IFRS 16: Leases

Question 1

The 2 parties are

Answer 1

Lessor:
Provides the Right to use an Asset
for a period of time
in exchange for consideration.

Lessee:
The entity that Obtains the Right to use an asset
for a period of time
in exchange for consideration

Question 2

IFRS 16 sets out the accounting treatment for leases - Recognition, Measurement, Presentation and Disclosure… what does this ensure?

Answer 2

.. that lessees and lessors provide RELEVANT information that FAITHFULLY REPRESENTS lease transactions

From this info users are able to assess the effect that leases have on the financial performance, financial position and Cash flows of an entity.

Ensures an accurate picture is presented of an entities leased assets & liabilities. This enables Direct Comparison to be made between a co that leases it’s assets and one that buys its assets.

Question 3

Identifying a Lease

Answer 3

A lease contract conveys the right of the Lessee to control the use of the asset for a period of time in exchange for consideration..

Note that control is conveyed when the lessee has the right to Both:

• OBTAIN substantially all of the ECONOMIC BENEFITS from the use of the asset

and

• DIRECT the USE of the asset

Question 4

Right-of-use asset

Answer 4

This term is used where a lessee has the right to use an IDENTIFIED asset for the lease term

Question 5

ACCOUNTING:

1. Initial measurement of a ROUA

Answer 5

COST - which comprises:

1. The Initial measurement of the lease liability. (Initial measurement of the LL is the PV of the lease payments to be made over the lease term. Disc. Rate is the rate implicit in the lease of the lessees incremental borrowing rate)
2. Add any lease pmts at or before commencement date.
3. Less any lease incentives received.

Question 6

ACCOUNTING

2. After commencement measurement of a ROUA

Answer 6

After commencement:

1. The lessee measures the ASSET (ROUA) using a Cost model (Cost less acc dep’n & Imp)

Depn period:
Useful life (if ownership transfers)
Otherwise the earlier of Useful life and the lease term.

2. ..and measures the LIABILITY (LL) by:
   * Increasing the CA to reflect interest on the LL.
   (Dr Finance costs / Cr Lease liability)
   * Reducing the CA to reflect payments made.
   (Dr Lease liability / CR Bank)

Interest on the LL uses the Discount rate that apples to the remaining balance of the LL

Question 7

ACCOUNTING

SFP & SPL

Answer 7

SPL:

• Dep’n charge for the asset
• Interest on the LL (ie. finance costs)

SFP:

• In NCAs: the CA of the asset (cost/revaluation less acc dep’n/imp loss)
• In Liabilities: the amount of the LL split between NC and Current assets

Question 8

When assets are leased what will be the effect on the lessee’s accounting ratios?

Answer 8

GEARING
* Will increase because of higher Non current liabilities.

ASSET TURNOVER
* Will Decrease because non-current assets are increased in relation to revenue

Question 9

NB I think the LL is initially just the present value of future payments unlike the ROUA where you incude deposit, exclude incentives?

Answer 9

.