FRS 116 Leases – Subsequent Measurement and Lease Modifications in a Finance Lease

If you think that the lessors just have to wait for the lessees to pay them every month after the leases have started, you may not know that there are actually some other tasks that the lessors should handle after the commencement date. Throughout the lease term, the lessors need to deal with some accounting tasks such as subsequent measurement as well as some other issues that may lead to modifications in the leases. Lessors should make sure that they comply with FRS 116: Leases (Also see FRS 116 Leases – Subsequent Measurement of Right-of-use Asset and Lease Liability by the Lessee) when they manage all these processes. For those that need help in handing leases, hiring an accounting firm in Johor Bahru can be a wise decision as they can get assistance from the professionals by doing so.

When the lessors are dealing with subsequent measurement, they should recognise the finance income throughout the lease term according to a pattern that can show a fixed periodic rate of return on the net investment of the lessor in the lease. All the lessors have an objective of allocating the finance income throughout the lease term on a rational and systematic basis. They need to apply the lease payments that are relevant to the period against their gross investment in the lease for them to reduce the unearned finance income (Also see An Overview of Income Summary Account) as well as the principal.

For the net investment in the lease, the lessors need to implement the impairment and derecognition requirements specified in FRS 109. Also, they need to review the unguaranteed residual values that they used to compute the lease’s gross investment regularly. If they found out that there is a decrease in the estimation of unguaranteed residual value, they need to revise the income (Also see Mistakes To Avoid When Filing Self-employed Income) allocation throughout the lease term. Then, they should recognise any reduction in the amounts accrued immediately.

In the lease term, there may be some modifications to the finance lease. The modification may have caused an increase in the scope of the lease by adding the right of using one or more underlying assets and has led to an increase in the consideration for the lease. The increment should be an amount that equals the stand-alone price for the increase in the scope of lease and any suitable adjustment to that stand-alone price. The lessors should treat the modification as a separate lease if it meets the requirements above.

If a modification made on a finance lease does not qualify as a separate lease, the lessor should deal with it by following specific rules in FRS 116 too. If at the inception date where the modification takes effect, the lease should be categorised as an operating lease, then the lessor should treat that modification as a new lease from the date the modification be in effect. Also, the lessor should measure the underlying asset’s carrying amount as the net investment immediately before the lease modification comes into force. If not, the lessor should implement the requirements specified in FRS 109.