Reference no: EM133033276

Question - Lucky Corp has entered into a lease of property whereby the title to the land does not pass to the entity at the end of the lease but the title to the building passes after 15 years. The lease commenced on July 1, 2020, when the value of the land was Php54 million and the building value was Php18 million. Annual lease rentals paid in arrears commencing on June 30, 2021, are Php6 million for land and Php2 million for buildings. The entity has allocated the rentals on the basis of their relative fair values at the start of the lease. The payments under the lease terms are reduced after every 6 years, and the minimum lease term is 30 years. The net present value of the minimum lease payments at July 1, 2020, was Php40 million for land and Php17 million for buildings. The buildings are written off on the straight-line basis over their useful life of 15 years. Assume an effective interest rate of 7%.

Required - Discuss how Lucky Corp should treat this lease under PFRS 16.