Leases Flashcards
What is a lease?
A contract that gives rights to use an asset in exchange for consideration (right-of-use).
What is a lessor?
Lessor- the entity that provides the right to use an asset in exchange for consideration (payment).
What is a lessee?
Lessee- the entity that obtains the right to use an asset in exchange for consideration.
What is a finance lease?
A finance lease finances the use of an asset by spreading the payment over the life of the asset, instead of paying the full amount all at once.
What is an operating lease?
An operating lease is similar to a rental agreement. The entity normally rents the asset for only part of its useful life.
What are the indications of a finance lease?
Ownership is transferred to the lessee at the end of the lease (as in hire purchase agreements).
The lessee has the option to purchase the asset for less than its expected fair value in the future
The lease term is for the major part of the economic life of the asset
The lessee will compensate the lessor if the lease is cancelled
The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
The present value of the minimum lease payments amounts to substantially all of the fair value of asset.
How to account for finance leases at the beginning of a lease term?
the lessee controls an asset and has a liability for the outstanding rentals
DR Asset CR Finance Liability The lower of FV of asset or PV of lease payments
IAS 17 requires the accounting treatment to report the substance of the transaction:
Double Entry
DR Assets
Cr Provision/Liability
Dr interest payable IS
Dr Provision/Liability
CR Cash
DR Depreciation Charge IS
CR Accum Depreciation SOFP
How to account for finance leases in subsequent periods?
Lessee makes lease payments which are split between the finance charge and the repayment of outstanding liability
The leased asset is depreciated over the shorter of the assets useful life or the lease term
IAS 17 requires the accounting treatment to report the substance of the transaction:
Double Entry
DR Assets
Cr Provision/Liability
Dr interest payable IS
Dr Provision/Liability
CR Cash
DR Depreciation Charge IS
CR Accum Depreciation SOFP
How to account for finance leases at lease payment?
The lease charge is split between the interest payment and the repayment of the liability
DR Finance Cost – interest element
DR Finance Lease Liability – capital element
CR Cash
Split the Finance lease liability between creditors due within one year and creditors more than one year
IAS 17 requires the accounting treatment to report the substance of the transaction:
Double Entry
DR Assets
Cr Provision/Liability
Dr interest payable IS
Dr Provision/Liability
CR Cash
DR Depreciation Charge IS
CR Accum Depreciation SOFP
How do you depreciate finance leases?
The non-current asset should be depreciated over the shorter of:
The useful life of the asset
The lease term
The lease term = period over which the lessee has the use of the asset. It includes:
Primary (non-cancellable) period
Any secondary periods during which the lessee has the option to continue to lease the asset (provided that reasonably certain at outset that option will be exercised).
How do lessors account for finance leases?
Here, the lessee, not the lessor, has control of the asset.
The lessor derecognises the NCA & recognises the lease as a receivable
The carrying value is the lessor’s net investment in the lease.
The net investment in the lease equals:
– the present value of the minimum lease payments receivable; plus
– the present value of the asset at the end of the lease.
How to account for operating leases by lessees?
The substance of the transaction is that the lessee uses an asset, but does not own or control it.
The lessee does not recognise the leased asset in its statement of financial position.
Rentals are charged as an expense on a straight line basis over the term of the lease unless another systematic and rational basis is more appropriate.
Any difference between amounts charged and amounts paid should be adjusted to prepayments or accruals in SFP
If you pay more than charged you have a prepayment
If you pay less than charge you have an accrual
Zoo Ltd entered into a four year operating lease on 1 January 20X1 for a machine. The initial deposit is $1,000 on 1 January 20X1 followed by four annual payments in arrears of $1,000 in arrears on 31 December each year. Payment begin on 31 December 20X1.
What is the charge to the income statement and what amount would appear on the statement of financial position at the end of the first year of the lease?
Total payments $5,000 (deposit plus 4 x 1,000)
Operating lease expense (5,000 / 4 ) 1250
Sofp
Current asset prepayment
Paid 2,000 less 1250 (goneto IS) 750
How do lessors account for operating leases?
Assets held under operating leases are recognised in the statement of financial position as non-current assets
Presented according to the nature of the asset and depreciated
Rental income from operating leases is recognised in profit or loss on a straight –line basis over the term of the lease
