IFRS 16 Leases Flashcards
what is a lease - Definition, substance over form
A Lease is a contract that conveys the right to control the use of an underlying asset for a period of time in exchange or consideration.
Lessor is the legal owner and receives cash, Lessee takes possession and pays cash
It doesn’t have to called a lease, if the contract gives possession for a period of time in exchange for consideration, it may be a lease.
Contract can also be an executory contract (no asset no liability)
Lessee Accounting - lease asset & liability, lease term, notes, depreciation, low value leases
Lessees will account for leases by recognising ROU asset and an associated liability
Liability is measured at the P.V of the minimum lease payments (Annuity factor) - there will be unwinding of finance cost
Add interest and deduct cash payments from liabilities at the end of the year to get closing balance
Asset includes transaction and dismantling costs - there will be depreciation
lease term comprises contracted periods plus non cancellable periods. periods covered by an option to extend which is reasonably certain should also be included.
If asset does not transfer to lessee it is depreciated over shorter of useful life and lease term, if ownership transfers it is deprecated over economic life.
Notes
ROU Asset/Liability
measured at P.V
Lease term
capitalising initial costs
Depreciation
finance costs
where lease contract is below 6 months or a low value, No ROU asset or liability and can be treated as an executory contract so rentals are expensed.
Sale and Leaseback arrangement - procedure, accounting, Loans
This gives a cash boost whilst retaining use of asset.
Entities must apply IFRS 15 to decide whether in substance it is a sale or not. It must checked whether control has passed and performance obligation has been satisfied.
Has control passed?
Has the ability to direct use of and obtain all the benefits passed away
Lease payments are small - Sale
if lease period is small compared to useful life - Sale
Sale - S&L
Derecognise asset and recognise profit/loss on disposal
cash in - Proceeds
Asset - Remove assets
Recognise the lease liability
recognise a fraction of the asset - Lease Liability/ fair value * CV of asset
balancing figure = profit or loss
Not a sale - Loan
Faithful representation of transaction may not be a lease if control of asset does not pass to lessee. It may be a loan. There is no performance obligation for control to pass
Asset remains
Depreciation and finance cost arises
No profit or loss on disposal
DR Cash/ CR Loan
Lessor Accounting - Operating lease, finance lease
Operating lease
Risk and rewards do not pass to Lessee
Assets has been rented out and recognises income
Assets is accounted for in accordance with IAS 16.
Finance lease
Risk and rewards do pass
Asset is de-recognised
In substance lessor has made a loan, loan is recognised at P.V of future payments
Lessor has financial asset on which interest income is earned
A lease is a finance lease if one or the following applies
1. Ownership of asset transfers at he end of the lease term
2. The leased assets are specialised
3. The lease term is for the major part of the asset’s economic life
4. Lessee has option to purchase asset for less than its market value
and that its reasonably expected to occur
5. The lessee will benefit from changes in the assets residual value
Accounting for Sub leases - operating lease or finance lease, derecognition
A sub lease is where Lessee leases (head lease) an asset from a lessor then sub leases asset to another third party.
This means Original lessee is now a lessor, how does the lessor account for sub lease in his books
Lessor classify sub leases as operating leases or finance leases based on risk and rewards unless head lease is not a ROU asset(less than 12 months or low value) then sub lease is an operating lease
Finance lease
If sub lease is a finance lease, this asset will be derecognised, loan will recognised with finance income in P&L, profit and loss on disposal will also arise
Initial recognition
Derecognise Asset
recognise cash (net investment, discount if needed)
calculate profit on disposal
Asset postings
calculate finance income = interest * net investment
calculate final Net investment DR cash, CR net investment (net investment +finance income)
Liability postings
calculate finance cost on head lease
calculate final liability (opening balance + finance cost)
