Accounting for Lease

Question 1

What is a Lease?

Answer 1

Contract that conveys right to use asset for period of time.

Question 2

What is a Lessor?

Answer 2

Legal owner of asset who leases asset to lessee and receives rental income.

Question 3

What is a Lessee?

Answer 3

Pays rent in accordance to terms of lease, and receives economic benefits associated with asset.

Question 4

What is the Substance of a Lease?

Answer 4

Asset belongs to lessee at end of lease. Lease payments add up to value of asset + interest.
Substance is equivalent of taking a loan to buy an asset.

Question 5

How is Lease Accounting Under IFRS 16 Carries out?

Answer 5

1. Recognise assets & liabilities for all leases, measured at PV of minimum lease payments at inception of lease.
2. Recognise depreciation of asset
3. Recognise interest expense on the liability. At a constant rate of interest.

Question 6

What does the Initial Measurement of a “Right of Use” Asset Consist of?

Answer 6

• Amount of initial measurement of lease liability
• Any lease payments made at/before commencement date (e.g. deposits)
• Any initial direct costs incurred by lessee
• Estimate of costs for removing underlying asset at end of the lease term (dismantling/restoration of site).

Question 7

What do Subsequent Measurements of a “Right of Use” Asset Consist of?

Answer 7

Cost less any accumulated depreciation (IAS 16) and accumulated impairment losses (IAS 36).
If lease transfers ownership (or lessee expected to exercise a purchase option), depreciate to end of the useful life.
Otherwise, depreciate up to the earlier of:
* End of lease term
* End of useful life.
Use revaluation model if right-of-use asset relates to a class of PPE.
Use FV model to investment in property.

Question 8

What is the Initial Measurement for Lease Liability?

Answer 8

• PV of lease payments which fall due after that date
• Payments should be discounted at interest rate implicit in the lease (if known)
• At lessee’s incremental borrowing rate

Question 9

What is the Subsequent Measurement for Lease Liability?

Answer 9

Lease payment is apportioned between,
* Interest element (SoPL expense)
* Amount which reduces outstanding liability (SoFP).

Do not apply to short-term lease (<12months) or low value (<£50k)

Question 10

What is the Classification of a Finance Lessee Under IAS 17?

Answer 10

• A lease that transfers substantially all the risks and rewards incidental to ownership of an asset.
• Legal title may or may not eventually be transferred.