FAR Recap Flashcards
Lease
A contract that conveys the right to use an underlying asset for a period of time in exchange for consideration
Lessor
Entity that provides the right to use an underlying asset in exchange for consideration.
Lessee
Entity that obtains the right to use an underlying asset in exchange for consideration.
Right of use asset
Lessee’s right to use an underlying asset for the lease term
Identifying a lease
Contract must convey right to control the use of an identified asset for a period of time in exchange for consideration.
Contract must give customer
- Right to substantially all of asset’s identified economic benefits
- Right to direct identified asset’s use
Right to direct use can still exist if lessor puts restrictions on use in contract
Customer does not have right to direct use of asset if supplier has practical ability to provide an alternative asset and if economically beneficial for them to do so.
- Supplier can choose which asset to use to fulfill contract - not an identified asset and supplier is directing asset’s use
- Supplier can use assets to also fulfill other work - customer not obtaining substantially all economic benefits
Substance over form
Purchase - asset legally belongs to customer, has right to use, recognise in accounts, substance = legal form
Lease - asset legally belongs to lessor, has right to use for period of time in exchange for consideration, still recognise asset in lessee accounts, substance does not equal legal form
Lessee accounting: Lease liability
PV of future lease payments i.e. not yet made including
Fixed payments
Variable payments - value at inception
Amounts expected to be paid under residual value guarantees
Options to purchase that are reasonably certain to be exercised
Termination penalties if lease term reflects expectation that they will be incurred
Lessee accounting: Right of use asset
Recognise at cost, which equals:
Initial value of lease liability
Payments made at or before commencement eg deposit - Dr ROUA X, Cr Lease liability X - deposit, Cr Cash Deposit
Initial direct costs
Estimated costs of asset removal or dismantling as per lease conditions
Current vs non-current lease liability
Current liability X < Bal figure
Non-current X < From end of Yr 2 row
At end of yr one X < From table
ROUA Depreciation
Over the shorter of lease term and UEL of asset IF ownership does not transfer to the lessee at end of lease term; OR
Over UEL of asset if does transfer
Short life and low value assets
Short term (less than or equal to 12 months at inception date) - simplified treatment is allowed
Lessee can recognise lease payments in SPL on SL basis.
No LL or ROUA.
Eg tablets, personal computers, small items of office furniture, telephones
Disclosures
Depn charge for ROUAs
Interest expense on LLs
Expense relating to S-T/LV leases
Total cash outflow for leases
Additions to ROUAs
CA of ROUAs by class of underlying asset
Sale and leaseback - is it a sale?
Apply IFRS 15 if PO satisfied i.e. control transferred
Sale
- Derecognise asset
- Recognise ROUA of previous CA x % rights retained
- Recognise LL of PV of future lease payments
- P/L on disposal for rights transferred
Not a sale
- Continue to recognise asset
- Recognise financial liability equal to proceeds received
Sale and leaseback (if it is a sale) - proceeds = FV
Dr Cash (proceeds)
Dr ROUA (CV * Lease Liability/FV)
Dr/Cr Loss/profit on disposal (bal figure)
Cr PPE (CV)
Cr Lease liability (PV of lease payments)
Sale and leaseback (if it is a sale) - proceeds < FV
Dr Cash (proceeds)
Dr Prepayment (FV - proceeds)
Dr ROUA (CV * Lease Liability/FV)
Dr/Cr Loss/profit on disposal (bal figure)
Cr PPE (CV)
Cr Lease liability (PV of lease payments + prepayment)
Assume lease rentals lower to compensate us for the reduced proceeds.
Hence prepayment reflects the benefits we will receive in future from reduced payments.
Lease liability settled by by making rental payments and releasing prepayment.
