Ch 20 Leases Flashcards
Right-of-Use Asset – Initial Measurement
Measured using contract-based approach.
Initial measurement includes:
Lease liability at the start of the lease.
Lease payments made before the lease starts, less any incentives.
Lessee’s initial direct costs of negotiating the lease.
Costs for dismantling, removing, and restoring the asset.
Lease Liability – Amortized Cost
Lease liability is calculated using the amortized cost method.
Payments are allocated between interest and principal.
The original discount rate is used to calculate the interest portion.
Lease term estimates and variable amounts are reassessed every reporting period.
Right-of-Use Asset Depreciation (Lessee)
Amortized over the lease term or the useful life (if ownership is expected).
Can be revalued if using the revaluation model.
Gains and losses from revaluation are recognized.
The asset is subject to impairment testing.
IFRS vs. ASPE – Lease Liability Recognition
IFRS: Lease liability includes:
Present value of fixed lease payments.
Variable payments (indexed), residual guarantees, purchase options.
ASPE: Lease liability is the lower of:
Present value of minimum lease payments.
Fair value of the leased asset at the start
Leased Asset Measurement (IFRS vs. ASPE)
IFRS: Leased asset = Initial lease liability + payments made at or before lease commencement.
ASPE: Same as IFRS, but less detail on the inclusion of purchase options or residual guarantees.
Depreciation and Lease Term (Lessee Perspective)
Lessee does not guarantee any residual value:
Capitalize the PV of minimum rental payments.
Depreciate over the lease term.
Lessee guarantees a residual value:
Include the guaranteed residual value in the capitalized asset cost.
Depreciate over the lease term.
Operating Leases – Lessee (IFRS)
Under IFRS, lessees must recognize:
Right-of-use asset and lease liability for most leases.
Short-term leases and leases of low-value assets are exempt.
No asset or liability is recorded under ASPE for operating leases.
Lessee Journal Entries for Lease (2024 Example)
First payment:
Debit: Right-of-use Asset
Credit: Lease Liability
Depreciation:
Debit: Depreciation Expense
Credit: Accumulated Depreciation
Interest expense:
Debit: Interest Expense
Credit: Lease Liability
Lease Term Calculation for Lessee
Lease term includes:
Non-cancellable period.
Renewal options if there is reasonable certainty of exercising them.
Termination penalties are factored in if applicable.
Lessor Accounting – Lease Types
Operating Lease: The lessor keeps the asset on its balance sheet.
Depreciates the asset.
Recognizes rental income over the lease term.
Finance Lease: Recognizes a lease receivable for the net investment in the lease.
Interest income recognized over the lease term.
Sales-Type Lease: Recognizes both sales revenue and cost of goods sold.
The difference is the profit/loss from the transaction.
Lessor Accounting for Sales-Type Lease
Recognize gross investment in lease.
Sales Revenue: Present value of lease payments.
Cost of Goods Sold: Cost of the leased asset minus any unguaranteed residual value.
Gross Profit: Sales revenue minus cost of goods sold.
Lessor Accounting – Finance-Type Lease
Net investment in the lease recorded as a receivable.
Interest income recognized based on the rate implicit in the lease.
Lessor Accounting for Residual Value
For finance-type leases, both guaranteed and unguaranteed residual values must be considered in the calculation of net investment.
Impairment of residual value is assessed periodically, and any reductions are recognized as a loss.
Upward adjustments to residual value are not recognized.
Lessor Accounting for Operating Lease
The lessor continues to hold the asset on its balance sheet and depreciates it.
Rental income is recognized evenly over the lease term.
Operating lease expenses like maintenance are expensed as incurred.
Short-Term and Low-Value Leases Disclosure (IFRS)
IFRS requires disclosure of:
Expenses related to short-term lease and low-value lease exemptions.
Commitment for short-term leases if it differs from other leases in the portfolio.
Lessor’s Disclosure Under IFRS vs ASPE
IFRS: Requires extensive disclosure, including:
Gross investment and present value of minimum lease payments.
Unearned finance income.
Variable lease payments and income from them.
ASPE: Limited to:
Net investment and the implicit interest rate.
Impaired lease amounts and allowances.
Lease Modifications and Reclassifications
IFRS: Lease modifications must be reassessed, affecting the lease liability and right-of-use asset.
ASPE: Similar to IFRS, lease modifications should be reflected by adjusting the liability and recognizing any changes in lease expenses.
Lessee Accounting for Lease Termination
If a lessee terminates a lease:
Right-of-use asset is derecognized.
Any remaining lease liability is adjusted.
Gains or losses are recognized in the period of termination.
Lease vs Service Contract (IFRS)
Lease: The lessee has the right to control the use of an asset for a period in exchange for payments.
Service Contract: The provider retains control over the use of the asset.
Lease Modifications (IFRS)
Lease modification involves a change in the terms of the lease that wasn’t part of the original contract.
Reassessment of lease liability is required.
If the modification changes the scope of the lease, re-calculate the lease payments and adjust the right-of-use asset.
If not, adjust the remaining lease payments and amortize the new lease liability accordingly.
Impairment of Right-of-Use Asset
Impairment test: Right-of-use assets are subject to the same impairment rules as other tangible and intangible assets.
Indicators of impairment:
Decline in asset’s market value.
Obsolescence or physical damage.
Changes in economic circumstances.
Variable Lease Payments (IFRS vs ASPE)
IFRS: Lease payments may be variable, based on factors such as inflation, usage, or sales.
Variable payments are included in the lease liability only if they are linked to an index or rate.
If not, they are expensed as incurred.
ASPE: Variable payments are generally not included in the lease liability and are expensed.
Lease Term Length (Renewal and Termination Options)
Lessee’s lease term:
Includes the non-cancellable lease period.
Includes periods covered by renewal options if the lessee is reasonably certain of exercising them.
Excludes termination periods unless the lessee is reasonably certain of not exercising the termination option.
Lease Incentives (Lessee Perspective)
Lease incentives: Payments or other benefits offered to the lessee to encourage them to enter the lease.
Incentives are deducted from the lease liability and reduce the right-of-use asset.
For example, if the lessor pays part of the lessee’s upfront costs, this reduces the total liability.
