IFRS 16- LEASES

Question 1

what does IFRS 16 say?

Answer 1

All leases should be recognised as ROU asset along with a liability. (single accounting model, all leases finance leases, recognised on balance sheet)

however, following 2 can claim exemption from capitalization (can be considered operating lease) =

-short lease (non cancellable period of less than 1 year)
-lease of low value asset (less than 5000 usd when new is a guideline, however diff for every company)

these will be directly expensed out in PnL. no asset or liability other than prepayment or accruals.

if exemption is claimed, all similar leases must be treated same. cherry picking not allowed.

Question 2

define
-LEASE
-RIGHT OF USE ASSET
-INTEREST RATE IMPLICIT IN THE LEASE

Answer 2

Lease – a contract for the right to use an asset for a period of time.

Right-of-use asset – The asset being used by the lessee

Interest rate implicit in the lease
– this is the rate of interest at which the PV of the lease payments is calculated, PV of residual value and IRR of lessors cash flows.

Question 3

at what point is a lease inception started?

Answer 3

the earliest of:
-date of lease agreement
-date of parties’ committment to the terms and conditions of lease

Question 4

how can we tell if a contract is a lease or contains a lease?

Answer 4

criteria:
-right to control
-identified asset
-in exchange for a consideration.

right to control:
-economic benefit is reseived by the entity
-can direct use of the asset (eg. if a bus route is predetermined, right to control is not there)

identified asset: if the supplier of asset has the right to substitute the asset (except when necessary, like repair) the asset will not be IDENTIFIED.

Question 5

what are the components of a lease contract?

Answer 5

-may have more than one lease component
-may have non lease components

if there is more than one lease component, they are combined and considered in total.

Question 6

what is the accounting treatment of a lease?

Answer 6

a right of use asset is recognised
a lease liability is recognised

Question 7

what is a sale and leaseback arrangement, what are the factors to evaluate when considering if it is an actual sale or not?

Answer 7

this is when a lessee sells an asset to a leasing company/ lender. then leases it from them.

it needs to be evaluated whether sale meets condition of IFRS 15 or not.
i.e risk and rewards must be transferred

factors
-lease term is majority of remaining life?
-maintenance responsibility is on seller or new owner?
-repurchase option price? fixed or MV?

Question 8

what will be the entries when sale condition as per IFRS 15 is satisfied? Include amount

Answer 8

-Derecognise asset (at Carrying value)
-Record Cash received
-ROU booked (CV of asset *PV of lease payments/ FV of asset)
-Liability booked (PV of future lease rentals)
-Gain/loss on disposal will be the balancing value of above entries.(Dr. will be loss, Cr. will be gain)

Question 9

what happens when the transfer does not qualify for a sale?

Answer 9

-not recorded as a sale/purchase

-continue to recognise asset at carrying value

-proceeds received will be recorded as a loan. lease payments will be treated as loan payments

Question 10

disclosure requirements in SOFP

Answer 10

-ROU should be shown separately in SOFP or disclosure notes

-A ROU asset that is investment property should be shown with other owned investment properties

-lease liability should be shown separately in SOFP or disclosure notes, and separated into current and non current liabilities.

Question 11

disclosure requirements in PnL

Answer 11

disclose that=

-depreciation of ROU and Rent payments for short term and low cost asset are expensed as operating costs
-Interest related to ROU is included in Finance costs.

Question 12

what disclosure is required in cash flow statement?

Answer 12

-FLO repayments will be financing activites.

-Interest paid may be classified as an operating or financing cash flow (IAS 7).

-Operating lease payments will be treated as operating cash flow.

Question 13

operating lease, non cancellable period for 1 year but probable that lease will be renewed

Answer 13

then do not treat it as operating lease, treat it as finance lease in SOFP.

Question 14

Low value asset

Answer 14

subjective, value varies from company to company, usually includes computers, fixtures and fitting

Question 15

how is initial recognition of lease done

Answer 15

DR- ROU ASSET (PV of future lease payments + directly attributable cost +PV of dismantling cost for which provison is made)

CR- CASH (Directly attributable cost + advance rental)
CR- LEASE OBLIGATION (PV of future lease payments)

Question 16

Yearly adjustments after recognition of ROU

Answer 16

-amortization of ROU asset
-payment of lease
-unwinding of discount of FLO
-liability split between current and non current portion

Question 17

Amortization of ROU asset

Answer 17

if certain we will not own asset in end, depreciate at lower of: 1) lease term 2) useful life

if certain we will own asset in end, depreciate over its useful life

if its an asset that is usually revalued, co. may choose to apply revaluation model on it.

if investment property then must be on revaluation model

entry:
DR: Amortization exp
CR: ROU asset

Question 18

what do PV of future lease payments include when recording a lease liability?

Answer 18

-fixed payments
-variable payments
-purchase options if reasonably certain to exercise it
-penalty of ending contract earlier if expecting to be paid

Question 19

unwinding of discount of lease obligation

Answer 19

LIABILITY IS INCREASED EACH YEAR BY UNWINDING OF DISCOUNT

DR: INTEREST EXPENSE
CR: FLO

Question 20

payment of lease rental

Answer 20

LIABILITY IS DECREASED EACH YEAR BY PAYMENTS MADE.

DR: FLO
CR: CASH

Question 21

Dismantling costs related to Lease?

Answer 21

Will be included in initial measurement of ROU asset

Debit= ROU asset
Credit= Provision for dismantling costs