C4 Leases Flashcards
What is a lease?
A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.
When does a lease arise?
A lease arises where the customer obtain the right to use the asset.
When the supplier retains control of the asset, a service rather than lease arises.
How can an entity identify whether a contract contains a lease?
A contract contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
When does the right to control an asset arise?
The right to control an asset arises where, throughout the period of use, the customer has:
1. The right to obtain substantially all of the economic benefits from use of the identified asset; and
2. The right to direct the use of the identified asset.
How does the lessee recognise a lease?
At the commencement date, the lessee recognises:
* a lease liability
* a right of use asset
How is the lease liability intially measured?
The lease liability is initally measured at the present value of future lease payments, which are those lease payment not paid on or before the commencement date, discounted at the interest rate implicit in the lease (or the lessee’s incremental borrowing rate if not readily determinable).
How is a lease liability subsequently measured?
The lease liability is subsequently measured by:
* increasing it by interest on the lease liability
* reducing it by lease payments made
How is a right-of-use asset intially measured?
The right-of-use asset if initally measured at cost, which includes:
* the amount og the intial measurement of the lease liability
* payments made at/before the lease commencement date
* initial direct costs incurred by the lessee
* an estimate of dismantling and restoration costs (where an obligation exists)
How is the right-of-use asset usually subsequently measured?
The right of use asset is normally measured subsequently at cost less accumulated depreciation and impairment losses in accordance with the cost model of IAS 16 Property, Plant and Equipment.
The right of use asset is depreciated from the commencement date to the earlier of the end of its useful life or end of the lease term.
Besides the cost model under IAS 16, how else may the right-of-use asset be accounted for?
Alternative, the right-of-use asset is accounted for in accordance with:
1. The revaluation model of IAS 16 (optional where the right-of-use asset relates to a clasee of property, plant and equipment measured under the revaluation model, and where elected, must apply to all right-of-use assets relating to that class)
2. The fair value model of IAS 40 Investment Property (compulsory if the right-of-use asset mets the definition of investment property and lessee uses the fair value model for its investment property)
How are right-of-use assets presented?
Right-of-use assets are presented either as a separate line item in the statement of financial position or by disclosing which line items include right-of-use assets.
What is the effect of an entity being granted tax relief as lease rentals are paid?
If an entity is granted tax relief as lease rentals are paid, a temporary difference arises, as the tax base of the lease is zero.
This results in a deferred tax asset.
What is the difference between a finance lease and an operating lease?
A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an underlying asset, whereas an operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.
What are some examples of situations which would normally lead to a lease being classified as a finance lease?
Situations which would normally lead to a lease being classified as a finance lease:
1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
2. The lessee has the option to purchase the underlying asset at a price expected to be sufficiently lower than fair value at the exercise date, so that it is reasonably certain, at the inception date, that the option will be exercised.
3. The lease term is for a major part of the economic life of the underlying asset even if the title is not transferred.
4. The present value of the lease payments at the inception date amounts to at lease substantially all of the fair value of the underlying asset.
5. The underlying asset asset is of such specialised nature that only the lessee can use it without major modifications.
How are lease payments from finance leases recognised?
At the commencement date, the lessor
* derecognises the underlying asset; and
* recognises a receivable amount equal to the net investment in the lease
How do you calculate the net investment in the lease?
The net investment in the lease is the sum of:
* present value of lease payments reeivable by the lessor
* present value of any unguaranteed residual value accruing to the lessor
When does an unguaranteed residual value arise?
An unguaranteed residual value arises where a lessor expects to be able to sell an asset at the end of the lease term for more than any minimum amount guaranteed by the lessee in the lease contract.
How is a manufacturer or dealer lease recognised?
A lessor which is a manufacturer or dealer of the underlying asset needs to recognise entries for finance leases in a similar way to items sold outright (as well as the lease receivable):
* Revenue - FV of underlying asset (or present value of lease payments if lower)
* Less Cost of sales cost (carrying amount) of the underlying asset less present value of the unguaranteed residual value
How are lease payments from operating leases recognised?
Lease payments from operating leases are recognised as income on either a straight-line basis or another systematic basis.
Why might a lease liability be remeasured?
The lease liability is remeasured (if necessary) for any reassessment of amounts payable.
Where the change relates to an expected payment on a residual value guarantee or payments linked to an index rate, how are the lease payments discounted?
The revised lease payments are discounted using the original discount interest rate.
Where there is a change in lease term, purchase option or payments linked to a floating interest rate, how are the lease payments discounted?
The revised lease payments are discounted using a revised duscount rate.
How are changes in the lease liability recognised?
The change in the lease liability is recognised as an adjustment to the right-of-use asset (or in profit or loss if the right-of-use asset is reduced to zero).
Are lease and non-lease components of a lease contract accounted for separately?
Yes, IFRS 16 requires entities to account for the lease component of the contract separately from the non-lease component. The entity must split the rental of lease payment and:
* account for the lease component under IFRS 16; and
* account for the service element separately, generally as an expense in profit or loss.
