Page 156 - pwc-lease-accounting-guide_Neat

Accounting for leases

Lessee Corp would calculate the amortization of the lease liability as shown in the following table. This
table is shown on an annual basis for simplicity; the schedule would be calculated on a monthly basis
to reflect the frequency of the lease payments.

“Interest” on the
Payment lease liability* Lease liability

Lease commencement $16,018

Year 1 $5,500** $820 11,338

Year 2 6,000 500 5,838

Year 3 6,000 162 —

$17,500 $1,482

*Although these amounts are labelled as “interest,” there is no interest expense recorded in the income
statement. These amounts are calculated on the lease liability on a monthly basis in order to determine the
ending balance of the lease liability; however, there is only one straight-line lease expense recorded in the
income statement. See LG 4.4.2 for additional information.
**This amount excludes the first month’s payment since it was made at lease commencement and is not included
in the lease liability.

The amortization of the right-of-use asset is calculated as the difference between the straight-line lease
expense ($500 per month) and the interest calculated on the lease liability. The following table shows
this calculation. This table is shown on an annual basis for simplicity; the schedule would be calculated
on a monthly basis to reflect the frequency of the lease payments.

Straight-line Interest on
expense lease liability Amortization Right-of-use
(A) (B) (A – B) asset
Commencement $16,518

Year 1 $6,000 $820 $5,180 11,338
Year 2 6,000 500 5,500 5,838

Year 3 6,000 162 5,838 —

$18,000 $1,482 $16,518

4.5 Subsequent recognition and measurement – lessor

The subsequent measurement of sales-type, direct financing, and operating leases differs significantly.
As discussed in LG 4.3, in sales-type and direct financing leases, lessors replace the underlying asset
on their balance sheet with a net investment in the lease, while in operating leases, lessors retain the
underlying asset on their balance sheet.

4-33