Syllabus C. Reporting The Financial Performance Of A Range Of Entities C4. Leases

C4a. Lessee Accounting 2 / 11

Syllabus C4a)

Discuss and apply the lessee accounting requirements for leases including the identification of a lease and the  measurement of the right of use asset and liability.

Basic Rule

Lessees recognise a right to use asset and associated liability on its SFP for most leases

How to Value the Liability

Present value of the lease payments

where the lease payments are:

  1. Fixed Payments

  2. Variable Payments  (if they depend on an index / rate)

  3. Residual Value Guarantees

  4. Probable purchase Options

  5. Termination Penalties

How to Value the Right of Use asset?

Includes the following:

  1. The Lease Liability (PV of payments)

  2. Any lease payments made before the lease started

  3. Any Restoration costs (Dr Asset Cr Provision)

  4. All initial direct costs

After the initial Measurement - Asset

  • Cost - depreciation (normally straight line) less any impairments

  • Any subsequent re-measurements of the liability

After the initial Measurement - Liability

  • Effective interest rate method (amortised cost)

  • Any re-measurements (e.g. residual value guarantee changes)


3 year lease term

Annual lease payments in arrears 5,000

Rate implicit in lease: 12.04%

PV of lease payments: 12,000


The lease liability is initially the PV of future lease payments - given here to be 12,000

Double entry: Dr Asset 12,000 Cr Lease Liability 12,000

The Asset is then depreciated by 4,000pa (12,000 / 3)

The lease liability uses amortised cost:

Opening Interest (I/S) 12.04% (Payment) Closing
12,000 1,445 (5,000) 8,445
8,445 1,017 (5,000) 4,463
4,463 537 (5,000) 0

Example - Variable lease payments (included in Lease Liability)

(Remember only include those linked to a rate or index)

So the lease contract says you have to pay more lease payments of 5% of the sales in the shop you're leasing - should you include this potential variable lease payment in your lease liability?

No - because it is not based on a rate or index

(They are just put to the Income statement when they occur)