Leases

Question 1

Lesser’s point of view

Answer 1

Initially
Dr. ROU asset
Cr lease Liability

Question 2

How is the ROU asset recognized?

Answer 2

The ROU asset is recognized at cost, which includes:
• the initial measurement of the lease liability
• any lease payments made at or before the commencement date, less any lease incentives received
• any initial direct costs incurred by the lessee
• an estimate of costs to be incurred by the lessee at the termination of the lease to dismantle and remove the ROU asset or restore it to the condition required under the terms of the lease

Question 3

Components to consider when measuring lease liability

Answer 3

Lease liability is measured initially at the present value of all future payments using either the discount rate or entity's incremental borrowing rate.
Components include
1. Fixed payments
2. Variable payments
3. BPO
4. Guaranteed Residual value
5. Unguaranteed Residual value
6. Termination penalities

Question 4

What is the formular for calculating the PV of future lease payments and what is included/excluded in the calculation

Answer 4

included
Variable payments dependant on index rate, exluded if not dependant on index rate
Guaranteed Residual Value expected to be paid, excluded if Unguaranteed.
Non-lease Component costs that are elected to be included, excluded if not elected
termination penalties that are expected to be paid by lessee, excluded if lessee does not expect to incur

Question 5

Subsequent measurement- Cost model

Answer 5

ROU asset is depreciated over the lesser of:
• the lease term
• the asset’s useful life,
If there is a BPO, then use Useful life of the asset

Question 6

steps in lease calculation

Answer 6

1. Calculate the lease liability and prepare entry
2. calculate depreciation and prepare entry
3. Prepare entry for lease liability payment
4. calculate and prepare entry for interest expense(depends on when payment is due)

Question 7

How is a lease classified from a lessor’s point of view

Answer 7

Lease is classfied as either operating lease or Finance lease

Question 8

What is a Finance Lease

Answer 8

A finance lease is one that transfers substantially all of the risks and rewards of ownership to the lessee.

Question 9

What is the criterion for a Finance Lease

Answer 9

1. Title transfers to the lessee by the end of the lease term.
2. A bargain purchase option exists, and at the date the lease begins, it is reasonably certain that the lessee will exercise it.
3. The lease term is of such a duration that the lessee will receive substantially all the economic benefits expected to be derived from the use of the leased property over its lifespan.
4. The present value (PV) of the minimum lease payments amounts to substantially all of the fair value (FV) of the asset.
5. The asset is specialized in nature and only the lessee can use it without major modifications.