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SBR > Leases > Flashcards

Leases Flashcards

1
Q

What is the accounting standard for Leases?

A

IFRS 16

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2
Q

What is the definition of a lease?

A

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

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3
Q

What is the definition of a lessee?

A

The entity obtains the right to use an underlying asset in exchange the consideration

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4
Q

What is the definition of a lessor?

A

The entity provides the right to use an underlying asset in exchange for consideration

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5
Q

What is the definition of a right to use asset?

A

Represents the lessee’s right to use an underlying asset for the lease term

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6
Q

What is the criteria for identifying a lease?

A

A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration

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7
Q

Explain the term control

A

Control of an asset exists where the customer has the right to obtain substantially all of the economic benefits from its use and the right to direct its use

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8
Q

Give an example of when the customer does not have the right to use an identified asset

A

If the supplier has the practical ability to substitute an alternative asset and would benefit economically from doing so

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9
Q

How do you account for the lease at the commencement date?

A

Dr Right of use asset (PPE)

Cr Lease liability

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10
Q

How is the right of use asset depreciated?

A

Shorter of the useful life and lease term

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11
Q

How is the lease liability measured?

A

Present value of future lease payments

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12
Q

Which discount rate should be used?

A
  • The rate implicit of the lease

- the lessee’s incremental borrowing rate (if above cannot be determined)

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13
Q

Give the 5 examples of what is included in future lease payments

A
  • Fixed payments
  • Variable lease payments
  • Amounts expected to be payable under residual value guarantees
  • Options to purchase the asset that are reasonably certain to be exercised
  • Any termination penalties that are expected to be incurred
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14
Q

How is the right of use asset initially recognised?

A

At cost

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15
Q

What does the initial cost comprise of?

A
  • Lease Liability
  • Payments previously made
  • Initial direct costs
  • Removing or dismantling costs
  • LESS lease incentives received
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16
Q

If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, how would you depreciate?

A

Over its useful life

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17
Q

How does the lessee measure the lease liability?

A

= CA at commencement of lease + interest - payments

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18
Q

How would you account for interest on a lease?

A

Dr Finance Cost

Cr Lease Liability

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19
Q

How would you account for the lease payments?

A

Dr Lease Liability

Cr Cash

20
Q

What do you always calculate to?

A

The next payment date

21
Q

What do you do when a contract contains a lease and a non lease component?

A

A lessee either:

  • Allocated the consideration to each component of the contract based on the stand alone price of each
  • Elects to account for the contract as a single lease (if immaterial)
22
Q

When is the lease liability remeasured?

A
  • The lease term changes

- The entity changes its assessment of an option to purchase the underlying asset

23
Q

What is the definition of a short life/ low value asset?

A

When a lease is for a period of 12 months or less or the underlying asset is of low value when new

24
Q

What is the simplified accounting treatment for a short life or low value asset?

A

Lessee can choose to recognise the lease payments as an expense in the SPL on a straight line basis

25
Q

What are the accounting treatment for the simplified basis?

A
  • No right of use asset is recognised in the SOFP

- The annual lease expense - total cost / life of lease

26
Q

What are examples of low value assets?

A
  • Tablets
  • Small PCs
  • Telephones
  • Small items of furniture
27
Q

What is not an example of a low value asset?

A

Cars

28
Q

What is the accounting treatment of a low value asset?

A

Dr Lease expense
Dr Prepayment
Cr Cash

Or:
Dr Lease Expense
Cr Accrual
Cr Cash

29
Q

What is the accounting treatment for a sale and leaseback?

A 
Dr Cash
Dr Right off use asset
Cr PPE 
Cr Financial Liability
Cr Gains on rights transferred
30
Q

Define a finance lease

A

A lease that transfers substantially all the risks and rewards incidental to ownership of an asset

31
Q

What are the five situations which would normally lease a lease to be a finance lease?

A
  1. Hire purchase
  2. Bargain purchase
  3. The lease term is for a major part of the asset’s economic life even if the title is not transferred
  4. The PV of the minimum lease payments amounts to substantially all of the assets FV at inception
  5. The lease asset is so specialised that it could only be used by the lease-e without major modifications being made
32
Q

Define an operating lease

A

An operating lease is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset

33
Q

How is a lease (as lessee) recognised initially?

A

Dr Right of Use asset

Cr Lease liability

34
Q

When can you account for a lease on a straight line basis as a lessee?

A

Short life or low value assets

35
Q

Under lessor accounting what are the 5 criteria for a finance lease?

A
  1. Hire purchase (ownership of transfers)
  2. Bargain purchase (buy at the end)
  3. The lease term is similar to the UL in years
  4. The PV of the minimum lease payments amounts to substantially all of the assets FV at inception
  5. The lease asset is so specialised that it could only be used by the lease-e without major modifications being made
36
Q

When a sale and leaseback is not a genuine sale, how are the sales proceeds treated?

A

As a lease liability

37
Q

What are the debits and credits for a sale and leaseback when it is a genuine sale and operating lease?

A 
Dr Cash
Dr Right off use asset
Cr PPE 
Cr Financial Liability
Cr Gains on rights transferred
38
Q

How is a lease (as lessee) recognised initially?

A

Dr Right of Use asset

Cr Lease liability

39
Q

When can you account for a lease on a straight line basis as a lessee?

A

Short life or low value assets

40
Q

What do you recognise in the SOFP if there is a finance lease (lessor)?

A

Net Investment in a finance lease in NCA and CA

41
Q

When a sale and leaseback is not a genuine sale, how are the sales proceeds treated?

A

As a financial liability at amortised cost

42
Q

What are the debits and credits for a sale and leaseback when it is a genuine sale and operating lease?

A 
Dr Cash
Dr Right off use asset
Cr PPE 
Cr Financial Liability
Cr Gains on rights transferred
43
Q

What are the change to lessee accounting?

A

We now include all leases as liabilities which means that there is higher gearing and does not help financial convenance

44
Q

How do you calculate the right of use asset for a sale and leaseback?

A

CA x [PVLP (+ ppmt - additional financing)]/ FV

45
Q

How do you calculate the PPE for a sale and leaseback?

A

Carrying amount

46
Q

How do you calculate the P/L for a sale and leaseback?

A

Balancing amount

SBR (41 decks)

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