Leases Flashcards

1
Q

What is a lease?

A

An agreement whereby you pay someone for the use of their asset for a period of time

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2
Q

What legislation deals with the accounting treatment of leases?

A

IFRS 16

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3
Q

What are the considerations relevant when dealing with leases?

A
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4
Q

What is affects a lease term?

A
  • non cancellable lease period
  • extension option if certain, termination option if certain
  • return of lessor guaranteed
  • reassessments
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5
Q

What is the difference between the inception and commencement of a lease?

A

the inception is when the contract is created, commencement is when the terms and conditions start applying

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6
Q

Over what timeline does the right of use asset get depreciated over?

A
  • if ownership passes, it gets depreciated over the useful life of the asset
  • if ownership does not pass, it gets depreciated over the shorter of its useful life or the lease term
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7
Q

What is the general approach and the simplified approach?

A
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8
Q

What is a finance lease and an operating lease?

A
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9
Q

How does guaranteed and unguaranteed residual values work?

A
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10
Q

How does a Lessor account for a lease?

A
  • diagnose whether you are going account for it as a finance lease or an operating lease, a finance lease will met if the risks and rewards of the asset transfer, the requirements for risks and rewards to transfer is as follows:
    > Ownership was transferred
    > purchase option was lease than the FV at the end of the lease term
    > the lease terms is a major portion of the economic useful life of the asset
    > the Present value of the lease payments = the FV at the start of lease date
    > it is a specialized asset
    > other stuff
  • if it is a finance lease, then do the following:
    > create a finance lease receivable account using the gross method or net method
    > check if you are a manufacturer or a dealer of the item being leased
    / if so, expense the initial direct costs and record Sales revenue on initial day with inventory sold
    / if not, capitalize the initial direct costs into the net investment receiable account, record the loss of asset
    > if the interest in the contract is really low, use the market related interest rate
    > calculate the Present value with the payments
  • the payments must include the unguaranteed residual value
  • if it is an operating lease, then do the following:
    > calculate the sum of all the lease payments
    > decrease the sum by any lease incentives
    > divide the sum by the number of lease payments to get how much income you are going to recognise per month
    > recognise the shortage or excess PAID in an asset(accounts receivable) ot liability account (revenue received in advance)
    > MOVE the vat on each payment, as it happens
    > depreciate the asset because you still own it
    > capitalise the intital direct costs
    > depreciate them over the lease term
  • recognise the deferred Taxation
    > Temporary difference is the difference between how the lease affects profit according to SARS and how it affects profit ccording to accounting standards
  • SARS accounts for lease payments, when they are paid
  • other stuff
  • Write up the notes for disclosure required by the standards
    > finance income
    > net investment in finance lease (recon and majurity analysis)
    > operating lease receipts
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11
Q

How does a lessee account for a lease?

A
  • diagnose whether you are going to apply the general approach or the simplified approach
    > can it be classfied as a short term lease because the lease term is 12 months or less
    > can it be classified as a low-value asset or has that class already been classified that way
  • If it is going to be a general lease, then do the following
    > Create a Right of use Asset which comprises of the following
  • the lease liability
  • transaction costs
  • YO MAMA
    > Create a lease liability, comprised of the following
  • all UNPAID lease payments
  • remove the VAT componenets all at once
  • discounted by the implicit rate in lease or next best, incremental borrowing rate
    > subsequently measure the right of use Asset according to these conditions
  • if on th cost model, depreciate it
  • if on the revaluation model, revalue it and depreciate it
  • if on the investment property model, accordingly as such
    > record the market-related interest on the liability and payments
  • calculate the interest using the amortization table
  • look for payment amount without VAT in it
  • if it is going to be a simplified lease
    > calculate the sum of all your lease payments
    > divide the sum by the number of lease payments to get how much income you are going to recognise per month
    > recognise the shortage or excess PAID in an asset(prepaid expense) ot liability account (lease liability)
    > MOVE the vat on each payment, as it happens
  • Recognise the Deferred Taxation
    > Temporary difference is the difference between how the lease affects profit according to SARS and how it affects profit ccording to accounting standards
  • SARS accounts for lease payments, when they are paid
  • other stuff
  • Write up the notes for disclosure required by the standards
    >
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12
Q

How is the VAT calculated on a simplified lease?

A

lease payment/ total lease payments * total VAT

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13
Q

How do you discuss how to account for a lease?

A

simply discuss in detail every step you consider as you account for the lease

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14
Q

How do you identify if you are part of a sale and leaseback transaction?

A

The sale of the asset must meet the definition of a IFRS 15 transaction

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15
Q

How does a Lessee account for a sale and leaseback transaction if the Proceeds for the Sale is less than the Fair Value of the Asset being sold and leased back?

A
  • Bank (gives you the amount you received)
  • Accumulated Depreciation (the amount until the current date)
  • Right of use Asset [ROU = rights retained = ({lease liability+(FV-SP}/ fair value) * CA]
  • CR Aircraft cost (self explanatory)
  • CR lease liability (present value of the lease payments)
  • CR Gain (DR, IF LOSS) on sale and leaseback (the difference)
  • interest on lease liability
  • payments on lease liability
  • depreciation of right of use Asset
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16
Q

How does a Lessee account for a sale and leaseback transaction if the Proceeds for the Sale is more than the Fair Value of the Asset being sold and leased back?

A
  • Bank (gives you the amount you received)
  • Accumulated Depreciation (the amount until the current date)
  • Right of use Asset [ROU = rights retained = ({lease liability+(FV-SP}/ fair value) * CA]
  • CR Aircraft cost (self explanatory)
  • CR lease liability (present value of the lease payments)
  • CR financial liability (difference between the SP and the fair value of asset)
  • CR Gain (DR, IF LOSS) on sale and leaseback (the difference)
  • interest on lease liability and financial liability in their value weightings
  • split payment accounting to liability value weightings
  • depreciation of right of use Asset
17
Q

How does a lessor account for a sale and leaseback transaction if the Proceeds for the Sale is less than the Fair Value of the Asset being sold and leased back?

A

Asset account
CR bank
CR income received in advance

Depreciation on new asset according to measurement style
CR Accumulated Depreciation

then account normally if its an operating lease or a finance lease

18
Q

How does a lessor account for a sale and leaseback transaction if the Proceeds for the Sale is more than the Fair Value of the Asset being sold and leased back?

A

Asset account
Financial Asset account
CR bank

Depreciation on new asset according to measurement style
CR Accumulated Depreciation

Financial Asset
CR Interest on FA

Then account for the lease as normal as a operating lease or finance lease

19
Q

How does one account for a transaction that looks like a sale and leaseback but doesn’t meet the IFRS 15 requirement for a sale?

A

Simply as a financial liability

20
Q

How does being a manufacturer/dealer who leases, compare to not being one?

A
21
Q

What is a balloon payment?

A

This type of payment the last payment of the lease and is normally a payment that is much larger than the others

22
Q

What rate is used to discount your lease payments?

A

the Implicit rate in the lease is preferred, if you don’t have that, then use the incremental borrowing rate.

23
Q

Can you change the rate of discounting during the lease?

A

No, what you used when you Pv’d it upfront is the rate that you need to stick with.

24
Q

what is the difference between a lease reassessment and modication?

A

It the terms of the lease have not changed, merely circumstances,, then the change is a reassessment, only when terms change is it a modification

25
Q

How do you judge whether someone will extend the lease?

A

In Order to judge whether someone will extend the lease, you need to judge what is said about what they feel, not what they are trying to do to extend it