Ch 11 - IFRS 16 Leases

Question 1

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

Answer 1

Lease agreement

Question 2

The definition of A LEASE . . . .

Answer 2

a contract or part of a contract that conveys the right to use an asset for a period of time in exchange for consideration.

Question 3

The definition of THE LESSOR . . . .

Answer 3

the entity that provides the right to use an underlying asset for a period o time in exchange for consideration.

Question 4

The definition of the LESSEE . . . . .

Answer 4

the entity that obtains the right to use an underlying asset for a period of time in exchange for consideration.

Question 5

The definition of A RIGHT OF USE ASSET . . . .

Answer 5

is an asset that represents a lessee’s right to use an underlying asset for the lease term.

Question 6

On commencement of the lease, the lessee should recognise:-

Answer 6

• the lease liability
  and
• a right-of-use asset

Question 7

What does the accounting treatment for leases consider:-

Answer 7

• the initial measurement

and the

• subsequent treatment of a lease

Question 8

What is the lease liability initially measured at?

Answer 8

the PRESENT VALUE of the lease payments that have NOT YET BEEN PAID.

Question 9

What should LEASE PAYMENTS include:-

Answer 9

• 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.

Question 10

What is a RESIDUAL VALUE GUARANTEE?

Answer 10

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.

Question 11

To determine the PRESENT VALUE of the lease payments not yet paid the discount rate should be . . . .

Answer 11

the rate IMPLICIT IN THE LEASE.

Question 12

What should you do if the implicit rate of the lease cannot be determined?

Answer 12

then the incremental borrowing rate should be used.

Question 13

What is the right-of-use asset initially recognised at?

Answer 13

Cost

Question 14

What does the initial cost of the right -of-use asset comprise of?

Answer 14

• 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

Question 15

What is the lease term?

Answer 15

The lease term is the length of time that the lessee has the right-of-use of an asset.