IFRS 16 Leases

Question 1

what is a lese definition

Answer 1

Lease - A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

Question 2

what is the right of use asset

Answer 2

A right of use asset represents the lessee’s rights to use an underlying asset over the lease term

Question 3

what is lessee definition

Answer 3

Lessee - An entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration’

Question 4

what is Lessor definition

Answer 4

Lessor- An entity that provides the right to use an underlying asset for a period of time in exchange for
consideration’

Question 5

the lease TERM comprises of

Answer 5

1) Periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option
2) Periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise the option

Question 6

the basic principles is that at commencement of the lease, the lessee should recognise and measure for 2 things

what are they

Answer 6

Right of use

Lease liability

Question 7

what is the initial measure of lease liability

Answer 7

At present value of future cash flows

Dr ROU
Cr Lease Liability

Question 8

what is the initial measure of right of use of asset

Answer 8

ROU is initially measured at the same value as the lease liability

Question 9

although the ROU is initially measured at the same value, what could the cost of ROU comprise of

Answer 9

Amount of initial measurement of the lease liability
.
Any lease payments made at or before the commencement date
.
Any initial direct costs
.
The estimated costs of removing or dismantling the underlying asset in accordance with the terms of the lease

IF SALE AND LEASE BACK
- The proportion of the right‐of‐use asset retained by Sideshow will be equal to the initial liability as a proportion of the proceeds

ROUS= (PV of lease rental/proceeds)xCarrying value

Question 10

what is the subsequent measure of lease liability and what does it depend on

Answer 10

Depends on if the payment is

• Arrears
• Advance

Question 11

what is the formula for subsequent measurement if payment for lease is in arrears

Answer 11

Interest is loaded prior to the payment being deducted

Bal Bfwd + Interest % - Payment = Bal cfwd

Question 12

what is the formula for subsequent measurement if payment for lease is in advance

Answer 12

The payment is taken off prior to the interest being calculated

(Bal Bfwd - Payment ) + Interest % = Bal cfwd

Question 13

what is the subsequent measure of ROU

Answer 13

Same as initial, at cost ;. ROU is depreciated in the same way as a normal asset. @ Lower of

• EUL
• Lease term

Question 14

the useful life of the right of use asset depends on who owns the asset at the end of the lease period.

1) If the asset is still owned by the lessor at the end of the lease period, Then depreciation is charged over what

Answer 14

1) If the asset is still owned by the lessor at the end of the lease period, Then depreciation is charged over the lease term

Question 15

the useful life of the right of use asset depends on who owns the asset at the end of the lease period.

2) If the asset is transferred to the lessee at the end of the lease period, The depreciation is charged over what

Answer 15

2) If the asset is transferred to the lessee at the end of the lease period, The depreciation is charged over the asset’s useful life

Question 16

Under which method, arrears or advance will the ROU and Lease never match again

Answer 16

Arrears

Question 17

for sale and lease back, how do you know if a sale has taken place or not

Answer 17

whether the risks and rewards of the assets are actually retained by the “seller” so no sale has effectively taken place.

Question 18

On a sale and leaseback, fo r an asset to be considered a genuine sale if it meets what criteria

Answer 18

The asset would be considered a genuine sale if it meets all the performance obligations under IFRS 15 Revenue.

Question 19

If an asset is a genuine sale (i.e. meets all the performance obligations under IFRS 15 Revenue) made at FAIR VALUE

list the set of journals that need to be posted

Answer 19

1) Record proceeds- Dr Bank
2) De recognise the asset- Cr Asset
3) Record liability- Cr Liability @PV of liability
4) Record the right of use of asset -Dr Asset

(PV of lease Liab/Proceeds)% x Carrying value

5) Gain or loss on transfer (BALANCING FIGURE) DR/CR Profit or loss statement

Question 20

If an asset is a genuine sale (i.e. meets all the performance obligations under IFRS 15 Revenue) made at FAIR VALUE

what is the theory behind the the 5 sets of lines that are posted .

Answer 20

Ideally we want to recognise the asset at the same value as PV of the lease liability BUT here we have transferred some of the rights of that asset to that lessor and therefore we only want to look at the rights that we have kept a hold of

We want to recognise what wee have retained based upon the original carrying value we had.

If we recognised it at the PV of the lease liability, we would be basing it upon it’s fairvalue as opposed to what we had in our books

even though we have sold it, the asset has actually come back so we don’t want to recognise more than what we should

Question 21

If an asset is a genuine sale (i.e. meets all the performance obligations under IFRS 15 Revenue) made at BELOW FV

list the set of journals that need to be posted

Answer 21

.All the figures are same as @ FV except for Liability
1) Record proceeds- Dr Bank
2) De recognise the asset- Cr Asset
3) Record liability- Cr Liability @PV of liability + EXTRA Financing received
4) Record the right of use of asset -Dr Asset
5) Gain or loss on transfer DR/CR
.
6) Dr Prepayments (Balancing figure)

Question 22

If an asset is a genuine sale (i.e. meets all the performance obligations under IFRS 15 Revenue) made at ABOVE FV

list the set of journals that need to be posted

Answer 22

.All the figures are same as @ FV except for Liability

1) Record proceeds- Dr Bank
2) De recognise the asset- Cr Asset
3) Record liability- Cr Liability @PV of liability + EXTRA Financing received
4) Record the right of use of asset -Dr Asset
5) Gain or loss on transfer DR/CR

Question 23

If the asset is not considered a genuine sale, what is double entry

Answer 23

Continue to recognise the asset

Treat the ‘sale proceeds’ as a loan from Lessor

Dr Bank
Cr Loan

Question 24

.

Answer 24

.

Question 25

how do you treat low value or short lease assets

Answer 25

lf a lease is less than 12 months at the inception date or considered to be a low value then the accounting
treatment is simple. You recognised the cost in profit or loss on a straight-line basis. No asset or liability is
recognised.

Question 26

what are examples of low value assets

Answer 26

Example
.
Tables
Personal computers
Telephones

Question 27

what is the definition used when identifying a lease

Answer 27

An entity must identify whether a contract contains a lease, which is the case if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

i.e. control the asset for a set amount of time

Question 28

how do you identify a lease

3 characteristics

Answer 28

1) Right to control the asset
2) Identified asset
3) period of time

Question 29

what is right to control

2 characteristics

Answer 29

Right to control - Present if the customer (the potential lessee) has the right to:

• Obtain substantially all economic benefits from the use of the asset; and
• Direct the use of the asset

Question 30

what is Identified asset

2 chracteristics

Answer 30

it must be explicitly or implicitly specified in the contract i.e. what is the asset

it may be a proportion of an asset (e.g. floor of office block)

Question 31

what characteristics mean that the customer does not have right to use an identified asset

Answer 31

A customer doesn’t have right to use an identified asset if supplier has substantive rights to substitute the asset throughout the period of use

i.e. you don’t have control if the lessor can change the asset as and when

Question 32

what is a period of time

Answer 32

May be described in terms of use of the underlying asset

e.g. the number of units produced by a leased machine (@FR level it’s months / years lease)

Lease may only be for a portion of the term of the contract (if the right to control an asset exists for only part of the term)…

in which case, recognise the asset for as long as you have control