Leases Flashcards
Define Lease
A contract which conveys
- right to use an identified asset
- for period of time
- in exchange for consideration
What is Lessee and Lessor
Lessee: An entity that obtains the right to use an underlying asset for a period of time in exchange for consideration
Lessor: An entity that provides the right to use and underlying asset for a period of time in exchange for consideration
Which conditions does contract contain a lease
- Right to control ( economic benefits of using asset)
- Identified asset
- Period of time (specified in contract can be time or usage)
What is meant by the lease term:?
- Non cancellable perood whereby lessee can use asset
- Includes- option to extend the lease if option is viable
- Includes- option to terminate lease is option is viable
Does the lessee legally own an asset which has been loaned
NO - only the economic gain in the period of time specified
What factor is most likely to influence lease term?
Useful life of an asset
Which definitions of the conceptual framework is used for lessee accouting
Asset - lessee gains use of asset
Liabilities- present obligation to transfer economic resource in exchange
What does lessee recognise at commencement date of a lease and how is it accounted for
Debit: Right of use asset
Credit: Lease liability
How is lease liability split up
Current Lease payment &
Present value of lease payments
What does lease payments incldue
- fixed payments
- variable lease payments dependent on rate
- amount expected to be
- price of purchase option to extend
- price of terminating lease early
What is the discount factor used in the calculation of present value
Interest rate implicit in the lease
- Present value does not include non refundable deposits or prepayed installment
Why might subsequent measurements of lease be different?
- Lessees will incur interest on outstanding lease liability
- Lessee will be making payments
What are the two methods by which lease liability can be paid
In arrears
In Advance
What are the entries for the reduction of lease liability through installments made?
DEBIT: Lease liability
CREDIT: Cash
What are the journal entries for increasing interest rate on lease liability
DEBIT: finance costs(SPL)
CREDIT: lease liability
What is PVOFLP
Present Value Of Future Lease Payments
What is meant by in arrears lease payments
PVOFLP + Finance cost (interest rate*pvoflp) -
Installment 1
=
Total Liability Carried Down
+ Finance cost (interest % x balance 2)
- Installment 2
= Non current liability
How is current liability worked out when lease libaility is payed in arrears?
Current Liability = Lease Liabiility Carried down - Non current Liability
How to calculate/ what is meant by lease liability payments in advance?
PVOFLP + Finance costs ( Interest % x PVOFLP)
= Liability Carried down
- Installment 2
= Non Current Liability
When is installment 1 paid in lease advance payemnts
Paid on lease commencement date so not included in the PVOFLP
How do you work out current liability when lease payments are in advace?
Current Liability = Liability Carried Down - Non currrent liability
What is non current liability when lease payments are made in advance?
Non current liability = installment amount
How is initial measurement of right of use asset measure
- At cost
What does the cost of right of use asset entail?
Initial measurement of lease liability (PVOFLP)
+ Lease payments before commencement
+ Initial cost inccured
+ dismantling costs
- Lease incentives recieved
How is subsequent right of use asset cost measured
- At Cost - using IAS 16 model for PPE
- Unless revalued- revaluation model applies
-otherwise accumulated depreciation and impairment still applies
How is right of use asset depreciated?
- From the lease commencement date to either
- end of it’s useful life
OR - end of lease term
WHICHEVER IS EARLIER
What are the journal entries when right of use of asset comes to an end to account for depreciation charges?
Debit : depreciation expense
Credit: Accumulated depreciation (offset against cost of right of use asset)
When is depreciation always charged to the end of the right of use asset’s useful life?
When ownership of the right of use asset is expected under terms of leases
What are the two exemptions for leases
- Short term lease (12 months or less)
- Low underlying asset value (subjective)
If exemption is recognised for an asset, how does an entitiy record this asset?
As an expense
- straight line basis
- over lease term
What disclosures are required by a lesse in reporting
- Depreciation charge for right of use assets
- Interest rate on lease liabilities
- Total cash flow of leases
- assitions to right of use assets
- carrying amount of right of use assets
- expense for short term/low value lease exemption assets
If the lease trerm was 10 months and one month is free. How do you account for this
Entity will still spread out the cost of the asset over 10 months
- multiple payment by number of months paid
- divide by number of months in lease term
What costss are included in the total amount charged regarding a lease
- Finance cost of that year
-Installment cost - Depreciation of right of use assets
How to work out total comprehensive income from equity table
Profits = Retained earning current - retained earning bought forward + dividends
Profits + reval surplus = total comp incom
