4. Leases:Lessor Flashcards
Define Lease
A contract that conveys the right to use an asset for a period of time in exchange for a consideration
Define Leesee
An entity that obtains the right ot use underlying asset for a consideration exchange
Define Lessor
An entity that provides the right to use an underlying asset for a period of time in exchange for a consdieration
What are the three a parts of lease
Right to control: Customer has right to obtain economic benefits and has drect use of asset
Identified asset: explicit defined
Period of time: described in contract
Define Lease term
Non Cancellable period for which a lessee has right to use an underlying asset along with:
- periods covered by option to extend lease
or-periods covered by option to terminate lease
What are the two types of leases
Finance lEase
Operating lease
What is meant by finance lease
Lease that transfers substantially all the risks and rewards incedental to the ownership of the underlying asset
What is meant by operating lease
A lease that does not transfeer substantially all of the risks and rewards of owndership underlying hte asset
What are the indicators of a finance lease
S: specialised nature
T: Transfers owndership at end of term
O: option to purchase asset at less that fair value
M: major part of asset’s economic life is leased
P: present value of lease payments at the inception date amounts to at lease substantially all of the fair value of asset
What does lessor have to consider at commentcement date of lease
- Lessor derecognises the carrying amount of underlying asset
- Recognises recievable at amount of net investment in the lease
- Recognises any difference in profit or loss
What are accounting entries at commencement date of lease
Debit New investment in lease
Credit Property, Plant Equipment
Credit/Debit profit or loss balancing figure
What should be included in the initial net investment in the lrease
- Present value of lease payments not recieved at the cmmencement date
- Present value of any unguaranteed residual value accruing to the lessor
Define unguaranteed residual value
That portion of the residual value of the underlying asset, the realisation of which by a lessor is not assured soley by a party related to lessor
What are the lease payments included in the measurement of net investment
- Fixed paymetns
- Variable lease payments that depend on an index or rate
- Any residual value guarantees provided to the lessor
- purchase option
- Penalties for termination of lease
How is initial direct costs measured for net investment in lease
Debit Net investment in lease
Credit Cash
What is the accounting entry for finance income
Debit Net investment in the lease (increase)
Credit Finance income (increase)
To crease by lease installments recieved:
Debit Cash (increase)
Credit Net investment in the lease (decrease)
How is lease payments recieved in arrears accoutned
Present value of lease payments not recieved at commencement
+ Finance income (interest balance)
- Installment 1
= nET INVESTMENT IN LEAse for Y1
+ Finance income (interest balance)
- Installment 2
=NET INVESTMENT IN LEASE for Y2
How is lease payments in advance recieved shown
Present value of lease payments not recieved at commecement date
+ Finance income (interest balance)
= Net investment in lease in Y1
- Instalment 2
+ Finance income
= Net investment in the lease
What are the implications of operating leases
- Underlying asset: lessor retains risks and rewards of ownership so lessor continues to recognise the asset
- Lease payments: recognised as income on straight line basis or other basis
- Initial direct costs: added to the carrying amount of the underlying asset
