Leases

Question 1

What is a lease?

Answer 1

A contract that conveys the right to use an underlying asset for a period of time in exchange for consideration

Question 2

What is a lessor?

Answer 2

The entity that provides the right-of-use asset and receives consideration

Question 3

What is a lessee?

Answer 3

The entity that obtains use of the right-of-use asset and transfers consideration

Question 4

What is a right-of-use asset?

Answer 4

Represents the lessee’s rights to use an underlying asset over the lease term

Question 5

How does IFRS 16 Leases require lessees to account for leases?

Answer 5

Recognise asset and liability
(unless short term or of minimal value)

Question 6

A contract contains a lease if it..

Answer 6

.. conveys the ‘right to control the use of an identified asset for a period of time in exchange for consideration’.

Question 7

A contract must give the customer;

Answer 7

-the right to substantially all of the identified assets economic benefits
-the right to direct the identified assets use.

The right to direct the use of the asset still exists even if there are restrictions in the contract

Question 8

At inception of a lease, what should the lessee recognise?

Answer 8

-lease liability
-right-of-use asset

Question 9

How is a lease liability recognised? (5)

Answer 9

present value of payment not yet made

-fixed payments, less any lease incentives receivable
-variable payments (valued as at inception)
-amounts expected to be paid under residual value guarantees
-options to purchase that are expected to be exercised
-termination penalties if lease term reflects expectation they will be paid

Question 10

How is the right-of-use asset recognised? (4)

Answer 10

at cost

-initial value of lease liability
-payments made at or before commencement
-initial direct costs
-estimated costs of asset removal or dismantling as per lease conditions

Question 11

What does IFRS 16 state the comprises the lease term? (3)

Answer 11

-non cancellation periods
-periods covered by an option to extend the lease is reasonably certain to be exercised
-periods covered by an option to terminate the lease if reasonably certain NOT to be exercised

Question 12

How is the liability subsequently measured? (double entry for interest charge and payments)

Answer 12

Interest charge which increases the lease liability
Dr Finance Costs (SPL)
Cr Lease liability

Cash payments reduce the lease liability
Dr Lease liability
Cr Cash

Question 13

How is the right-of-use asset subsequently measured? (inc. criteria)

Answer 13

Under cost model, at cost less accumulated depreciation and impairment losses

Depreciated over;
-shorter of the lease term and useful life if ownership does not transfer to lessee
-over useful life is ownership does transfer to lessee

Question 14

What do you do if there is a lease and non-lease component of the contract?

Answer 14

IFRS 16 specifies that the contract should be allocated to each component based on standalone selling prices

Question 15

What do you do if there are any change to the lease payments?

Answer 15

Recalculate the lease liability and it’s carrying amount adjusted. The corresponding adjustment is posted against the carrying amount of the right-of-use asset

Question 16

What does IFRS16 state with regards to short term/low value leases?

Answer 16

if the lease is 12 months or less or of low value, then a simplified treatment is permitted

lessee can choose to recognise the lease payments in P&L on straight line basis. No lease liability or right-of-use asset would be recognised

Question 17

IFRS 16 states a lessor must classify a lease at inception as;

Answer 17

either a finance lease or an operation lease

Question 18

What is the definition of an operating lease?

Answer 18

A lease that is not a finance lease

Question 19

What is the definition of a finance lease?

Answer 19

A lease which transfers substantially all the risks and rewards of an underlying asset to the lessee

Question 20

What are the 7 finance lease indicators?

Answer 20

-ownership of asset transfers at the end of the lease term
-lessee has the option to purchase the asset for less than its expected fair value and that is reasonably certain to occur
-lease term (including secondary periods) is for the major part of the assets useful life
-at the inception of the lease, the present value of the lease payments amounts to substantially all of the fair value of the leased assets
-lease assets are specialised
-lessee will benefit from changes in the assets residual value
-lessee can continue the lease for a secondary period in exchange for rent payments that are much lower than market rates

Question 21

What is the initial treatment of a finance lease?

Answer 21

lessors present assets held under a finance lease as a receivable. The value of the receivable should be equal to the net investment in the lease

Question 22

The net investment is the present value of: (6)

Answer 22

-fixed payments
-variable payments made at the inception date
-residual value guarantees
-unguaranteed residual values
-purchase options reasonably expected to be exercised
-termination penalties, if the lease term reflects the expectation these will be incurred

Question 23

How is the finance lease subsequently measured? (interest and cash double entry)

Answer 23

Lease receivable is increased by interest income
Dr Lease receivable
Cr Investment Income (SPL)

Cash receipts reduce the lease receivable
Dr Cash
Cr Lease receivable

Question 24

How is an operating lease recognised?

Answer 24

Income is recognised on a straight line basis over the lease term

Question 25

How is the underlying asset recognised and measured?

Answer 25

In accordance with IAS 16 PPE or IAS 38 Intangible Assets

Question 26

If an entity (seller-lessee) transfers an asset to another entity (buyer-lessor) and then leases it back, both entities must assess whether the transfer should be accounted for, in substance, as a sale. What should the entities apply?

Answer 26

IFRS Revenue from contracts with customers to decide whether a performance obligation has been satisfied