Leases Flashcards
What is a lease?
An agreement whereby you pay someone for the use of their asset for a period of time
What legislation deals with the accounting treatment of leases?
IFRS 16
What are the considerations relevant when dealing with leases?
What is affects a lease term?
- non cancellable lease period
- extension option if certain, termination option if certain
- return of lessor guaranteed
- reassessments
What is the difference between the inception and commencement of a lease?
the inception is when the contract is created, commencement is when the terms and conditions start applying
Over what timeline does the right of use asset get depreciated over?
- 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
What is the general approach and the simplified approach?
What is a finance lease and an operating lease?
How does guaranteed and unguaranteed residual values work?
How does a Lessor account for a lease?
- 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
How does a lessee account for a lease?
- 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
>
How is the VAT calculated on a simplified lease?
lease payment/ total lease payments * total VAT
How do you discuss how to account for a lease?
simply discuss in detail every step you consider as you account for the lease
How do you identify if you are part of a sale and leaseback transaction?
The sale of the asset must meet the definition of a IFRS 15 transaction
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?
- 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
