FR - Lease - Lessee Accounting Flashcards
Explain what a lease is
It is a rental agreement & Owner are lessor, the (rent) of the asset to the user of the asset (Lessee)
What is the Handbook used for IFRS
IFRS 16 - Lease requires that lessees account for most leases as a purchase of an asset financing component
- Refer to the agreement as “lease”
- Lease refers to Right to use (ROU) and corresponding liability - lease liability
What is the three part to identifying a lease vs a service
- Identification of the asset - If identified, can be considered as a lease
- Right to economic benefit from use - Customer must have exclusive right to the economic benefit of using the asset
- Right to direct use of the asset - The customer must have the right to direct the use of the asset
Explain what a lease and non-lease component is
Lease component - Portion of a lease contract that pertains to the ROU the leased asset, rather than to service associated with ROU asset
Non-lease component - Portion of lease contract that pertains to the provision of services associated with ROU asset provided by the lessor, rather than ROU lease asset
- Normally, requires entities to separate the various components in the contract
-Entities may elect to account for a lease component and associated non-lease components as a single lease component - Lease payment - are negotiated and not eligible for expedient
What are three benefit of a lease
- Leasees can receive financing for up to 100% of the value of the asset
- Lease companies tend to be more flexible than traditional lender in tailoring payment
- NFP and unprofitable companies find cost of financing less under a lease
How is the initial measurement determined for the lease
Commencement date - the date that the ROU asset is first available to the lessee
Lease term - obligation represent the payment requirement under the lease agreement
For ROU asset
1. Initial measurement of the lease liability
2. Lease payment made at or before the commencement date, less any lease incentive
3. Initital direct cost (Lessee)
4. Estimate the cost to be incurred by the lessee at the termination of the lease to dismantle and remove the ROU asset or restore it to the condition required under term of the lease
Dr. ROU asset
Cr. Lease Liability
How is lease liability initially measured
Measured at PV of the lease - Discounted using the implicit rate in the lease for lessor, incremental borrowing rate if impliit rate is not known
What are 4 elements to consider for leases agreement
- Residual value - of an asset, which is the estimated future value of the asset at the end of the asset useful life or lease term
- Guaranteed residual value - amount specified in the residual value guarantee provided by the lessee or independent third party about the asset value
- Unguaranteed residual value - which is the portion of the residual value of the asset that is not guaranteed by the lessee or
- Bargain purchase option (BPO) - option that exists at end of the lease to purchase the asset from the lessor at a “bargain” price, sufficiently lower than the FV at the end of lease
What are the two types of model to use for subsequent measurement
- Cost model
- original cost, less accumulated depreciation, less any accumulated impairment loss
Depreciation is over the lesser of: - Lease term
- Asset useful life
Depreciation amount less asset less its residual value
Dr. Depreciation expense ROU asset xx
Cr, Accumulated depreciation - ROU asset xx
- Revaluation model
What are the accounting entries for when lease liability is paid and interest expense
Dr. Lease liability xx
Cr. Cash xx
Dr. Interest expense xx
Cr. Lease liability. xx
What are some recognition exemption
Short term lease - one year or loss
Low value lease - Company may elect to expense lease payment on either straight line basis or systematic basis over term of lease
- Ex. Three year old photocopier that is worth 4500, but cost 12000, if new. Low when it is new
When is the derecognition of the ROU asset
- Lease terminates and ROU asset return to lessor
- NOn-residual guarantee, lease liability should be nil because all payment have been made. ROU must be fully depreciated and must be unrecognized
Dr. Accumulated depreciation xx
Cr. ROU asset. xx - If residual guarantee, then the guarantee must be paid through the return of the leased asset and cash. Cash paid form lessee to the lessor because of residual value is equal to the residual value
If BPO is paid and title is transferred automatically, what is the accounting transaction of lease liability and if BPO not paid
Dr. Asset
Dr. Accumualted depreciation
Cr. ROU asset
Dr. Lease liability xx
Cr. Cash. xx
Not paid
Dr. Loss of derecognition of ROU asset xx
Dr. Accumualted depreciation. xx
Cr. ROU asset xx
Dr. Lease laibility xx
Cr. Gain on lease derecognition
What are the disclosure and presentation of Lease transaction
IFRS 7 - Finanical instruement - disclosure
- ROU asset and current and non-current portion of the lease liability should be reported separately as unique line item on company statement FP
- General requirement - description of nature of lease, future cash outflow to which lessee is exposed that are not reflected in reported lease liability
Pertain to SFP
- Maturity analysis for lease liability
- Additinoal to ROU asset during the year
- Year end carrying amount of ROU asset
Explain what a sale and leaseback transaction occurrs
- Occurs when an ntity transfer an asset to another entity. Then lease the asset back, sell its land and building.
First step IFRS 15 - if company controls of the asset has been transferred - Seller-lessee has obligation to repurchase the asset
- Seller-lessee has right to repurchase the asset
- Seller-lessee has obligation to repurchase the asset at the buyer-lessor requires for an amount less than the original selling price of asset
