Chapter 11 - Leases

Question 1

Define a lease

Answer 1

The right to control the use of an identified asset for a period of time in exchange of consideration. The customer must have substantially all the identified assets economic benefits, and can direct the use of the asset.

Question 2

We must distinguish between a lease and a ?

Answer 2

contract of service

Question 3

We have a contract for 8 lorries. The supplier provided a pool of 30 lorries. Can this be a lease

Answer 3

No as this is not an identifiable asset

Question 4

Lorries are stored at the suppliers premisis when not used. Is this a lease

Answer 4

No, buyer does not have the rights of control / doesnt direct the assets use

Question 5

If the supplier can use the lorry for other customers when not in use, why is this a problem?

Answer 5

Because it means that the buyer does not have substantially all the economic benefits

Question 6

Double entry for lease?

Answer 6

Dr Right of use asset (NCA)

Cr Lease liability (PV of payments not made)

Cr Cash payables.

Question 7

Leases are often over a few years. Thus we need to recognise the lease liability and CA of right of use asset. How will our workings look

Answer 7

Date
Cash flow
Discount rate (hence if lease was 3 years we would discount for 3 years
= NPV

Question 8

If we want to extend a lease contract, when would we include this as the lease term?

Answer 8

If there is reasonable certainty the lease will take place.

Question 9

Set out the lease liability tables for payments in arrears vs payments in advance

Answer 9

Arrears

Year 1 / Year 2 BF figures
Interest accrued (Finance Cost)
Payment (deducted)
C/f

Advance

Year 1 / Year 2 B/f figures
Payment - in year 1 this is 0
Balance
Interest accrued
C/f

Question 10

The lease liability is always?

Answer 10

The NPV of future cash flows

Question 11

Right of use asset is reflected on the SFP in order to recognise

Answer 11

Substance over form

Question 11

Payment in arrears is when?

Answer 11

We make payment at the end of the year

Question 12

We depreciate the right of use asset different depending on whether the asset is transferred over to the leesee or not at the end of its useful life. We assume in the exam that it does not transfer unless otherwise told.

What are the different treatments for depreciating depending on ownership transfer?

Answer 12

If ownership transfers;

Depreciate over useful economic life

If ownership does not transfer;

Depreicate over the shorter of the lease term vs useful economic life

Question 13

We recognise the right of use asset at cost which equals?

Answer 13

Initial value of the lease liability + direct costs + any deposits + removal or dismantle costs

Question 14

When do we treat a lease in a more simplified way?

Answer 14

If it is short term (<12 months) or low value, no lease liability or right of use asset needs to be recognised, we can just recognise the lease payments in SPL

Question 15

What disclosures are required for leases?

Answer 15

Depreciation charge for ROU assets
Finance cost for lease liabilities
Expense relating to low cost or short term leases

Question 16

Sometimes a asset is sold and then leased back. We only recognise this as a sale if we can see a

Answer 16

Transfer of ownership/control

Question 17

When is the accounting treatment for this

Answer 17

Cr the asset (decognise)
Dr a ROU asset, as a proportion of the previous CA that relates to the rights contained
Recognise a lease liability
P/L disposal

Question 18

Proceeds from selling an asset are equal to?

Answer 18

The fair value

Question 19

The overall double entries of a sale and the proceeds obtained from a leaseback are?

Answer 19

Dr Cash(Proceeds)
Cr PPE
Dr ROU Asset
Cr lease liability (PV of lease payments)
Dr / Cr SPL

Question 20

Given we want to recognise the value of the ROU as the amount of CA that we have retained ownership for, how do we work this out

Answer 20

CA * PV of lease liability / FV of asset

Question 21

What are the different UK GAAP Treatments for leases

Answer 21

UK GAAP identifies two types of leases; finance and operating lease.

A finance lease is a lease that transfers substantially all the risks and rewards of ownership to the party using the asset. Operating is anything other than this.

For finance lease, we recognise
Dr Fixed asset
Cr finance lease liability

Of which is the lower of the fair value of the asset and NPV of minimum lease payments

Charge depreciation on fixed asset as you would under IFRS

Operating lease;

Recognise lease payments in P&L on stright line basis.