Ch 9 IFRS16 - Leases

Question 1

What is a Lessor?

Answer 1

Owner of the asset

The lessor is the ENTITY that provides the RIGHT TO USE an underlying ASSET in exchange for CONSIDERATION.

(Lessor)

Question 2

What is a Lessee?

Answer 2

Leases

The Lessee is the ENTITY that OBTAINS the RIGHT TO USE an underlying ASSET in exchange for CONSIDERATION.

(Lessee)

Question 3

What is an ASSET?

Answer 3

An Asset is a

RESOURCE that an entity CONTROLS as a result of a PAST EVENT of which FUTURE ECONOMIC BENEFIT was expected to FLOW.

Question 4

What is a RIGHT TO USE ASSET? (x4 options)

Answer 4

It is about who CONTROLS the asset (not about who owns the asset).

Recognised @cost

• Initial value of lease liability
• Payments made at or b4 commencement
• Initial direct costs (e.g. brokers fees)
• Estimated costs of assets removal or dismantling as per lease conditions (IAS16).

Question 5

What is a lease?

Answer 5

A lease is a CONTRACT that CONVEYS the RIGHT TO USE and underlying ASSET for a period of time in exchange for CONSIDERATION.

Question 6

What is a LEASE LIABILITY? (x4 options)

Answer 6

The present value of payments not yet made

• Fixed payments
• Amounts expected to be paid under residual value guarantees (e.g. car lease extra payments)
• Options to be purchased that are reasonably certain to be exercised.
• Termination penalties if expected to be incurred

Incrimental rate could be given in the exam

Question 7

When are payments made in arrears?

Answer 7

End of the year
(cash payments)

Year /Liability bf/Interest (SPL) /Payment /Liability cf

Question 8

When are payments made in advance?

Answer 8

Beginning of the year
(cash payments)

Year /Balance bf /Payment /Subtotal /Interest @% /Bal cf

Question 9

What is the double entry at the start of a lease?

Answer 9

DR Right of use asset (SOFP) A^
CR Lease Liability (SOFP) L^

Brings the recognition of an asset under a lease & the assumption of a liability.

Question 10

What is the treatment of short life & low value assets

Answer 10

Can recognise the lease payment in the P&L on a straight line basis.

= No Lease Liability
or
=No Right of Use Asset recognised

Question 11

What would be classed as a short life & low value assets?

Answer 11

<12m

Based on value when new

Non monetary amount
E.g.
Tablets
Phones
Small items of furniture

Question 12

Right of use Asset

Length of the lease term - what to include

E.g 4 years

Answer 12

• Covers non-cancellable periods (4years)
• Options to extend if reasonably certain (eg plus 2 years) then lease term would be 6 years if reasonably certain, if not kept at 4 years.
• Options to terminate if reasonably certain not to be exercised. (If had options to cancel the 4 yr lease over 3 years and was reasonably certain it could be terminated go with 3 years, if reasonable certain they would not exercise this option the lease would be 4 years). Costs involved in termination would be included in the costs,