Lease

Question 1

what is lease?

Answer 1

= a contract, or part of contract, that coveys right to use asset for period of time in exchange for consideration

• a means of gaining access without actually owning asset
  = payments are made for right to use asset for specified period of time

Question 2

what is lessor?

Answer 2

owner of asset and retain ownership under lease arrangement

Question 3

what is lessee?

Answer 3

obtains right to use asset, not ownership of asset itself, in return for making or series of payments to lessor

Question 4

initial recognition for leases by lessees?

Answer 4

• the lessee, at commencement date of lease, must recognise a right of use asset and a related liability

Question 5

what are the two classification for leases by lessor?

Answer 5

• finance lease

- operating lease

Question 6

classifying leases by lessor - how does it impact?

Answer 6

it impacts accounting treatment and disclosures for the lessor

Question 7

what is a finance lease?

Answer 7

a lease that transfers substantially all the risks and rewards incidental to ownership of underlying asset

Question 8

what is operating lease?

Answer 8

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

Question 9

the lease is a finance lease if any of following apply:

Answer 9

1. lease is non-cancellable
2. lease transfers ownership of asset at end of lease term
3. lease contains bargain purchase option
4. lease covers major part of asset’s economic life
5. present value of minimum lease payments represents substantially the fair value of asset
6. leased asset specialised nature only lessee can use them without major modification
7. gain or losses from fluctuations in fair value of residual accrue to lessee
8. lessee has ability to continue lease for secondary period at rental that is substantially less than market value

Question 10

what happens when lease is classified as finance lease?

Answer 10

the lessor transfers substantially all risks and rewards incidental to ownership of underlying asset to lessee

Question 11

finance leases - what will lessor do?

Answer 11

• need to ‘derecognise’ the underlying asset

- record lease receivable to reflect payments will receive as result of lease

Question 12

Finance leases need to further be classified into:

Answer 12

1. finance leases involving a financier lessor

2. leases involving manufacturers or dealers

Question 13

A lease arrangement gives rise to two types of income:

Answer 13

• profit or loss equivalent to the outright sale of the asset being leased
• finance income over the lease term.

Question 14

what is operating lease?

Answer 14

are those where substantially all the risks and rewards incident to ownership remain with the lessor

Question 15

when is the right of use asset recognised?

Answer 15

recognised based on the cost that includes the value of the liability plus all other payments made in advance or that are expected to be made for the right to use the underlying asset.

Question 16

The key criterion for the classification of leases into finance or operating leases by the lessor is

Answer 16

the transfer of substantially all the risks and rewards of ownership.

Question 17

Finance lessors must be classified into financiers and manufacturer/dealer lessors based on

Answer 17

whether the lessor carries the asset to be leased at fair value or cost.

Question 18

difference between financier lessor and manufacturer/dealer lessor?

Answer 18

• For a financier lessor, a lease receivable is recognised at an amount equal to the fair value of the underlying asset plus any initial direct costs incurred by the lessor.
• With manufacturer/dealer lessors there are no initial direct costs involved.
• a profit or loss is recognised at the commencement of the lease.

Question 19

The lessor recognises sales revenue based on

Answer 19

the fair value of the underlying asset or the present value of lease payments if lower, and cost of sales at the carrying amount of the underlying asset less the present value of any unguaranteed residual value of the underlying asset.

Question 20

Subsequent to initial measurement of the lease receivable, a lessor will, on receipt of lease payments from the lessee,

Answer 20

reduce the lease receivable and recognise interest revenue earned.

Question 21

With operating leases, all payments are treated as

Answer 21

as income by the lessor. The lessee will still recognise a right‐of‐use asset and a related lease liability.