Leases Flashcards
What is a lease according to IFRS 16?
A contract that conveys the right to use an asset for a period of time in exchange for consideration.
The underlying asset must be identified, and the contract must give the customer the right to control its use.
Who is the lessor in a lease agreement?
The legal owner of the asset who leases the asset to another company.
Who is the lessee in a lease agreement?
The party that leases and uses the asset but does not legally own it.
List three reasons why companies choose to lease.
- Source of funding
- Cash flow management
- Flexibility
What are the main changes introduced by IFRS 16?
- New definition focuses on control over ‘right of use’
- All leases create a ‘right of use’ asset
- No distinction between finance and operating leases
What is the definition of a finance lease?
A lease that transfers substantially all the risks and rewards of ownership to the lessee.
What is an operating lease?
A lease other than a finance lease where lease rental payments are included as an expense in the Statement of Comprehensive Income.
True or False: Under IFRS 16, all leases must be recognized on the Statement of Financial Position.
True
Fill in the blank: The _______ retains ownership of the asset in a lease agreement.
[lessor]
What is the effect of IFRS 16 on lessor accounting?
Effectively no accounting change for lessors.
What type of asset is recognized by the lessee under IFRS 16?
A right-of-use asset.
How is the right-of-use asset depreciated?
Using the same policy as for similar assets owned by the company.
What is the implicit rate of interest used for?
To allocate finance costs over the term of the lease.
What are the two charges that appear in the Statement of Comprehensive Income for lessees?
- Depreciation
- Finance charge
What is the accounting treatment for lease instalments paid by the lessee?
The instalments are split between capital and interest elements.
What does the term ‘off balance sheet’ leases refer to?
Leases that were not recognized on the balance sheet, leading to incomplete information for investors.
What is the total finance cost if total lease payments are £40,000 and the fair value of the asset is £35,000?
£5,000.
What journal entry is made when acquiring an asset on lease?
DR ROU Asset – cost (SOFP) and CR Lease liability (SOFP).
Under IFRS 16, how is the lease liability structured in the Statement of Financial Position?
It is split into current and non-current portions.
What happens to the lease liability at the end of the lease term?
The liability will be £0.
What is the treatment of short-term leases under IFRS 16?
Simplified accounting is allowed for short-term leases.
What is the accounting treatment for short term leases under IFRS 16?
Simplified accounting allows lease rentals to be charged to SCI on a straight-line basis over the term of the lease. No liability and asset not capitalised.
What is the threshold for low value assets under IFRS 16?
Less than USD 5,000.
How is lease expense calculated for low value assets?
Total lease payments divided by the number of periods.
Calculate the monthly expense for Company C’s 15-month lease.
£85 per month.
What are the key disclosure requirements of IFRS 16?
- Additions to right of use assets
- Year end carrying amount of right of use assets by class
- Lease liabilities
- Depreciation expense of right of use assets
- Finance cost of right of use assets
- Expense relating to short term leases
- Expense relating to low value leases
- Expense relating to variable lease payments not included in lease liabilities
- Income from sub-leasing
- Gains or losses from sale & leaseback
- Amount of short-term lease commitments
- Description of how liquidity risk is managed
- Use of exemption for short term / low value leases
True or False: IFRS 16 allows for the recognition of an asset for operating leases by the lessor.
True.
What does a lessor recognize for finance leases under IFRS 16?
A lease receivable equal to lease payments plus any expected residual value of the asset.
What is retained by the lessor in a finance lease?
Legal title.
How is rental income recognized for operating leases?
On a straight-line basis or based on usage of the asset.
Fill in the blank: The split between capital and interest will be calculated using the _______.
[interest rate implicit in the lease contract].
What does IFRS 16 require regarding leases?
ALL leases to be brought onto the Statement of Financial Position.
What are the exemptions from IFRS 16?
- Low value (< USD 5,000)
- Short term (< 12 months)
What is introduced by IFRS 16 in relation to leases?
The term ‘right-of-use’.
What complications can arise in accounting for leases?
- Asset and service coverage
- Break clauses and renewal options
- Measuring liability (present values)
- Variable lease payments – contingent rents
- Determining right of use.
What are the two main types of leases under IFRS 16?
- Finance leases
- Operating leases.
What should one be able to discuss regarding provisions of IFRS 16?
- Main terms used in the standard (e.g., lessor, lessee, right-to-use)
- Disclosure requirements.
Why might companies choose to lease instead of buy?
[Various strategic financial reasons, such as preserving capital, flexibility, tax advantages, etc.]
What is the impact of IFRS 16 on the Statement of Financial Position?
All leases must be recognized.
