IFRS16 Leases

Question 1

Lessee vs Lessor

Answer 1

Lessee has the right to use the asset where as the lessor leases the asset

Question 2

when is there control?

Answer 2

• theres right to direct the identified use of the asset
• obtain substantially all the economic benefits from that use

Question 3

when is there not control?

Answer 3

if the supplier has a substantive right to substitute the asset during the period so the customer does not have right of use of the asset

Question 4

Why is there a need for an accounting standard for leases?

Answer 4

• uniformity in the accounting treatment
• better transparency in financial reports
• reduced possibility of off-balance sheet financing
• consequences on key ratios
  prevent the financial information being manipulated

Question 5

what was the change from IAS17

Answer 5

no more operating/finance lease distinction for lessees. all lease are now treated as finance leases were. (except for low value or short term)

Question 6

Right of use asset, measurement

Answer 6

initailly measured at the amount of the lease liability plus any direct costs incurred by the lessee

Question 7

lease liability

Answer 7

initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease

Question 8

Steps for accounting for leases - lessee

Answer 8

1. calculate present value of lease payments
2. record the amount as lease liability
3. capitalise the same amount plus any indirect cost incurred (right of use asset)
4. calculate total finance cost (interest expense)
5. allocate the finance cost to the lease period
6. calculate depreciation on the right of use asset
7. recognition of lease in lessee’s financial statements

Question 9

Exemptions for leases

Answer 9

• leases with a lease term of 12 months or less and containing no purchase options
• leases where the asset has a low value (suggested under £5k at new but depends on size of the business)

Question 10

Criteria to classify finance lease

Answer 10

• ownership passes at end of the lease term
• option to purchase asset below fair value
• lease term represents the major part of assets economic life
• pv of minimum lease payments represents substantially all of the assets fair value
• leased asset is specialised in nature

Question 11

Lessor accounting - operating leases

Answer 11

• income receipts are recognised as income through profit or loss on a straight line basis
• asset itself is recognised as a NCA
• depreciation on the asset continues over its useful life

Question 12

lessor accounting- finance leases

Answer 12

• de-recognise asset and record as a receivable
• record finance lease receipts as a reduction in the receivable
• record interest income on the receivable

Question 13

net investment in the lease

Answer 13

cross investment in the lease discounted at the implicit rate of interest

Question 14

gross investment in the lease

Answer 14

minimum lease payments receivable plus any ungauranteed residual value

Question 15

sale and Leaseback transaction

Answer 15

• one entity (seller) transfers an asset to another entity (buyer) who then loses the asset back to the original seller.