Ch 11 - IFRS 16 Leases Flashcards
An entity may need a particular asset for its operations but may not have the cash available to purchase the asset outright, as a result the entity may enter a
Lease agreement
The definition of A LEASE . . . .
a contract that conveys the RIGHT TO USE an ASSET for a period of time in exchange for consideration.
The definition of THE LESSOR . . . .
the entity that provides the RIGHT TO USE an underlying asset for a period of time in exchange for consideration.
The definition of the LESSEE . . . . .
the entity that OBTAINS the RIGHT TO USE an underlying asset for a period of time in exchange for consideration.
The definition of A RIGHT OF USE ASSET . . . .
is an asset that represents a lessee’s right to use an underlying asset for the lease term.
On commencement of the lease, the lessee should recognise:-
- the lease liability
and - a right-of-use asset
What does the accounting treatment for leases consider:-
- the initial measurement
and the
- subsequent treatment of a lease
What is the lease liability initially measured at?
the PRESENT VALUE of the lease payments that have NOT YET BEEN PAID.
What should LEASE PAYMENTS include:-
- fixed payment over the lease term;
- variable lease payment that depend on an index rate - as at the commencement date;
- amounts expected to be payable under the residual value guarantee;
- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
- payments of penalties for terminating the lease, IF the lease term reflects the lessee exercising an option to terminate the lease.
What is a RESIDUAL VALUE GUARANTEE?
is provided by the lessee and states that the underlying asset at the end of the lease term will not be worth less than a specified amount. This REDUCES the risk of damage and unauthorised usage of the asset.
To determine the PRESENT VALUE of the lease payments not yet paid the discount rate should be . . . .
the rate IMPLICIT IN THE LEASE.
What should you do if the implicit rate of the lease cannot be determined?
then the incremental borrowing rate should be used.
What is the right-of-use asset initially recognised at?
Cost
What does the initial cost of the right -of-use asset comprise of?
- the amount of the initial measurement of the lease liability;
- lease payment made at or before the commencement date;
- any initial direct costs
- the estimated costs of removing or dismantling the underlying asset as per the conditions of the lease
What is the lease term?
The lease term is the length of time that the lessee has the right-of-use of an asset.
What does the length of term comprise:-
- non-cancellable periods;
- periods covered by an option to EXTEND the lease, if they are reasonably certain to be exercised
- periods covered by an option to TERMINATE the lease, if these are reasonably certain not to be exercised.
If the Discount Rate is 8% over 3 years, what is the formula?
1/(1+0.08)^3 = 0.793
What are the jnl entries for the initial recognition of a lease agreement?
DR - Right-of-use
CR - Lease liability
CR - cash (whats already been paid)
What is the subsequent measurement of IFRS 16 Leases?
This is after the initial measurement is completed and the carrying amount of the lease liability is increased by the interest charge.
What is the right-to-use asset measured using?
The Cost Model - This means it is measured at its initial cost LESS accumulated dep and impairment loss.
When should depreciation of a asset/leased be charged over the assets remaining useful life?
if the ownership of the asset transfers to the LESSEE at the end of the lease term then depreciation is charged over the assets remaining useful life.
If ownership of the lease stays with the LESSOR how is depreciation charges?
Depreciation is charged over the SHORTER of the useful life and the lease term.
How would a lease be treated if it had a short-term (less than 12 months)?
SIMPLIFIED TREATMENT is allowed. In these cases, the lessee can choose to recognise the lease payments in P&L on a straight-line basis. No lease liability or right-of-use asset would be recognised.
IFRS 16 Leases does not specify a particular monetary amount below which an asset would be considered LOW VALUE, what are some example assets of this?
- tablets
- small personal computers
- telephones
- small items of furniture
Based on the value when new
