrying amount to the carrying amount of the asset because initial direct caring amount and then recognize as expense over what this will recognize as expense over the least term okay so useful life of the asset initial direct cost this is based this is based s least term okay and any inexpense portion once again will be added carrying amount of the asset now cost sir well executory cost no these are the uh cost uh that are incurred by the lesser no in maintaining the assciation maintenance or repairs repairs and maintenance taxes okay so these cost no that are incurred by the Lesser in maintaining or in owning the asset will be what will be expense as incurred initial direct cost initial direct cost out expense over the least term executory cost these are actually expense as incurred next number three sir number three number three refundable security deposit again refundable security deposits okay so refundable security deposits C to it are not classified or not recognized as income sir from the word itself refundable at the end of the at of the refundable security deposit now is recognized as a liability liability then number four will be what number four is bonus sir bonus well sir what doas well most of theas or those are actually the least bonus or these are the additional payments made by the lessi to obtain the bonus from the as what these are treated as unearned Revenue okayed Revenue liability and then these are recognizes income again these are recognizes income over what over the least term so not outright right over the least term Mal so to apply all these not to the problems let's now move on here in illustrative problem number one so here in illustrative problem number one pepper company owns an office building and normally charges tenant 3,000 per square meter per year for office space because the occupancy rate is low Pepper company agreed to Le 1,000 square m to Iana company at 1,200 square meter for the first year no of a three-year operating list rent for the remaining years will be at the 3000 rate so first year second next pepper company moved into the building no should I say Iana Iana so Iana company moved in into the building on January 1 2022 and paid the first year rent in advance so the requirement here is the amount of rental Revenue that should be reported in the income statement for the year ended December 30 2022 okay so here's a first year will be I mean receive will be 1,200 Time 1, Square M or this is equal to 1.2 million okay so second year third year well back to the original rate 3000 soive second third year is 3 million pesos each okay so year oneus theal will be equal to 7.2 million then divide by three 3 years is 2.4 million so 2.4 million now will be the annual no again this is the annual rent income but 2.4 million or Alpha is not yet The Final Answer sir because once again year end pepper is September 30 months okay January rent income again rent income for 9 months will now be equal to 2 .4 million time 9 /2 again times 9 /2 or this is equal to guys this is equal to 1.8 million that is why problem number one Charle or 1.8 million will be our final answer illustrative problem number two here in illustrative problem number two pepper company Le the office to Evana a company for a 5-year term beginning what beginning January 1 2022 under the least terms no of the operating list rent for the first year is 800 then rent for the years 2 through 5 is 1250 perom so discounted first year then however additional discount as an inducement to enter the list pepper company granted Ian company the first 6 months of the rent free so 800 first year then 6 months to first year 400,000 receive okay first year second year third year fourth year ataka fifth year okay so so first year is 400,000 per years 2 through five 1 to 25050 4 plus 400,000 or this is equal to 5.4 million okay by rent income again the annual no rent income will be equal to 5 .4 million divided by 5 or this is equal to 1,800,000 pesos so if the question is the amount that that should be reported as rental income for 2020 to 1,80 or Charlie will now be our final answer okay now illustrative problem number three illustrative problem number three on January 1 2017 pepper company leased a building to a Vana company under a 4year operating list the monthly once again monthly monthly rental for 2017 18 19 and 20 is 100 150 200 and 250,000 respectively then rentals are payable at the end of each month then all rental payments within the year were made when due so the requirement here is the amount that should be reported as rent receivable from Ivana company on December 31 2018 so for the years 2017 2018 2019 at 2020 so monthly rentals receive from Iana well 2017 that's 100,000 201850 202,000 then 2020 250,000 okay so annual rental annual rentals received from Iana will be 100 * 12 or that's 1.2 million 150 * 12 or this is equal too 150 * 12 this is equal to 1.8 million 200 * 12 this is equal to 2.4 million and then 250 no * 12 this is actually equal to 3 million pesos and adding these four annual rentals will give us how much 1 2 +8 + 24 + 3 million or this is equal to 8.4 million again this is equal to 8.4 million divide by 4 years annual rent income again this will be no the annual rent income of how much this is equal to 2.1 million rentable on December 31 2018 so 2017 then 2018 rent or rentals received income okay well 2018 201 2018 total rentals that's 1.2 milon plus 1.8 million or million that's 2.1 million * 2 2017 start or this is equal to 4.2 million so 4.2 million income which is equal to how much which is equal to 1.2 million that's why here in illustrative problem number three 1.2 million or Charlie will be our final answer again illustrative problem number three Charlie will be our final answer okay now illustrative problem number four on January 1 2022 pepper company Le they building to Iana company under an operating lease for 10 years no again 10 years at 500,000 per year payable the first day of each lease year pepper company paid 150,000 to a real estate broker no as initial direct cost so once again advertise over the 10e Leist term by 10 years anual expense will be equal to 15,000 okay next the building is depreciation depreciated 120,000 per year then pepper company paid insurance and property taxes no amounting to 90,000 for 2022 so 120 + 90 or this 210,000 EX cost once again executory cost are what are expense as incurred what is the rent income for 2022 so rent income which is equal to 500,000 year assume 500 income per year initial direct cost per year expense which is equal to 15,000 Pesos then exe cost so this will be equal to 210,000 and apparently the net rent income will be how much the net rent income now will be equal to 500,000 plus minus rather 15,000 then minus 210,000 or this will be equal to 200 75,000 so Alpha will now be our final answer here in illustrative problem number four okay example for example April 1 all right commencement of thease or starting so if starting April 1 months income 9 initial direct since again S executory cost okay then last problem will be illustrative problem number five pepper company Le The Mach to company on January 1 2022 the Le expires on January 1 2027 and then the annual rental is how much 900,000 and then additionally on January 2022 Iana company paid 500,000 to Pepper company as a list bonus def to and advertise over the Le well January 2027 January 2022 start so divide to by five to it now 100,000 income every year okay and then receive 250 security deposit to be refunded upon the expiration of the list liability because for the current year our final answer will just be equal to 900 + 100,000 or the this is equal to 1 million pesos that's why illustrative problem number five Charlie will be our final answer okay so this will be the end of part one discussion hopefully if you like this video please subscribe and right click the notification Bell see you a part two wherein we will discuss the finance list accounting L okay so God bless guys take and right see you on our next video [Music]