IFRS 16 Leases Flashcards
what is a lese definition
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
what is the right of use asset
A right of use asset represents the lessee’s rights to use an underlying asset over the lease term
what is lessee definition
Lessee - An entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration’
what is Lessor definition
Lessor- An entity that provides the right to use an underlying asset for a period of time in exchange for
consideration’
the lease TERM comprises of
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
the basic principles is that at commencement of the lease, the lessee should recognise and measure for 2 things
what are they
Right of use
Lease liability
what is the initial measure of lease liability
At present value of future cash flows
Dr ROU
Cr Lease Liability
what is the initial measure of right of use of asset
ROU is initially measured at the same value as the lease liability
although the ROU is initially measured at the same value, what could the cost of ROU comprise of
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
what is the subsequent measure of lease liability and what does it depend on
Depends on if the payment is
- Arrears
- Advance
what is the formula for subsequent measurement if payment for lease is in arrears
Interest is loaded prior to the payment being deducted
Bal Bfwd + Interest % - Payment = Bal cfwd
what is the formula for subsequent measurement if payment for lease is in advance
The payment is taken off prior to the interest being calculated
(Bal Bfwd - Payment ) + Interest % = Bal cfwd
what is the subsequent measure of ROU
Same as initial, at cost ;. ROU is depreciated in the same way as a normal asset. @ Lower of
- EUL
- Lease term
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
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
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
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
Under which method, arrears or advance will the ROU and Lease never match again
Arrears
for sale and lease back, how do you know if a sale has taken place or not
whether the risks and rewards of the assets are actually retained by the “seller” so no sale has effectively taken place.
On a sale and leaseback, fo r an asset to be considered a genuine sale if it meets what criteria
The asset would be considered a genuine sale if it meets all the performance obligations under IFRS 15 Revenue.
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
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
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 .
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
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
.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)
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
.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
If the asset is not considered a genuine sale, what is double entry
Continue to recognise the asset
Treat the ‘sale proceeds’ as a loan from Lessor
Dr Bank
Cr Loan
.
.
how do you treat low value or short lease assets
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.
what are examples of low value assets
Example . Tables Personal computers Telephones
what is the definition used when identifying a lease
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
how do you identify a lease
3 characteristics
1) Right to control the asset
2) Identified asset
3) period of time
what is right to control
2 characteristics
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
what is Identified asset
2 chracteristics
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)
what characteristics mean that the customer does not have right to use an identified asset
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
what is a period of time
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
