In this article, we compare the differences in the financial reporting requirements for leases under MPSAS 13, MFRS 16 and Section 20 of MPERS. MPSAS, MFRS and MPERS are the three financial reporting frameworks used by entities for financial reporting purposes in Malaysia. The Malaysian Accounting Standards Board (“MASB”) issues MFRS and MPERS while the Accountant General’s Department of Malaysia issues MPSAS.
If you wish to understand further on these frameworks and which framework should entities use, head out to Financial Reporting Frameworks in Malaysia.
Definition of a Lease
There are no significant differences in the definition of a lease under the three frameworks. The standards generally define a lease as a contract or arrangement where the lessor conveys to the lessee the right to use an asset for an agreed period of time in return for payment or exchange of consideration. Entities perform this assessment at the contract inception.
MPSAS 13, however, made clear that a hire purchase contract that contains a provision giving the hirer an option to acquire title to the asset upon fulfilment of agreed conditions meets the definition of a lease.
The accounting requirements for the lessee
Take note that the accounting of leases by the lessees are very much different in MFRS 16. On the other hand, the accounting requirements for the lessee in MPSAS 13 and Section 20 are similar to the previous lease accounting standard, MFRS 117 Leases.
MFRS 16 which replaces MFRS 117 introduces a totally new accounting model for lessee. The details of the new accounting model are available in IFRS 16 Leases – The Lessee Perspective. Accordingly, this article will not discuss the financial reporting requirement for the lessee under MFRS 16.
Classification of leases
Both MPSAS 13 and Section 20 require a lessee to determine an appropriate classification of a lease arrangement. It is to determine whether the lease is a finance lease or an operating lease arrangement. Entities perform the assessment at the contract inception, unless there are changes to the terms subsequently.
No significant differences on how entities should determine the classification in MPSAS 13 and Section 20. For this purpose, entities assess the risks and rewards incidental to the ownership of the underlying asset.
Classification of land and building
Additionally, MPSAS 13 provides guidance when a lease includes both land and building elements. They are as follows:
- In classifying the land element, MPSAS 13 states that land normally has an indefinite economic life.
- The allocation of minimum lease payments between the land and building elements are based on their relative fair value at the inception of the lease. Where a reliable allocation between the two is not possible, the entire lease is classified as a finance lease, unless there is an indication that suggests otherwise.
- Where the amount that would initially be recognised for the land element is immaterial, the land and building may be treated as a single unit for classification purposes. In this regard, the economic life of the buildings is deemed as the economic life of the entire leased asset.
- Entities do not need to separately measure the land and building if the lessee’s interest in both is classified as an investment property and a fair value model is adopted. Entities will only need to do detailed calculations if the classification of one or both elements is uncertain.
- When a property interest held under an operating lease is an investment property, such interest is treated as if it were a finance lease and a fair value model is used for the asset. The accounting as a finance lease continues even if there is a change in the classification as an investment property.
The recognition and measurement
The recognition and measurement for a finance lease and an operating lease are generally the same between MPSAS 13 and Section 20. They are as follows:
| Finance lease | Operating lease | |
|---|---|---|
| Initial recognition and measurement | Measure the assets and liabilities at the fair value of the leased properties or if lower, the present value of the minimum lease payments at the inception date. | No assets and liabilities are recognised on initial recognition. |
| Subsequent measurement | Amount of liabilities reduce through lease payments. Leased assets are depreciated and impaired (if necessary) similar to property, plant and equipment. | Lease payments are recognised as an expense over the lease term on a straight-line basis unless another basis is more appropriate. |
The lessee disclosure requirements
With regard to disclosure, MPSAS 13 requires the following additional disclosures for finance lease as compared to Section 20:
- Firstly, a reconciliation between the total of future minimum lease payments at the reporting date and their present value.
- Secondly, an expense in the period relating to contingent rents.
- Thirdly, the total of expected future minimum sublease payments under non-cancelable subleases at the reporting date.
As for the operating lease, MPSAS 13 also requires additional disclosures as compared to Section 20:
- The total of expected future minimum sublease payments under non-cancelable subleases at the reporting date.
- Sublease payments are recognised as an expense.
The accounting requirements for the lessors
As for the accounting of leases by the lessors, MFRS 16 carry-forward most of the requirements in MFRS 117. As such, we compare the financial reporting requirements for leases by the lessors under the three standards.
Classification of leases
Similar to the classification of a lease by lessees, lessors will also need to determine the classification of a lease. Specifically as a finance lease or an operating lease.
The approach to classification is also similar or the same as how a lessee determines the lease classification. The approach is based on risk and rewards incidental to ownership of the underlying asset.
The recognition and measurement
There are no significant differences in how lessors account for an operating lease and a finance lease under the 3 standards. Basically, the standards require a lessor to account as follows:
| Finance lease | Operating lease | |
|---|---|---|
| Initial recognition and measurement | Recognise lease payments receivable as an asset, presented as a receivable at an amount equal to the net investment in the lease. | The leased asset is recognised according to the nature of the asset. |
| Subsequent measurement | The net investment in the lease is subject to derecognition and impairment requirements for financial assets. Recognise lease payments for the period as a reduction of the receivable. Finance income is recognised over the lease term based on a pattern reflecting a constant perioicd rate of return on the lessor’s net investment in the lease. | The leased asset is subject to depreciation and impairment similar to other assets of the lessor. Lease income or revenue is recognised in profit or loss on a straight line over the lease term. |
Lease modification by the lessors
MFRS 16, however, provides additional guidance in relation to lease modification for lessors. The guidance is not explicitly provided in MPSAS 13 and Section 20 of MPERS. The modification guidance are as follows:
- For modification of a finance lease, entities need to assess whether such modification is a separate lease. For this, entities need to account for such modification as a separate lease if both the following are met:
- Firstly, there is an increase in the scope of the lease arising from such modification. The increase in scope is by adding the right to use one or more underlying assets.
- Secondly, the consideration for the lease increases by an amount commensurate with the stand-alone price for the increase in scope and other appropriate adjustments to the stand-alone price reflecting the circumstances of the contract.
- Modification of an operating lease requires the lessor to account for such a modification as a new lease from the effective date of the modification.
The lessor disclosure requirements
The disclosure requirements for finance leases are similar between MPSAS 13 and Section 20. MFRS 16 requires a lessor to disclose the following additional information in relation to the finance lease:
- Selling profit or loss
- Finance income on the net investment in the lease
- Variable lease payments not included in the measurement of the net investment in the lease.
- The maturity analysis of the lease payments receivable on an annual basis for the first five years and a total amount for the remaining years.
Again, MPSAS 13 and Section 20 have the same requirements for the disclosure on an operating lease. MFRS 16, however, requires additional information as follows:
- Lease income
- Disaggregation of assets that are subject to operating lease from owned assets for property, plant and equipment
- The necessary disclosure required in MFRS 136 Impairment of Assets, MFRS 140 Investment Property and MFRS 141 Agriculture for assets subject to operating lease
- Maturity analysis of lease payments on an annual basis for the first five years and a total amount for the remaining years.
Sale and leaseback transaction
All three standards provide specific guidance in relation to sale and leaseback transactions. Sale and leaseback is an arrangement whereby an entity sells an asset to a buyer and leasing the same asset back from the buyer.
Both MPSAS 13 and Section 20 require an entity to defer and amortise, over the lease term, any excess of sales proceeds over the carrying amount if such transaction results in a finance lease. This is because, in such an arrangement, the lessor provides finance to the lessee with an asset as security. Accordingly, it is not appropriate to immediately recognise the excess as revenue or income.
However, if the transaction resulted in an operating lease, both MPSAS 13 and Section 20 allow an entity to recognise any profit or loss immediately if the transaction is at fair value. Similarly, if such transaction is below fair value, entities recognise any profit or loss immediately, unless if the loss is compensated by future lease payments at below market value. In such a situation, entities defer and amortise the loss over the period that the asset is expected to be used.
MFRS 16 requirements for sale and leaseback transactions
MFRS 16, on the other hand, requires an entity to first determine and assess whether the transfer of the asset constitutes a sale as per MFRS 15 Revenue from Contracts with Customers.
Where the transfer constitutes a sale, the following applies:
- The seller-lessee measure the right-of-use asset on the leaseback at the proportion of the previous carrying amount that relates to the right-of-use retained by it. Seller-Lessee only recognises any gain or loss that relates to the rights transferred to the buyer-seller.
- The buyer-lessor applies the applicable standards in relation to the purchase of the asset and apply lessor accounting for the lease transaction.
If the transfer of the asset does not constitute a sale,
- The seller-lessee will continue to recognise the transferred asset and recognise a financial liability for the transfer proceeds.
- The buyer-lessor will not recognise the transferred asset and instead recognise a financial asset reflecting the transfer proceeds.
Conclusion
The above sums up the differences in the financial reporting requirements for leases under MPSAS 13, MFRS 16 and Section 20 of MPERS. Similar comparisons for other standards are available in the Public Sector Accounting Series.