12. Leases Flashcards
Leases: Definition
- Substantially all economic benefits
- identified asset
- Right to direct its use
(Even with restrictions)
Leases: When would a customer not have the right to use an identified asset?
Possible & economically beneficial to provide alternative
Leases: What might an agreement be if it isn’t a lease?
Contract for a service
Leases: At start of lease: Treatment: Lease liability
Present value of payments not made:
1. Fixed payments
- Residual value guarantees
- Expected purchase options
- Expected termination penalties
Leases: At start of lease: Treatment: ROU asset
At cost
1. Initial value
- Pre-commencement payments
(E.g. deposit, advance payment) - Initial direct costs
- Estimated removal costs per conditions
Leases: Journal to record a ROU asset
DR ROU Asset
CR Lease liability
(PV of payments not yet made)
(CR Cash/Payables)
(initial costs etc.)
(CR Provision)
(Dismantlement etc.)
Leases: Lease term length calculation
1. Non-cancellable periods
- Expected extension/reduction
Leases: Lease payments: How are they discounted?
Interest rate implicit in lease
If unavailable:
Lesee’s incremental borrowing rate
Leases: Calculating lease liability: In arrears: Table (horizontal)
- B/f
- Interest accrued
(Finance costs) - Payment
- C/f
Leases: Calculating lease liability: In advance: Table (horizontal)
- B/f
- Payment
- Balance
- Interest accrued
(Finance costs) - C/f
Leases: Calculating lease liability: In arrears: Where to put initial lease liability?
Year one B/f
Leases: Calculating lease liability: In arrears: Where is TOTAL liability?
Year one C/f
Leases: Calculating lease liability: In arrears: Where is NON-CURRENT liability?
Year 2 c/f
Leases: Calculating lease liability: In advance: Where to put the initial lease liability?
Year 1 balance
(First 2 are empty)
Leases: Calculating lease liability: In advance: Where is TOTAL liability?
Year 1 C/F
Leases: Calculating lease liability: In advance: Where is non-current liability?
Year 2 Balance
(Last 2 are empty)
Leases: Calculating lease liability: Rule for finding NCL for both arrears and advance?
Balance to the right of payment (in 2nd year)
Leases: Calculating lease liability: What if payments not annual?
Each line is a period (e.g. quarter)
Leases: Deposit: DE
DR ROU Asset
CR Cash
Leases: Incentives (received before/on commencement) treatment?
Deducted to arrive at initial asset figure
Leases: How is the asset depreciated?: Ownership doesn’t transfer at end of lease
Over SHORTER of:
- Lease term
- Useful life
Leases: How is the asset depreciated?: Ownership does transfer at end of lease
Over useful life
Leases: is a ROU asset subject to an impair review?
Yes
Leases: IF lease part of a revalued class of asset: Which value is relevant?
FV of ROU
(Not underlying asset’s FV)
Leases: Short-term (less than 12m) leases: Treatment
CHOICE for simplified treatment:
Expense lease payments on straight-line basis
Leases: Where do you present the ROU?
Either separately or as part of PPE
Leases: Disclosures:
- Depn’ charge for ROUs
- Finance cost on LLs
- (Short-term low value lease expenses)
- Total lease cash outflow
- ROU additions
- ROU carrying amount by class (if not on face)
Leases: Low value lease: Treatment
E.g. computers, small office furniture, phones
(No specific value given)
Same as short leases
Leases: Sale and leaseback: How to decide if a sale is made?
Generally a sale
Exception: Lessee has substantive right to repurchase asset
Leases: Sale and leaseback: No sale: Treatment
- Continue to recognize asset
- Recognize financial liab for proceeds received
Leases: Sale and leaseback: No sale: DE
DR Cash
CR Loan (secured)
Leases: Sale and leaseback: Yes sale: Treatment
- Derecongise asset
- Reconise ROU asset
- Reconise a lease liability
- Note profit/loss on disposal
Leases: Sale and leaseback: Yes sale: Treatment: What to recongise the new ROU asset as?
The proportion of previous carrying amount that relates to rights retained
Leases: Sale and leaseback: Yes sale: DEs:
(proceeds at FV - will always be for exam)
DR cash
CR PPE
DR ROU asset
CR Lease liability
DR/CR Loss/Profit on disposal
(*Balancing figure)
Leases: Sale and leaseback: Yes sale: DEs: What is the cash amount?
Proceeds
Leases: Sale and leaseback: Yes sale: DEs: What is the PPE amount?
Carrying amount
Leases: Sale and leaseback: Yes sale: DEs: What is the ROU amount?
Carrying amount
X
(Lease Liability
/
Fair value = Proceeds)
Leases: Sale and leaseback: Yes sale: DEs: What is the Lease liability amount?
PV of lease payments
Leases: Sale and leaseback: Yes sale: DEs: What is the profit/loss amount?
BALANCING FIGURE
Leases: UK GAAP differences: Operating lease DE
DR Fixed asset (depreciate)
CR Finance lease liability (Same as with ROU)
Leases: UK GAAP differences: Operating lease amount
Lower of FV (cash) and PV of minimum lease payments
