Chapter 5 - IFRS 16 Leases

Question 1

What are the two classifications of leases?

Answer 1

– Finance lease
– operating lease

Question 2

How do you identify the Type of lease?

Answer 2

Finance leases are recognised when the risk and reward of ownership is transferred.

– Ownership passes at the end of the lease term
– lease term represents most of the assets economic life
– option to purchase the assets below the fair value at the end of the lease term and likely this option will be taken
– PV of the minimum value of the lease payment represent substantially all the fair value
– Lease asset is specialised in nature

Question 3

How do you account for operating leases?

Answer 3

Operating lease payments are recognised as income in the statement of profit and loss on a straight line basis

Depreciation of the asset continues over its useful life.

Question 4

How do you account for finance lease?

Answer 4

– Derecognise the assets and recognise a receivable at the net investment value
– record payments/lease receipts As a reduction against the receivable
– record interest income on the receivable.

Question 5

How do you calculate the net investment in the lease?

Answer 5

NI = gross investment in the lease discounted at implicit interest rate

Question 6

How do you calculate the gross investment in the lease?

Answer 6

GI = the minimum lease payments receivable plus the unguaranteed residual value.