Leases

Question 1

Finance lease

Answer 1

as if lessee purchased the asset

Question 2

operating lease

Answer 2

as if lessee ‘rents’ the asset

Question 3

lease arrangement

Answer 3

if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration

Question 4

Is there an identified asset?

Answer 4

explicitly or implicitly specified in contract and supplier has no substantial right to substitute the asset

Question 5

Right to control the use of the identified asset

Answer 5

right to obtain substantially all economic benefits and right to direct the use

Question 6

Exemptions right-of-use asset

Answer 6

• short-term leases (<12 months)
• low value assets (< 5,000)

Question 7

Right-of-use assets (cost)

Answer 7

lease liability (at cost/PV) + lease payments made at or before commencement date - lease incentives received + initial direct cost incurred by lessee + estimate of the cost to be incurred by the lessee in dismantling and removing the underlying asset

Question 8

Which interest rate to use

Answer 8

lessor’s implicit interest rate in the lease, if that is not available then use the incremental borrowing rate

Question 9

Lease payment (PV calculation)

Answer 9

(Lease payment * (1- (1+r)^-T) / r

Question 10

subsequent measurement lease

Answer 10

at cost less any accumulated depreciation and any accumulated impairment losses

Question 11

Interest expense

Answer 11

lease liability (previous end period) * borrowing rate

Question 12

Front-loading effect

Answer 12

total expense higher in initial lease years due to interest expense

Question 13

remeasurement lease liability if change in

Answer 13

• lease term
• assessment of an option to purchase the underlying asset
• expected residual payments
• underlying index- or interest rates linked with the payment structure

Question 14

Prospective recognition

Answer 14

adjustment of lease liability will be reflected in right-of-use asset

Question 15

Finance lease indicators

Answer 15

• transfer of ownership (transfer by end lease term)
• purchase option (reasonable certain to exercise)
• lease term (major part of economic life)
• present value (PV lease payments amount to substantially all of fair value)
• Alternative use (no alternative use for lessor at end)
• cancellability (lessee cancels, lessee responsible for any losses)
• gains/losses fluctuation (lessee entitled to gains or losses)
• option to extent at lower than market rent

Question 16

Finance lease initial measurement lessor

Answer 16

at commencement date, lessor ‘derecognizes’ the leased asset and records a lease receivable

Question 17

Net investment

Answer 17

Fair value + Initial Direct Cost due to the lessor

Question 18

low value exemption + calculation annual rental expense

Answer 18

do NOT have to recognize right-of-use asset nor corresponding lease liability

Annual rental expense = total rental payments / no. of years on lease

Question 19

right-of-use asset should be typically depreciated over the

Answer 19

shorter of the lease term and the asset’s economic life