IAS 17 - Leases

Question 0

What is the definition of a finance lease?

Answer 0

A finance lease transfers substantially all the risks and rewards of ownership of an asset. Indicators of a finance lease are where legal title is transferred over a period of time or where an asset come to the of its useful economic life whilst the lessee has the asset.

Question 1

What is the definition of a lease?

Answer 1

An agreement whereby the lessor conveys to the lessee in return for rent the right to use an asset for an agreed period of time

Question 2

What is the definition of an operating lease?

Answer 2

An operating lease is a lease other than a finance lease. No responsibility to repair of insure the asset as you are just renting the asset. Indicators of an operating lease are where the fair value of the asset is far greater than the lease payments.

Question 3

What is the amount in respect of a finance lease that should be recognised in the statement of financial position?

Answer 3

The lower of the fair value and the present value of the minimum lease payments

Question 4

What is the double entry for a finance lease in the financial statements?

Answer 4

DR Asset
CR Finance Lease Payables (Capital)

CR Depn (SOFP) 
DR Depn (I/S) 

CR Bank
DR Finance Lease Payables

DR Finance Lease Interest (I/S)
CR Finance Lease Payables (Interest)

Question 5

What is the double entry for an operating lease in the financial statements?

Answer 5

CR Bank
DR Lease payments (I/S)

• recognise in SOFP as a prepayment or an accrual where necessary.

Question 6

How is the interest on a finance lease calculated?

Answer 6

Total lease payments £X
less : FV of asset (£X)
=
INTEREST

Question 7

What are the 2 ways of calculating the amount of finance to be charged in each period?

Answer 7

1) The Actuarial Method

2) Sum of Digits Method

Question 8

What is the actuarial method of calculating a finance charge?

Answer 8

This is where the capital amounts are paid off in equal amounts over the life of the lease of the & interest is paid off at a % of the c/fwd amount.
It should be set out in a table as per the below : -

Date Bfwd Int Payment Cfwd
2007 5,710 916 (2,000) 4,626
2008 4,626 687 (2,000) 3,313

non current finance lease = £3,313
current finance lease = £1,313 (4,626 - 3,313)

Question 9

What is the Sum of Digits method of calculating a finance charge?

Answer 9

This is where more interest is apportioned in early years using the following fraction : n(n+1)/ 2 where n = number of years in the term of the lease.

EXAMPLE : Cash paid = £2000 x 5 = 10,000 less Fair Value = 7710 = £2,290 Interest. 4 years lease term.

4(4+1) / 2 = 10.

Period 1 = £2,290 / 10 x 4 = £916
Period 2 = £2,290 / 10 x 3 = £687

these interest amounts are then included in the actuarial table.

Question 10

How is the receivable balance on the lessors statement of financial position initially measured?

Answer 10

Initially measured at the NET INVESTMENT IN THE LEASE

Question 11

What is the definition of the net investment in the lease?

Answer 11

The gross investment in the lease discounted to present value.

Question 12

What is the definition of gross investment in the lease?

Answer 12

Minimum lease payments receivable plus any unguaranteed residual value and guaranteed residual value.

Question 13

What is the definition of minimum lease payments?

Answer 13

Payments contractually due from the lessee plus any residual value guaranteed by the lessee.

Question 14

When is special consideration required for a lessor finance lease?

Answer 14

Special consideration is required with : -

1) Manufacturers who lease out assets they have made
2) Dealers who acquire assets to lease to third parties

Question 15

How should amounts be recognised in the financial statements where a dealer acquires an asset and then leases it to a third party?

Answer 15

I/S
REVENUE               (lower of fair value & PV of min lease payments) 
COST OF SALE      (cost of the asset) 
-------------------
PROFIT 

FINANCE INCOME (revenue x interest %)

SOFP
RECEIVABLE (c/fwd amount from actuarial table)

Question 16

What is the accounting treatment for the lessor where an asset is leased out under an operating lease?

Answer 16

> RECOGNISED AS AN ASSET OF THE LESSOR : Risks & rewards of ownership have not been transferred to the lessee.
IMPAIRMENT REVIEWS : Should be conducted in accordance with IAS 36
INDIRECT COSTS : Should be added to the carrying of the leased asset.

Question 17

What happens to the lessor of an operating lease who is a manufacturer or dealer?

Answer 17

A lessor who is a manufacturer or dealer should NOT recognise any selling profit on entering into an operating lease because the risks and rewards of ownership have not been transferred to the lessee.

Question 18

What is a sale and leaseback transaction?

Answer 18

A sale and leaseback transaction is where the original owner of an asset sells it to a bank and then immediately leases it back

Question 19

What are the accounting entries for a sale and leaseback transaction on a finance lease?

Answer 19

> Derecognise the carrying amount of the asset sold now
Recognise the sale proceeds
Calculate the profit on sale as proceeds less carrying amount and recognise it as deferred income
Recognise the finance lease asset and the associated liability
Amortise the profit on sale as income over the lease term.

Question 20

What are the comparatives of IAS 17 and SSAP 21 under UK GAAP?

Answer 20

UNDER IAS 17 : -
There are a number of factors which would indicate that the risks & rewards of ownership have been transferred.

UNDER SSAP 21 : -
Transfer of risks and rewards of ownership is presumed if present value of minimum lease payments is >90% of fair value.

UNDER IAS 17 : -
Land and buildings split at inception into separate leases

UNDER SSAP 21: -
Lease of land and buildings is considered as one lease and is normally treated as an operating lease