IIÄFÄRÄS 16 leases (beisikki)

Question 1

Lease?

Answer 1

Lease is a contract, or a part of a contract, that conveys the right to control the use of an asset (the underlying asset) for a period of time in exchange for consideration. A contract meets the definition of a lease if a customer has the right to CONTROL the use of an IDENTIFIED ASSET.

Question 2

Lessee ja Lessor?

Answer 2

Lessee = is the entity that obtains the right to use an underlying asset for a period of time in exhange for consideration. (consideration = maksu/korvaus)

Lessor = is the entity that provide the right to use an underlying asset for a period of time in echange for consideration. (consideration = maksu/korvaus)

Question 3

Underlying asset?

Answer 3

Underlying asset is an asset that is the subject of a lease, for which the right to use that asset has been provided by a lessor to a lessee.

Question 4

When does a contract convey the right to CONTROL the use of an IDENTIFIED ASSET?

Answer 4

The customer must have both:
a) Right to obtain substantially all of the ECONOMIC BENEFITS from the use of the identified asset
b) Right to DIRECT THE USE of the identified asset.

Question 5

Eli mitkä asiat käydään läpi mietittäessä, että onko kyseessä lease?

Answer 5

1) Is there an identified asset?
2) Does the customer have the right to obtain substantially all of the economic benefits?
3) Does the customer have the right to direct the use of the identified asset throughout the period of use?

Question 6

How are assets identified?

Answer 6

Assets are typically identified by being EXPLICITLY specified in a contract. Like in a rental car contract, the license-plate of the car is specified. Assets can be IMPLICITLY specified also.

Lessee does not have control if the lessor has a substantive right to substitute the asset throughout the period of use. -> Contract would not contain a lease and IFRS 16 would no apply.

Question 7

How may an asset generate economic benefits?

Answer 7

Economic benefits arising from the use of an asset include its primary output and by-products and other economic benefits. Examples are if the asset:
a) Is used to manufacturing (machinery)
b) Is held to generate revenue (investment property), or
c) Is subleased to generate revenue (office space).

Question 8

When does a customer have the right to direct the use of asset?

Answer 8

A customer has the right to direct the use of asset if EITHER:

a) Customer has right to direct HOW and FOR WHAT PURPOSE the asset is used

b) Relevant decisions about HOW and FOR WHAT PURPOSE the asset is used are predetermined, AND: (i) the customer has the right to OPERATE the asset and the supplier does not have the right to change operating instructions and (ii) the customer designed the asset in a way that predetermines how and for what purpose it is used.

Question 9

Commercial date of the lease?

Answer 9

Commercial date of the lease = is the date on which a lessor (vuokranantaja) makes and underlying asset available for use by a lessee (vuokraaja).

Question 10

Economic life?

Answer 10

Economic life = is either:

A) the period over which an asset is expected to be economically usable by one or more users, OR

B) the number of production or similar units expected to be obtained from an asset by one or more users.

Question 11

Finance lease?

Answer 11

Finance lease = is a lease that transfers substantially all the risks and rewards incidental to OWNERSHIP of an underlying asset.

Question 12

Fixed payments?

Answer 12

Fixed payments = are made by a lessee to a lessor for the rights to use an underlying asset during the lease term, excluding variable lease payments.

Question 13

Gross investment in the lease?

Answer 13

Gross investment in the lease = is the sum of:
A) the lease payments receivable by a lessor under a financial lease, AND
B) any unguaranteed residual value accruing to the lessor.

Question 14

Initial Direct Cots?

Answer 14

Initial Direct Cots = are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, except for such costs incurred by a manufacturer or dealer lessor in connection with a finance lease.

Question 15

Incremental cost?

Answer 15

Incremental cost = is the cost incurred due to an additional unit of product being produced. (lisäkustannus)

Question 16

Interest rate implicit in the Lease?

Answer 16

Interest rate implicit in the Lease = is the rate of interest that causes the present value of:
A) the lease payments, and
B) the unguaranteed residual value to EQUAL the sum of: fair value of the underlying asset + any initial direct costs of the lessor

Question 17

Unguaranteed residual value?

Answer 17

Unguaranteed residual value = is the portion of the residual value of the underlying asset, the realisation of which by a lessor is not assured or is guaranteed solely by a party related to the lessor.

Question 18

Lessee’s incremental borrowing rate?

Answer 18

Lessee’s incremental borrowing rate (IBR) = is the rate of interest rate that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

Question 19

Lease incentives ?

Answer 19

Lease incentives = are payments made by a lessor to a lessee associated with a lease, or the reimbursement with a lease, or the reimbursement or assumption by a lessor of costs of a lessee.

Question 20

Lease Modification?

Answer 20

Lease Modification = is a change in the scope or consideration of a lease, that was not part of the original terms and conditions.

Question 21

Lease Payments?

Answer 21

Lease Payments = are payments made by a lessee to a lessor relating to the right to use an underlying asset during the lease term, comprising:
A) fixed payments, less any lease incentives
B) variable lease payments that depend of an index or a rate
C) exercise price of a pruchase option if the lessee is reasonably certain to exercise that option
D) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease

Question 22

Lease term?

Answer 22

Lease term = is the non-cancellable period for which a lessee has the right to use an underlying asset:
A) PLUS periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option, AND
B) LESS periods covered by an option to terminate the lease if the lessee is reasonably certain to exercise that option.

The lease term begins at the commencement date and includes any rent-free periods provided by the lessor.

Question 23

Commencement date?

Answer 23

Commencement date = is the date on which a lessor makes an underlying asset available for use by a lessee.

Question 24

Net investment in the lease?

Answer 24

Net investment in the lease = is the gross investment in the lease discounted at the interest rate implicit in the lease.

Myöhemmin tosin sanottii:
The sum of
- Lease payments receivable by a lessor under a finance lease, and
- Any guaranteed residual value accruing to the lessor, discounted at the interest rate implicit in the lease.

Question 25

Operating lease?

Answer 25

Operating lease = is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.

Question 26

Period of use?

Answer 26

Period of use = is the total of time that an asset is used to fulfil a contract with a customer (including any non-consecutive periods of time).

Question 27

Residual value guarantee?

Answer 27

Residual value guarantee = is a guarantee made to a lessor by a party UNRELATED to the lessor that the value (or a part) of an underlying asset at the end of a lease will be at least a specified amount.

Question 28

Right-of-use asset?

Answer 28

Right-of-use asset = is an asset that represents a lessee’s right to use an underlying asset for the lease term.

Question 29

Short-term lease?

Answer 29

Short-term lease = is a lease that, at the commencement date, has a lease term of 12 months or less.

A lease that contains a purchase option is not a short-term lease.

Yleisiä, jos seasonal operations: ice-cream sellers lease a van and ski resorts lease skiing equipmet.

Question 30

Sublease?

Answer 30

Sublease = is a transaction for which an underlying asset is re-leased by a lessee (“intermediate lessor”) to a third party, and the lease (“head lease”) between the head lessor and lessee remains in effect.

Question 31

Variable lease payments?

Answer 31

Variable lease payments = is the portion of payments made by a lessee to a lessor for the right to use an underlying asset during the lease term that varies because of changes in facts or circumstances occuring after commencement date, other than the passage of time. (eli ei vain kulunut aika, vaan muut asiat?)

Question 32

What is in the scope of IFRS 16 Leases? Eli mihin asioihin saa apply IFRS 16?

Answer 32

Entity shall apply IFRS 16 to all leases, including leases of right-of-use assets in a sublease, EXCEPT FOR:

a) Leases to explore for or use natural resources (minerals, oils, natural gas and similar non-regenerative resources)
b) Leases of biologial assets within the scope of IAS 41 Agriculture held by a lessee
c) Service concession arrangements within the scope of IFRIC 12 Service Concession Arrangments
d) Licenses of intellectual property granted by a lessor within the scope of IFRS 15 Revenue from contracts with customers, AND
e) Rights held by a lessee under licensing agreements within the scope of IAS 38 Intangible assets (esim. Motion pictures, video recordings, plays, manuscripts, patents, and copyrights).

A lessee may, but is not required to apply IFRS 16 to leases of intangible assets byt IFRS 16 may not be applied to rights held by a lessee under licesing agreement ase per point e) above.

Question 33

What type of businesses use leases typically?

Answer 33

• Property = companies lease all types of buildings, from commercial and office to residential, as well as undeveloped land.
• Shipping = companies lease shipping vessels, as well as plant and machinery to load and unload cargo.
• Airline = companies lease aircraft, equipment for loading airplanes and berths at airports. (berth = hyllymäinen makuupaikka laivassa tai lentokentillä esim.)
• Distribution and logistics = companies lease cars, vans and other transport equipment.
• Manufacturing = companies lease warehouses, factories and manufacturing equipment.
• Mining = companies lease land, mining plant and machinery.
• Energy = companies lease power plants and infra like power lines.
• Retail = companies lease retail or concession space. (concession space = ylimääräinen myyntitila, kuten ständin paikka kauppakeskuksen käytävällä).
• All of the above often lease office and IT equipment.

Question 34

Why do businesses lease assets?

Answer 34

There are many benefits to leasing:
a) Entities can obtain the use of an asset for just a short period
b) Leasing can provide access to specialized assets that are not easily buyable
c) No risks related to owning an asset
d) Leasing is a way of financing the longer-term use of an asset, instead of undertaking a loan with a bank for the asset

Question 35

Lue vaan!

Answer 35

A lease will always have a LESSEE and LESSOR. It is important to know that both parties have different rights and obligations, and therefore is subject to different accounting requirements. Contract can be a lease or service contract, OR have elements of both.

Question 36

Service contract?

Answer 36

Service contract = If a contract where a supplier provides a good or service to a customer, does not contain a lease, it is referred to as a service contract and IFRS 16 does not apply (e.g. cleaning services for a building).

Question 37

Non-lease component?

Answer 37

Non-lease component = where a lease contains multiple elements (esim. Lease of an office and provision of office cleaning), the service element is commonly referred to as a non-lease component of the contract. Entity account each lease component within the contract as a lease separately from non-lease components of the contract unless the entity applies the practical expedient in paragraph 15 of IFRS 16.

Question 38

Capacity portion of an asset?

Answer 38

Contracts may provide entity with the right to use a capacity portion of an asset, instead of an entire asset. In these cases, entity assess whether the capacity portion is an identified asset. It depends whether it is physically distinct or not.

• Physically distinct: capacity portion of an asset that is physically distinct is an identified asset. -> For example: a specified floor of a building.
• Not physically distinct: capacity or other portion of an asset that is not physically distinct IS NOT an identified asset, unless it represents substantially all of the capacity and so, proved the right to obtain all of the economic benefits. -> For example: a capacity of a fiber optic cable.

Question 39

What are the possible risks related to owning an asset?

Answer 39

Owning an asset may create risks like:
a) Idle capacity (not used)
b) Repairing
c) Technological obsolescence

Question 40

What are the possible benefits related to owning an asset?

Answer 40

a) Increase of the value of the asset
b) Realization of a residual value: cash generated from selling asset at the end of its useful life

Question 41

In IFRS 16, the classification model for lessees and lessors is different. Therefore, the recognition and measurement of leases are different depending on the types of leases identified. What are the accounting approaches for the lessee and for the lessor?

Answer 41

• LESSEE uses: Balance sheet approach
• Lessor uses: Dual model approach

Question 42

What is the Balance sheet approach?

Answer 42

Balance sheet approach is a single lessee model, since there is only one model. When a lessee enters into a lease contract, it will recognize a RIGHT-OF-USE ASSET and a LEASE LIABILITY on the statement of financial position.

Initial measurement:
- The right-of-use asset: is generally recorded AT COST, in non-current assets.
- The lease liability: is recorded AT AMORTIZED COST, which represents the present value of lease payments, in current and non-current liabilities.

Subsequent measurement:
- The Right-of-use asset: is measured AT COST LESS ACCUMULATED DEPRECIATION in accordance with IAS 16 and IAS 36, and any re-measurement of lease liability. -> The depreciation expense is recognized within operating expenses, in the Statement of profit or loss and Other comprehensive income.
-> Kaava ROU = Initial measurement of lease liability + Lease payments made to the lessor at or before commencement date – Lease incentives received + Initial direct costs incurred by the lessee + Restoration costs as required by the contract.
-> A lessee measures the ROU asset using cost model, or one of the below measurement models:
 A fair value under IAS 40 Investment properrty IF the lessee applies the model to its investment propert and the ROU assets meet the definition of investment property in IAS 40, OR
 A revaluation model under IAS 16 if the ROU asset relate to a class of PPE revalued under IAS 16.
-> The lessee shall depreciate the ROU asset over:
 The lease term, OR
 From the commencement date to the end of the useful life of the underlying asset if the ownership of the underlyign asset is transferred to the lessee by the end of the lease term, or if the cost of the right-of-use asset reflects that the lesee will exercise a purchase option.
 HUOM! Right-of-use asset applying the fair value model under IAS 40 do not depreciate.

The lease liability: is ACCRETED USING THE EFFECTIVE INTEREST METHOD. -> The interest expense is presented separately in Statement of profit or loss and Other comprehensive income withing finance costs. -> The lease liability is recognized at the NET AMOUNT INCLUDING ACCUMULATED INTEREST ON THE INITIAL LEASE LIABILITY, LESS LEASE PAYMENTS MADE, and taking into account any reassessment or lease modifications.
o Lease liability (PV) = Lease payment / ((1+interest rate implicit in the lease)^number of periods)
o Accretion = kasvu tai lisääntyminen
o A lessee shall measure the lease liability at amortized cost subsequent to the initial recognition. That is:
 Lease payments will reduce the lease liability when paid, and
 The lease liability would be increased using the interest rate implicit in the lease.
o The lessee shall also recognize in profit or loss, unless the costs are included in the carrying amount of another asset applying other applicable Standards, both:
 Interest on the lease liability, and
 Variable lease payments not included in the lease liability on the initial recognition. Variable lease payments not included in the measurement of the lease liability are recognized in profit or loss in the period in which the event or condition that triggers those payments occurs.

Question 43

What is the Dual model approach?

Answer 43

Lessor accounting has a dual lessor model, which includes two classifications of leases: finance and operating lease.

Finance lease:
o Initial measurement: Lessors derecognize the carrying amount of the leased asset and recognize a receivable in the BS at an AMOUNT EQUAL TO THE NET INVESTMENT IN THE LEASE. Lease payments received by the lessor are allocated between finance income and repayment of principal (reduction in the lease debtor) over the lease term.
o Subsequent measurement: Lessors apply the derecognition and impairment requirement in IFRS 9 to the net investment in the lease and review regularly estimated unguaranteed residual values used in computing the gross investment in the lease.

Operating lease:
o Initial measurement: Lessors present the leased assets within property, plant, and equipment in their BS. These assets are subject to depreciation in accordance with IAS 16 and impairment in accordance with IAS 36 in the same way as similar non-current assets.
o Subsequent measurement: Lease income is generally recorded on a straigh-line basis. Initial direct costs incurred are recognized as an expense over the lease term on the same basis as the lease income. Initial direct costs are incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained.

Question 44

Not all leases will result in a right-of-use asset and lease liability being recognized. Which two exemptions are there in accordance with IFRS 16?

Answer 44

A lessee that elects to apply these exemptions would recognize the lease payments as an expense on a STRAIGHT-LINE BASIS:

a) Exemption for SHORT-TERM leases: needs to be made by class of underlying asset. A class of similar nature and use in an entity’s operations (esim. Land, buildings, plant and equipment)

b) Exemption for leases for which the underlying assets is of LOW VALUE: esimerkkeinä läppärit, puhelimet ja toimistokalusteet. Asset’s value is assessed on a value of a new one, no matter the age of the asset being leased. The assessment is not affected by the size, nature or circumstances of the lessee. Entity can elect to apply this exemption on a LEASE BY LEASE BASIS.

Question 45

Lessee accounting: how to measure the lease liability?

Answer 45

The lease liability is measured at the present value (PV) of the lease payments over the lease term using the interest rate implicit in the contract or the lessee’s incremental borrowing rate.

Question 46

Explain lessee disclosures in the Statement of financial position (BS)?

Answer 46

Right-of-use assets and lease liabilities can be presented either:
- Separately from other owned assets (other liabilities), or
- Together with owned assets (other liabilities), but with disclosure of the balance sheet line items that include right-of-use assets (lease liabilities) and their amounts).

Question 47

Explain lessee disclosures in the Statement of profit or loss and Other comprehensive income?

Answer 47

The following shall be presented separately:
- Interest expense on the lease liability (a component of finance costs),
- Depreciation charge from the right-of-use assets (operating costs).

Question 48

Explain lessee disclosures in the Statement of cash flows?

Answer 48

Cash flows are categorized as follows:
- Cash payments for the principal portion of the lease liability within FINANCING ACTIVITIES
- Cash payments for the interest portion of the lease liability presented consistently with other INTEREST PAYMENTS
- Short-term lease payments, payments for leases of low-value assets and variable lease payments not included in the measurement of the lease liability within OPERATING ACTIVITIES

Question 49

There is a dual lessor accounting model for lessor. According to this model, a lessor classifies each lease as either a) finance lease OR a) operating lease. How do you determine which one it is?

Answer 49

Whether a lease is a finance or an operating lease, it depends on the SUBSTANCE OF THE TRANSACTION, rather than the form of the contract.

Question 50

IFRS 16 provides five examples of situations which, when considere individually or in combination with others would NORMALLY indicate a lease is a FINANCE lease. Ownership, Option to purchase, Lease term, Lease payments and Specialized asset.

Answer 50

It is a finance lease, if:
a) Ownership: OF THE ASSET IS TRANSFERRED TO THE LESSEE BY THE END OF THE LEASE TERM that states that the lessee is required to purchase the legal title of the underlying asset.
b) Option to purchase: THE ASSET FOR THE LESSEE AT A PRICE THAT IS EXPECTED TO BE SUFFICIENTLY LOWER THAN THE FAIR VALUE (including inflation) at the date the option becomes exercisable. Therefore, at the inception of the lease IT IS REASONABLY CERTAIN that the call option will be exercised, and that the ownership of the asset will be transferred to the lessee by the end of the lease term.
c) Lease term: IS FOR THE MAJOR PART OF THE ECONOMIC LIFE of the underlying asset even if title is not transferred. There is no quantitative guideline for the “major part”, so judgement is required. The economic life of an asset may be represented by useful life or in other manner that best reflects its use.
d) Lease payments: At the inception of the lease the PRESENT VALUE OF THE LEASE PAYMENTS AMOUNT TO AT LEAST SUBSTANTIALLY ALL OF THE FAIR VALUE of the leased asset. No quantitavie guidelines for this “substantially”, so judgement needed.
e) Specialized asset: The leased assets are of such a SPECIALIZED NATURE THAT ONLY THE LESSEE CAN USE THEM WITHOUT MAJOR MODIFICATION. Lessor will have no further use for them without major modifications. (esim. Jet fighters, satellites, submarines, assets in locations other entities could not use them: office building in a rural area)

Question 51

IFRS 16 provides three indicators of situation that COULD, either individually or In combination, lead to a lease being classified as a finance lease.

Answer 51

1) Losses on cancellation: If the lessee cancels the lease, it bears the lessor’s losses associated with the cancellation. So, lessee bears the risks related to the ownership. If the lessee suffers a penalty for termination option on a lease, it is unlikely for the lessee to exercise this option. And because of that, if the lease term covers the whole useful life, it is an indicator that the lease could be a finance lease.
2) Fair value fluctuations: Gains or losses from the fluctutation in the fair value of the residual value fall to the LESSEE. Even if the ownership does not transfer to the lessee at the end of the agreement, the lessee may bear the risk of the variation in the residual value of the asset. Lessee may enter into a residual value guarantee with lessor: lessee is to pay lessor the residual value of the van at the end of the term.
3) Secondary rentals: The lessee has the ability TO CONTINUE THE LEASE FOR A SECONDARY PERIOD AT A RENT THAT IS SUBSTANTIALLY LOWER THAN THE MARKET RENT. This suggests that the lessor has recovered their required return on the lease. Because of lower rent, lessee is likely to continue the lease for the secondary period. Rent is “substantially lower” if it is economically rational to continue the lease at the lower rent.

Question 52

Walk me through the initial recognition of a Finance lease?

Answer 52

On initial recognition, lessors will recognize a receivable in their statement of financial position at an amount equal to the NET INVESTMENT IN THE LEASE, discounted at the interest rate implicit in the lease.

The net investment in the lease is equal to the present value of lease payments comprising of:
a) FIXED AND CERTAIN VARIABLE LEASE PAYMENTS receivable by a lessor under a finance lease,
b) Any RESIDUAL VALUE GUARANTEES provided to the lessor by the lessee,
c) The EXERCISE PRICE OF A PURCHASE OPTION if it is reasonably certain to exercise that option
d) PENALTIE FOR TERMINATING THE LEASE OPTION if the lease term reflects the lessee exercising that option, and
e) Any GUARANTEED RESIDUAL VALUE accruing to the lesser.

Question 53

Tell me about Initial indirect costs of a Finance lease?

Answer 53

Initial direct costs, such as commissions and legal fees, are often incurred by lessors when negotiating and arranging a lease. The initial direct costs of finance leases, other than those held by manufacturers and dealers, are:
- Included in the initial measurement of the net investment in the lease, AND
- Reduce the amount of income recognized over the lease term.

Question 54

What about Initial direct costs included in the net investment in the finance lease?

Answer 54

Initial directs are not added separately to the initial measurement of the net investment in the lease because they are already incorporated into the calculation of the interest rate implicit in the lease.

Saadaan kaava (lessors use the rate implicit in the lease that causes the following):

PV of lease payments + PV of unguaranteed residual = FV of the asset + Lessor’s initial direct costs

Question 55

And Initial direct costs incurred by manufacturers or dealers?

Answer 55

If the lessor is a manufacturer or a dealer, costs incurred in connection with negotiating and arranging a lease are expensed at the inception of the lease term as they are mainly related to earning a selling profit.

This accounting treatment is consistent with IFRS 15 Revenue from contracts with customers.

Question 56

Tell me about the subsequent measurement of finance leases?

Answer 56

Subsequent to initial recognition, a lessor recognizes finance income over the lease term based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the lease.

Meaning that when lessor receives lease payments, these are allocated between:
- Finance income, AND
- Repayment of principal (reduction in the gross investment in the lease).

Lease payment do NOT include any costs for services, for example, insurance and maintenance, which are recognized in profit or loss.

The method used to allocate the finance income must be applied consistently to all similar leases.

The most commonly used method is the ACTUARIAL METHOD.

Question 57

Under IFRS 16, the objective of the disclosures for LESSORS is to ENABLE USERS OF THE FINANCIAL STATEMENTS TO ASSESS THE EFFECT THAT LEASES HAVE ON THE FINANCIAL POSITION, PERFROMANCE AND CASH FLOWS OF THE LESSOR. These disclosures are divided into what two?

Answer 57

1) Qualitative dislcolusers:
a. provide qualitative explanation of significant changes in the carrying amount of the net investment in the leases,
b. Maturity analysis of the lease payments receivable
c. Reconciliation of the undiscounted lease payments to the net investment in the lease
d. These items are disclosed in a tabular format, unless another format is more appropriate: selling profit or loss, finance income on net investment in the lease, Income relating to variable lease payments not included in the measurement of the net investment in the lease.

2) Additional qualitative and quantitative information about the leasing activities are to be included to meet disclosure objectives, like:
a. The nature of the lessor’s leasing activities
b. How the lessor manages the risk associated tih any rights it retains. In particular, a lessor shall disclose its risk management strategy for the rights it retains in underlying assets.

Question 58

Recognition of Operating leases in the Statement of financial position by LESSOR?

Answer 58

A lessor shall present assets that are subject to operating leases within Property, plant and equipment in the balance sheet. These ASSETS ARE SUBJECT TO DEPRECIATION AND IMPAIRMENT in accordance with IAS 16 and IAS 36.
Initial direct costs, such as legal fees, incurred by lessors in negotiating and arranging an operating lease are:
- Added to the carrying amount of the leased asset, AND
- Recognized as an expense over the lease term on the same basis as the lease income.

Question 59

Recognition of Operating leases in the Statement of Profit or loss by LESSOR?

Answer 59

Lease income is usually recognized on a straight-line basis over the lease term. For example, if a lessor received an upfront payment of 12 000 under a three year operating lease, it would recognize 4 000 as income each year under the straight-line basis.

However, lessors should use another systematic basis IF that basis will better represent the pattern in which the benefit from the use of the asset is diminished. For example, a benefit from a computer equipment’t benefits use and value may reduce over time, so this may lead to a higher level of lease income recognition in the first years.

Costs, including depreciation, incurred in earning the lease income are recognized as EXPENSES.

Lessors that are manufacturers or dealers do not recognize any selling profit on entering into an operating lease because it is not the equivalent of a sale.

Question 60

How are legal fees handled in accounting for an operating lease for lessor?

Answer 60

The legals fees are added to the carrying amount of the leased asset at commencement of the lease and are subsequently recognized as an expense over the lease term, on the same basis as the recognition of the lease income.

Question 61

Explain LESSOR operating leases disclosures in the Statement of financial position (BS)?

Answer 61

Lessors should present underlying assets subject to operating leases in their statement of financial position according to the NATURE of the underlying asset.

Lessors apply the requirement of IAS 16 and disaggregate each class of property, plant and equipment into ASSETS SUBJECT TO OPERATING LEASES AND ASSETS NOT SUBJECT TO OPERATING LEASES.

Lessors are also required to apply the disclosure requirements in IAS 36, IAS 38, IAS 40 and IAS 41 Agriculture for assets subject to operating leases.

Question 62

Explain LESSOR operating leases disclosures in the Statement of Profit or loss and OCI?

Answer 62

• LEASE INCOME
• Income relating to VARIABLE LEASE PAYMENTS THAT DO NOT DEPEND ON AN INDEX OR A RATE

Question 63

What else are lessors to disclose related to operating leases?

Answer 63

Maturity analysis of lease payments, showing the undiscontinued lease payments to be received on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years.