8 - Accounting for Liabilities Flashcards
What is a lease?
a contract that conveys the right to use an asset such as machinery or vehicles for consideration (often cash). The lessee makes agreed payments for the period of the lease to the lessor (often a leasing company)
What is a short term lease?
A lease that has a term less than one year. If the lease contains a purchase option, then it cannot be a short term lease.
What are the journal entries required for recognising a lease?
DR - Right to use asset (Asset class i.e. PPE)
CR - Lease liability
How is the original cost of the lease calculated?
The cost is the present value of the future lease payments
How is the right to use asset balance calculated?
Cost less depreciation and impairment. The asset will be depreciated at longer of its useful life/the lease term. If there is a purchase option at the end of the term then the useful life is used
What is the formula for the lease expense of a short term lease?
Lease expense = Total payments / life of lease
What is the definition of a liability?
A present obligation, as a result of a past event, from which economic benefit is expected to flow from the company
What is a provision?
A liability of an uncertain timing or amount
When should a provision be recognised?
- When an entity has a present obligation (legal or constructive) as a result of a past event
- It is probable (over 50% chance) that an outflow of economic resources is required to meet this obligation
- A reliable estimate can be made to the amount of this obligation
What is a contingent liability?
A possible obligation arising from past events where it is not probable (less than 50%) than an outflow of economic benefit will be required to settle it or because the amount of the obligation cannot be reliably measured
Where is a contingent liability recognised in the accounts?
There is not quantifiable figure able to be recognised in the SOFP figures, so a note is included as a brief description and an estimate of financial effects
When should a contingent asset be disclosed?
Only if it is probable that the asset exists
Are assets low value assets depreciated?
No
