NOTES TO THE FINANCIAL STATEMENTS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2022 2 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 2.8 Leases (continued) Accounting as lessee (continued) (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. (b) Operating leases The Group and the Company lease its investment properties under operating leases to non-related parties. The Group also leases its plant and equipment under operating leases to an associate. Leases of investment properties and equipment, where the Group and the Company retain substantially all risks and rewards incidental to ownership, are classified as operating leases. Rental income from operating leases is recognised in profit or loss on a straight line basis over the lease term. Contingent rents are recognised as revenue in the period in which they are earned. During the financial year, operating lease income from lease contracts in which the Group and the Company act as a lessor is RM7,814,000 (2021: RM18,794,000) and RM1,506,000 (2021: RM1,331,000) respectively. Wah Seong Corporation Berhad Annual Report 2022 116
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