F2B - Chapter 5: Leases

Question 1

What is a lease?

Answer 1

contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration

Question 2

What is the lessor?

Answer 2

Entity that provides the right to use an underlying asset in exchange for consideration

Question 3

What is a lessee?

Answer 3

Entity that obtains the right to use an underlying asset in exchange for consideration

Question 4

What does the right to use asset represent?

Answer 4

The lessee’s rights to use an underlying asset for the lease term

Question 5

When would a lease be classified as a finance lease?

Answer 5

Ownership transferred to the lessee at the end of the lease
The lessee has the option to purchase the asset for a price substantially below the fair value of the asset and it is reasonably certain the option will be exercised
The lease term is for the major part of the asset’s useful life
Present value of the minimum lease payments amount to substantially all of the fair value of the asset
Leased assets are of such a specialised nature that only the lessee can use them without major modification
Lessee bears losses arising from cancelling the lease
Lessee has the ability to continue the lease for a secondary period at a rate below market rent

Question 6

What is a finance lease?

Answer 6

A lease that transfers all the risks and rewards of ownership. Title may or may not be transferred.

Question 7

What is the accounting treatment of an operating lease?

Answer 7

Lease receipts are shown as income in SPL on a straight line basis over the term of the lease, unless another systematic basis is more appropriate.
Any difference between the amounts charged and the amounts paid will be recognised as accrued income or deferred income in the SFP

Question 8

What is the finance lease receivable equal to?

Answer 8

Net investment of the lease

Question 9

What is the net investment of the lease calculated as?

Answer 9

Present value of all unreceived:
Fixed rental payments
Variable rental payment
Residual value guarantees
Unguaranteed residual values
Termination penalties

The payments are discounted at the rate implicit in the lease

Question 10

What is the subsequent treatment for the accounting treatment of a finance lease?

Answer 10

Carrying amount of the lease receivable is:
Increase by the finance income earned
Decreased by the cash receipts