7 - Leases Pt. 1 Flashcards
Subsequent measurement of right-of-use asset
Cost model
Subsequent measurement of lease liability
Amortized cost financial liability
Right-of-use asset is initially measured at?
@ cost
Lease liability is initially measured at?
@ PV of lease payment not yet paid
Lessee recognizes lease liability & right-of-use-asset at what date?
@ commencement date
Define the scope of customer’s right of use (but do not prevent customer from having the right to direct the use of an asset)
Protective rights
Potential inflows from asset’s outputs
Economic benefits
Explicitly stated in the contract or implicitly specified at time made available for use.
Identified asset
Entity has right to control the use of an asset if:
- Right to obtain all of the economic benefits
- Right to direct the use of the asset
Provides right to use an underlying asset for a period of time in exchange for a consideration
Lessor
Obtains right to use the underlying asset for a period of time in exchange for consideration
Lessee
Parties to a lease contract are:
Lessor & Lessee
Contract or part of contract that conveys right to use an asset for a period of time in exchange for a consideration
Lease
Asset on which financial instruments are based on
Underlying asset
Portion of an asset is an identified asset if
physically distinct.
Asset is not an identified asset if
supplier has substantive right to substitute it throughout the period of use.
A suppliers substitution right is presumed not substantive if
it is not readily determinable that it is substantive.
Right to obtain economic benefits from use
exclusive use of the asset throughout period.
Right to direct the use:
a. customer has right how and for what purpose asset is used
b. asset’s use is predetermined and supplier is not allowed from changing that use.
Existence of right to change how and for what purpose asset is used:
a. change the type of output
b. change when output is produced
c. where output is produced
d. change whether output is produced and quantity of it
Do not grant right to direct how & for what purpose asset is used but may grant customer right to direct use of asset if purpose is predetermined
Right to operate/maintain
Contracts may specify:
- maximum amount of use
- require customer to follow particular operating procedures
- inform supplier of changes how asset will be used
Non-cancellable period of a lease
Lease term
Lease term covers
a. option to extend the lease if lessee is certain to exercise
b. option to terminate the lease if lessee is certain not to exercise
Period which contract is enforceable
Non-cancellable period
In assessing if lessee is certain to exercise option entity considers all relevant facts that create
economic incentive for the lease
Lease payments are discounted using
Interest rate implicit in the lease
If interest rate implicit in the lease is not determinable what is used?
Lessee’s incremental borrowing rate
Rate of interest that lessee would have to pay to borrow a similar term, and with similar security
Incremental borrowing rate
Lessee depreciates the underlying asset over
shorter of asset’s useful life and lease term
Depreciation starts from
commencement date
Expense is higher in the earlier years
Front-loaded
Lessee may elect to not apply recognition requirements for
- Short term leases
- Leases with low value underlying asset
Leases that @ commencement date has lease term of 12 months or less
Short-term lease
Lease that contains a purchase option is
not a short-term lease
Assessment of value is based on the value of the asset when it is new, regardless of aged asset is being leased
Low valued asset
Not affected by materiality or the lessee’s size; asset is considered low value regardless whether lessee is small or a big company
Absolute basis
Lessee may recognize the lease payments for short-term lease and low valued asset as an
expense on straight line basis
Equal depreciation
Straight line basis
Lease components are allocated based on the
relative stand-alone price
While non-lease components are allocated based on the
aggregate stand-alone price
Lessor would charge for a component separately
Relative stand-alone price
Separate element if it transfers goods or services to the lessee
Non-lease elements
Examples of non-lease elements:
- Maintenance
- Security services
- Supply of utilities
- Supply of goods
- Supply of operational services
Payments for costs that do not transfer goods or services to the lessee are
not a separate component
Allows an entity to elect not to separate the lease and non-lease components of a contract instead account for them as single lease component
PFRS 16
Payments that are variable in legal form but unavoidable in substance
In-substance fixed lease payments
Payments made by a lessor to a lessee as a reimbursement of costs.
Lease incentives
Portion of payments made by lessee to lessor for right to use an asset during the lease term that varies in circumstances occurring after commencement date
Variable lease payments
Estimated amount that entity would currently obtain from disposal of an asset (after deducting estimated costs of disposal)
Residual value
Lessee accounts for the residual value only if residual value is
guaranteed
Guarantee made to a lessor (by party unrelated to lessor) that value of an underlying asset will be at least a specified amount
Residual value guarantee
As to lessee, residual value is guaranteed if:
- guaranteed by lessee
- guaranteed by party related to lessee
