8 Leasing

Question 1

Benefit of leasing

1.
2.
3.
4.
5.

Answer 1

• spreading cash payments over lease period (instead of making a one-off lump sum payment included)
• cash flow management: more working capital is available
• conservation of capital: lines of credit may be kept open and be used for purposes where finance might not be available easily
• flexibility of asset base: non current assets can be more easily expanded and contracted
• off statement of financial position financing: leasing gives lessee possibility of off statement of financial position financing

Question 1

At the beginning of the lease, lessees recognise…

1.
2.

Answer 1

1. a right of use asset: measured at present value of the minimum lease payments; also including any payment made to lessor at / before commencement date + costs incurred in dismantling or removing asset
2. and an associated liability: financial liability, measured at present value of lease payments that are NOT paid at that date; use interest rate or incremental borrowing rate

Question 2

What is the major difference in the recognition of the right of use asset and the associated liability?

Answer 2

right of use asset also includes any initial direct costs incurred by the lessee,

the liability not.

Question 3

IFRS 16 dinstinguishes between two types of leases, which are….

Answer 3

1. finance lease: transfers substantially all the risk and rewards of ownership of an asset. title can also be transferred
2. operating lease: any other than financing lease

Question 4

when is a lease a financing lease?

1.
2.
3.
4.
5.

Answer 4

• OWNERSHIP ownership of asset transferred to lessee at end of lease term
• LOWER COST lessee can buy the asset at a price LOWER than the assets fair value
• LIFE OF ASSET lease term = major part of economic life of the asset even if the title is not transferred
• ALL PV ARE FAIR VALUE at start of lease, present value of lease payments amount to substantially all of the fair value
• ONLY LESSEE only lessee can use the leased asset cause its so special

OCLFO

Question 5

How does the lessor recognize the finance lease in his books?

Answer 5

• not as PPE
• instead: recognizing lease receivables (PV of minimum lease payments) + any expected residual value at the end of the lease that is not guaranteed by the lessee

Question 6

What are the criteria that ALL have to be met in order for a contract to be a lease?

1.
2.
3.

Answer 6

• there is an identified asset
• the customer has the right to obtain substantially al of the economic benefits from use of the identified asset throughout the period of use
• customer has the right to direct the use of the identified asset throughout the period of use

Question 7

What are the criteria for (if just one is met) it’s a finance lease?

1.
2.
3.
4.

Answer 7

1. ownership transferred at end of lease term
2. lease has bargain purchase option
3. lease term is for major part of assets useful life
4. PV of minimum lease payments greater than or equal to assets fair value