Learning Unit 3 - IFRS 16: Leases Flashcards
What is the definition of a operating lease in terms of IFRS 16 (lessor point of view)?
A operating lease:
- does not transfer
- substantially all the risks and rewards incidental to ownership
- of an underlying asset.
What is the definition of a finance lease in terms of IFRS 16 (lessor point of view)?
A finance lease:
- does transfer
- substantially all the risks and rewards incidental to ownership
- of an underlying asset
What is the definition of the gross investment in the lease?
- The lease payments received by a lessor under a finance lease; and
- any unguaranteed residual value accruing to the lessor
What is the definition of the net investment in the lease?
The gross investment in the lease discounted at the interest rate implicit in the lease.
Another definition is the present value (PV) of the gross investment in the lease.
What is the definition of the unearned finance income?
The difference between:
- the gross investment in a lease; and
- the net investment in the lease
What is the definition of interest rate implicit in the lease?
The rate of interest that causes the sum of:
(a) The PV of the lease payments plus the Present Value (PV) of the unguaranteed residual value to be equal to the sum of:
(b) the fair value of the underlying asset plus any initial direct costs of the lessor.
What is the definition of the residual value guarantee?
The residual value guarantee is defined as:
- A guarantee made to the lessor
- by a party unrelated to the lessor
- that the value (or part of the value) of an underlying asset at the end of the lease
- will be at least a specified amount.
What is the definition of the unguaranteed residual value?
That portion of the residual value of the underlying asset, the realisation of which by the lessor, is not assured or is guaranteed solely by a party related to the lessor.
What is the definition of initial direct costs?
Initial direct costs are defined as:
- 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 connect with a finance lease.
What are the four criteria for a Finance Lease (POETS)?
A Lease is a Finance Lease if it meets ANY of the following (POETS):
- Present Value: Present Value equals or exceeds Fair Value
- Option to Purchase: Exercise is reasonably certain
- Economic Life: Lease term is major part of Economic Life
- Transfer of Ownership
- Specialized Nature: No alternative use to Lessor at end of Lease
Lessee accounting
Define a lease
- A contract, or part of a contract
- that conveys:
• the right of use
• an asset - for a period of time
- in exchange for consideration
What are the requirements for an asset to be identified?
The asset can be:
1. explicitly / implicitly identified
2. can be a portion if it:
- is physically distinct
- reflects substantially all the assets capacity
3. An asset is not identified if the supplier has a substantive right to substitute it.
What does it mean if the supplier’s right to substitute an asset is substantive?
If the supplier:
- has the practical ability to substitute throughout the lease; and
- would benefit economically if it did substitute the asset.
If the substitution right is substantive the asset is not identified and this is no lease.
When does an entity have the right to control the use of the identified asset?
If during the period of use, we have the right to:
- obtain substantially all the economic benefits from the use of the asset; and
- direct the use of the asset.
What are the criteria for determining when a entity has the right to direct how and for what purpose an asset is used?
The entity:
- can decide how and for what purpose the asset is used; or
- cannot decide this because the how and what for is predetermined but can operate the asset; or
- cannot decide this because the how and what for is predetermined but the entity designed the asset and it is this design that the reason why the how and what for is predetermined.
