F2 - 8. Leases Flashcards
What is a lease?
A contract that conveys the right to use an asset for a period of time in exchange for consideration
What is a right of use asset?
Represents the lessee’s right to use an underlying asset for the lease term
What is a finance lease?
A lease that transfers substantially all the risks and rewards incidental to ownership of an asset
What are the 5 situations under which a lease will be classified as a finance lease?
- Major part of economic life
- Ownership of the asset transferred at the end
- Purchase option that is likely to be exercised
- Present value of the lease payments amounts to substantially all of the fair value
- Specialised so can only be used by lessee
What is an operating lease?
A lease that does not transfer substantially the risks and rewards of asset ownership
What is the substance to the lessor of a finance lease?
Providing the lessee with an asset and a loan to finance it’s purchase
What is the entry at the inception of a finance lease?
Dr Lease Receivable (Net Investment)
Dr Cash (Any deposit/first instalment)
Cr Asset (to derecognise)
Dr/Cr balance to P&L
What makes up the net investment in the lease?
PV FUTURE lease payments receivable
+ discounted unguaranteed residual value
What are the 3 things likely to make up future lease payments?
- Fixed payments
- Residual value guarantees
- Termination payments (likely to be paid)
What is the movement in lease receivable during a period?
Opening SFP
+ Interest (Cr Fin Income)
- Payment (Dr Cash)
= Closing SFP
What is the substance of an operating lease?
Short term rental
How are lease payments recognised?
On a straight line basis over the lease term
How are direct costs incurred in setting up operating leases recognised?
Added to asset value and expensed over lease life
