Page 157 - Pakistan Oilfield Limited - Annual Report 2022

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Annual Report 2022

4.29 Leases
4.29.1 Right of use asset

The Company assesses whether a contract is or contains a lease at inception of the contract. If
the Company assesses that a contract contains a lease and meets requirements of IFRS 16, the
Company recognises a right-of-use asset and a lease liability at the lease commencement date.
The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before the commencement date, plus any
initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset
or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the
commencement date to the earlier of the end of the useful life of the right-of-use asset or the end
of the lease term. The estimated useful lives of right-of-use assets are determined on the same
basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically
reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

4.29.2 Lease liability
If applicable, the lease liability is initially measured at the present value of the lease payments that
are not paid at the commencement date, discounted using the interest rate implicit in the lease or
if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally,
the Company uses its incremental borrowing rate as the discount rate.

Lease payments in the measurement of the lease liability comprise the following:
a. fixed payments, including in-substance fixed payments;
b. variable lease payments that depend on an index or a rate, initially measured using the index or
rate as at the commencement date;
c. amounts expected to be payable under a residual value guarantee; and
d. the exercise price under a purchase option that the Company is reasonably certain to exercise,
lease payments in an optional renewal period if the Company is reasonably certain to exercise
an extension option, and penalties for early termination of a lease unless the Company is
reasonably certain not to terminate early.
The lease liability is measured at amortised cost using the effective interest method. It is remeasured
when there is a change in future lease payments arising from a change in an index or rate, if there
is a change in the Company’s estimate of the amount expected to be payable under a residual
value guarantee, or if the Company changes its assessment of whether it will exercise a purchase,
extension or termination option.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the
carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of
the right-of-use asset has been reduced to zero.
Variable lease payments are recognised in profit or loss in the period in which the condition that
triggers those payments occurs.
The Company has opted not to recognize right-of use assets for short-term leases i.e. leases with
a term of twelve(12) months or less. The payments associated with such leases are recognized in
profit or loss when incurred.