12: Leases Flashcards
What is…
A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
Lease
What is…
An entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration’
Lessee
What is…
An entity that provides the right to use an underlying asset for a period of time in exchange for
consideration’
Lessor
How do we know if a contract contains a lease?
If the contract conveys the right to
control the use of an identified asset for a period of time in exchange for consideration
How do we know if someone has the right to control an asset?
If they obtain substantially all economic benefits from the use of the asset; and
Direct the use of the asset
What must we do with the asset in the contract?
Must be explicitly or implicitly specified in the contract
Can we lease a portion of an asset?
Yes - Block of offices
Do you have a lease is the lessor has the right to substitute the asset through the period?
No
How can we describe the period of use?
In terms of use of underlying asset (12 goes with it)
Number of units produced
Time
What is the double entry for a lease transaction?
DR Right of use asset
CR Lease Liability
What does the lease term comprise of?
- Periods covered by an option to extend the lease (Reasonably certain to exercise the option)
- Periods covered by an option to terminate the lease (Reasonably certain not to exercise the option)
What payments are included in fair value of lease?
- Annual payments
- Balloon payments
- Penalties
How do you measure the liability if they pay in arrears?
Year 1 - Bal bfwd + Interest - Payment = Bal cfwd
How do you measure the liability if they pay in advance?
Year 1 - (Bal bfwd - Payment) + Interest = Bal cfwd
Interest is calculated on cfwd - payment
How do we depreciate a ROU asset?
Depreciate as normal over useful life
How do we depreciate if the asset is still owned by the lessor at the end of the lease period
Then depreciation is charged over the lease term
How do we depreciate if the asset is transferred to the lessee at the end of the lease period
The depreciation is charged over the asset’s useful life
How do we ascertain if a sale of an asset is genuine?
Determine who has got the risk and rewards of the asset now
What is the double entry for a genuine sale?
Derecognise the asset:
DR Profit/ loss on sale of fixed asset
CR Non- current assets
Recording the proceeds
DR Bank
CR Profit/ loss on sale of fixed assets
What is the double entry for when the sale is not deemed a genuine sale from the lessor
“Proceeds” treated as a loan from the lessor
DR Bank X
CR Loan
lf a lease is less than 12 months at the inception date or considered to be a low value then the accounting
treatment is…
You recognise the cost in profit or loss on a straight-line basis. No asset or liability is recognised.
Give examples of low value assets
Tablets
Small personal computers
Telephones
Small items of furniture
