IFRS 16: Lessor

Question 1

When to classify a lease as finance lease for a lessor? [5]

Answer 1

1. If substantial portion of economic life of the asset is used by the lessee.
2. If PV of lease payments >= 90% of FV of the asset
3. It is a special specific asset and cannot be used by any other user unless substantially modified
4. Compulsory transfer at the end of lease term or option at lessee and he is certain to exercise it

Question 2

NIFL = ??

Answer 2

FV of Asset + IDC paid by lessor + Downpayment - PV of expected RV at period end

Question 3

How to account for incentive by lessor to lessee in form of an asset or a service

Answer 3

Incorporate it in NIFL and rentals

Question 4

How to account for incentive by lessor to lessee in form of lease holiday period

Answer 4

Compound NIFL (FV of asset) to the date until the end of lease holiday period. Find rentals from that compounded NIFL for the rest of the term.

Question 5

MDL: Normal accounting if there is no UGRV or GRV [4]

Answer 5

1. IDC is to be expensed
2. NIFL = Cost of asset + mark up
3. Rentals = NIFL - PV of expected RV
4. Entry at day 1: NIFL dr, Sales cr. COS dr, Inventory cr (at cost)

Question 6

MDL: if there is UGRV in the lease contract

Answer 6

Everything would stay the same except Sales and COS would be reduced by amount = PV of unguaranteed residual value.

This is because risk and reward pertaining to such RV (which is volatile in future and not guaranteed to be paid for) still lie with the lessor, hence sale cannot be booked for such amount.

Question 7

MDL: Artifically low rate. If rentals as per lease contract are given

Answer 7

1. Find PV of those rentals as per the MARKET RATE.
2. Calculated PV + PV of Expected GRV = NIFL

Question 8

MDL: Artifically low rate. If PV of rentals as per low rate in the lease contract is given

Answer 8

1. Find rentals as per this incorrect PV using annuity factor of the lower rate
2. Find PV of the calculated rentals using market rate
3. That Calculated PV + PV of Expected RV = NIFL

Question 9

Lessor Modification: Rule of thumb

Answer 9

1. Find PV of new rentals/c.f using Old rate
2. Put difference in NIFL and gain/loss (PNL)

Question 10

Lessor Modification: Reduction in asset base

Answer 10

1. Find CA of NIFL till the date of modification
2. Proportionately reduce the NIFL
3. If 20% reduction, entry:
   - PPE dr NIFL (20%) cr
4. Then find PV of revised cashflows using old rate and put the difference (from CA of point 3) to PNL and NIFL

Question 11

What to do if modification results in change of classification from Finance Lease to operating lease

Answer 11

1. By CA of NIFL : PPE dr, NIFL cr
2. Cash dr, Rental Income cr (from now on)

Question 12

Sale and Lease back entry format

Answer 12

RoUA (CA of PPE * LL/FV) dr
Cash (Sale Proceeds) dr
Advance Rental (FV-SP) dr

Lease Liability (PV of rentals - (SP-FV) + (FV-SP)) cr
Loan (SP-FV) cr
PPE @ CA cr

Question 13

Sale and lease back if there is purchase option to lessee [2]

Answer 13

1. This is not qualified sales and is a financing transaction.
2. Will be treated as a loan

Question 14

Sub lease - rule of thumb

Answer 14

A > B > C
1. Lease treatment for C would be based on lease of B. So, if lease term remaining for B is 7 years and LT for C is 6 years. The economic life of asset for C would be 7 years regardless of its actual life.

Question 15

Sub lease : low value lease [2]

Answer 15

If head lease was a low value lease and is now leased to another party in sub lease.
- We would reclassify it first as a finance lease by booking PV of LP: RoUA dr, LL cr
- Net investment (at PV of LP from sub lessee) dr, Roua cr, Gain Loss bal fig