Wah Seong Corporation Berhad Annual Report 2020

103 ANNUAL REPORT 2020 NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2020 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.8 Leases (continued) Accounting as lessee (continued) (c) Lease liabilities Lease liabilities are initially measured at the present value of the lease payments that are not paid at that date. The lease payments include the following:  fixed payments (including in-substance fixed payments), less any lease incentive receivable;  variable lease payments that are based on an index or rate, initially measured using the index or rate as at the commencement date;  amounts expected to be payable by the Group under residual value guarantees;  the exercise price of a purchase and extension options if the Group is reasonably certain to exercise that option; and  payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. Lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the lessee’s incremental borrowing rate is used. Lease payments are allocated between principal and interest expense. Interest expense is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The Group presents the lease liabilities as a separate line item in the statement of financial position. Interest expense on the lease liabilities is presented within the finance cost in profit or loss. (d) Reassessment of lease liabilities The Group is exposed to potential future increases in variable lease payments that depend on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is remeasured and adjusted against the right-of-use assets. (e) Short-term leases and leases of low-value assets Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture. Payments associated with short-term leases and leases of low-value assets are recognised on a straight line basis as an expense in profit or loss. Accounting as lessor As a lessor, the Group and the Company determine at lease inception whether each lease is a finance lease or an operating lease. To classify each lease, the Group and the Company make an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying assets to the lessee. As part of this assessment, the Group and the Company consider certain indicators such as whether the lease is for the major part of the economic life of the asset. (a) Finance leases The Group leases its compressors under finance leases to non-related parties, where the Group transfers substantially all the risks and rewards incidental to ownership. When assets are leased out under a finance lease, the present value of the lease payments is recognised as a receivable. The receivable is subject to MFRS 9 impairment (See accounting policy 2.17(d) on impairment of financial assets). The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method so as to reflect a constant periodic rate of return. The Group revises the lease income allocation if there is a reduction in the estimated unguaranteed residual value.