12: Leases

Question 1

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

Answer 1

Lease

Question 2

What is…

An entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration’

Answer 2

Lessee

Question 3

What is…

An entity that provides the right to use an underlying asset for a period of time in exchange for
consideration’

Answer 3

Lessor

Question 4

How do we know if a contract contains a lease?

Answer 4

If the contract conveys the right to

control the use of an identified asset for a period of time in exchange for consideration

Question 5

How do we know if someone has the right to control an asset?

Answer 5

If they obtain substantially all economic benefits from the use of the asset; and

Direct the use of the asset

Question 6

What must we do with the asset in the contract?

Answer 6

Must be explicitly or implicitly specified in the contract

Question 7

Can we lease a portion of an asset?

Answer 7

Yes - Block of offices

Question 8

Do you have a lease is the lessor has the right to substitute the asset through the period?

Answer 8

No

Question 9

How can we describe the period of use?

Answer 9

In terms of use of underlying asset (12 goes with it)

Number of units produced

Time

Question 10

What is the double entry for a lease transaction?

Answer 10

DR Right of use asset

CR Lease Liability

Question 11

What does the lease term comprise of?

Answer 11

• 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)

Question 12

What payments are included in fair value of lease?

Answer 12

• Annual payments
• Balloon payments
• Penalties

Question 13

How do you measure the liability if they pay in arrears?

Answer 13

Year 1 - Bal bfwd + Interest - Payment = Bal cfwd

Question 14

How do you measure the liability if they pay in advance?

Answer 14

Year 1 - (Bal bfwd - Payment) + Interest = Bal cfwd

Interest is calculated on cfwd - payment

Question 15

How do we depreciate a ROU asset?

Answer 15

Depreciate as normal over useful life

Question 16

How do we depreciate if the asset is still owned by the lessor at the end of the lease period

Answer 16

Then depreciation is charged over the lease term

Question 17

How do we depreciate if the asset is transferred to the lessee at the end of the lease period

Answer 17

The depreciation is charged over the asset’s useful life

Question 18

How do we ascertain if a sale of an asset is genuine?

Answer 18

Determine who has got the risk and rewards of the asset now

Question 19

What is the double entry for a genuine sale?

Answer 19

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

Question 20

What is the double entry for when the sale is not deemed a genuine sale from the lessor

Answer 20

“Proceeds” treated as a loan from the lessor
DR Bank X
CR Loan

Question 21

lf a lease is less than 12 months at the inception date or considered to be a low value then the accounting
treatment is…

Answer 21

You recognise the cost in profit or loss on a straight-line basis. No asset or liability is recognised.

Question 22

Give examples of low value assets

Answer 22

Tablets
Small personal computers
Telephones
Small items of furniture