IFRS 16 - Lease Accounting for Lessors Flashcards
When is a Lease a Finance Lease from the Lessor’s perspective:
When the lease transfers substantially all the risks and rewards incidental to ownership to the lessee, then the lease is effectively a sale.
The buyer is effeftly purchasing the asset by taking out a loan with the seller.
What is an Operating Lease:
When the lease doesn’t transfer the risks and rewards incidental to ownership to the lessee. In this case it’s more like rental agreement.
Typically when the economic useful life of an asset is considerably longer than the lease term, this is an Operating Lease.
What is a Lease:
It’s a contract that conveys (carries over or transfers) the right to use an asset.
What is the Gross Investment in the lease:
The sum of:
- the lease payments receivable by a lessor under a finance lease; and
- any unguaranteed residual value accruing to the lessor
What is the Net investment of the lease:
The gross investment in the lease discounted at the interest rate implicit in the lease.
What is unguaranteed residual value:
That portion of the residual value of the underlying asset, the realisation of which by a lessor is not assured or is guaranteed solely by a party related to the lessor.
What leases are not included in IFRS 16:
- Leases to explore minerals, oil, natural gas
- Leases of biological assets (see IAS 41 Agriculture
- service concession arrangements (covered by IFRIC 12 instead) (when gov grants a contract for public service to a private operator.
- Licences of intellectual property (IFRS 15 - Revenue from Contracts with Customers)
- Rights held by a lessee under licensing agreements within the scope of IAS 38 Intangible Assets. Like films, recordings, plays patents, copyrights.
When is a contract a lease:
When the contract conveys the right to control the use of the asset for a period of time in return for consideration:
1) When the lessee obtains all of the economic benefits from the use of the asset
2) When the lessee has the right to direct the use of the asset
What is in IFRS 15:
This standard sets out the scope to identify what components of a lease contract are part of a lease and which ones aren’t.
How to recognise an Operating Lease - as a Lessor:
- Underlying asset is recognised in accordance with IAS 16 PPE.
- Lease payments are recognised as income, usually on a straightline basis.
- any difference between rentalninckme due in a period and cash received is either accrued or deferred as a timing difference in the SOFP. This will be zero by the end of the lease.
- Initial costs incurred by the Lessorat the commencement date, should be deferred and recognised over the lease term, the same as the lease income.
What are accruals:
This is income that the company should recognise at the end of its reporting period in the financial statements, but for which it hasn’t received the cash yet.
Accrued income.
Accrued income is money owed to the company for that period, which hasn’t been billed yet.
As soon as the income has been billed for it becomes a Receivable.
Recognition of income on Operating leases:
- Income from lease payments should be spread evenly over the period.
- Underpayments should be logged as accrued income
- overpayments should be logged as Deferred Income
What is a Finance Lease:
When the risks and rewards of the asset, incidental to ownership, are transferred to the lessee under the lease contract. Examples:
- when the lease transfers ownership to the lessee at the end of the lease period
- if the lessee has the option to buy the asset during the lease contract, at a price that is lower than the fair value. This making it pretty much certain the lessee will exercise the option at the due date.
- the lease term is for the major part of the economic life of the asset
- if the lease payments add up to the fair value of the asset
- the asset is so specialised, only the lessee can use it
- the lessee can continue the lease for a second period below market rate.
