Leases

Entity as Lessee 

The entity assesses whether a contract is or contains a lease, at inception of the contract. The entity recognizes a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low-value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the entity recognizes the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. 

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the lessee uses its incremental borrowing rate. 

 

Lease payments included in the measurement of the lease liability comprise: 

 

• Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable; 
• Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; 
• The amount expected to be payable by the lessee under residual value guarantees; 
• The exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and 
• Payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease. 

The lease liability is presented as a line item in the statement of financial position. 

 

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. 

The entity remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: 

• The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. 
• The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). 
• A lease contract is modified and the lease modification is not accounted for as a lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. 

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. 

 

Whenever the entity incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognized and measured under PAS 37. To the extent that the costs relate to a right-of-use asset, the costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories. 

 

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.  

 

The right-of-use assets are presented as a line in the statement of financial position.  

 

Entities apply PAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in their ‘Property and Equipment’ policy. 

 

When a lease is terminated in its entirety, any difference between the carrying amounts of the right-of-use asset and the lease liability is recorded in the income statement as a gain or loss, net of lease termination penalties, if any. 

 

Leases under short-term lease are accounted in the profit and loss when incurred.