What is Use of Right Assets in Accounting?

Background

MFRS 117 introduces the treatment of both finance lease and operating lease, but operating lease is treated as an off-balance sheet lease.

MFRS 16 superseded MFRS 117 and introduced the “right to use” approach, which requires lessee to recognize the rights and obligations arising from the lease arrangement in the balance sheet with the effect from 01.01.2019 in order to standardize the treatment for both finance and operating lease.

Definition of Right-of-Use Asset -  MFRS 16

• Lessee has the rights to control the use of an identified asset for a period of time. [Para 9]

• Lessee able to obtain all of the economic benefits generated from the use of assets. [Para 9]

• Lessee able to decide how and for what purpose the asset is used [Para 9]

• Lessee has the obligation to make payment for the identified asset [Para 9]

• Risk and reward of the ownership for the asset is still mainly retained with the lessor. [Para 65]

Exemption of MFRS 16 – Para B6

• Short term lease (Less than 12 months) and contain no purchase option.

• Lease for asset with a low value when new

Initial measurement:

(i) Cost of the right of use asset should include [Para 24]:

• Lease liability

• Prepayment of lease payment – lease incentives

• Initial direct costs

• Dismantling costs

(ii) Lease liability [Para 26]:

• Present value of lease payments

Subsequent measurement:

(i) Right of use assets [Para 30]

• Cost – accumulated depreciation – accumulated impairment loss

(ii) Lease liability [Para 36]

• Recognise lease interest and payment

Tax implications:

Lessee:

• Not entitled to claim the capital allowance on the leased assets [Public Ruling No. 5/2014 - Para 11.3]

• Depreciation charged is non-tax deductible

• Interest expenses is tax deductible if fulfilled the condition of Section 33 (1) of Income Tax Act 1967 

Sources:

• MFRS 16

• Section 33 (1) of Income Tax Act 1967

• Public Ruling No. 5/2014

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