Leasing

Question 1

Identifying a lease

Answer 1

right to control of an identified asset for a period of time for consideration.

Right to control = right of use and right to obtain substantially all of the economic benefit

Question 2

Lessee (customer) recognises

Answer 2

A lease liability and the right of use

Lease liability = PV of future payment (not what has already been paid or to be paid on commencement date). Discounted at rate of implicit interest in lease. After recognition it is increased by interest on liability and decreased by payments.

Right of use = initially measured at cost (including: lease liability, payments made at/before commencing date, direct initial costs (legal). Subsequently depreciated and impaired.

Question 3

Recognition exemptions

Answer 3

IFRS 16 provides exemptions for:

Short-term leases = <12m
If the asset is of low value

If this is used the item is expensed

Question 4

Deferred tax implications (Lessee)

Answer 4

Right of use - lease liability = carrying amount

Tax base = 0

Question 5

Lessor classifications

Answer 5

Finance = transfers substantially all risks and rewards 
Operating = does not transfer 

Finance = derecognise asset and recognise lease receivable (include and residual value) in BS

Operating = rental income in P&L, any costs to obtain lease are added to carrying value of asset

Question 6

Finance lease (5 parts)

Answer 6

Transfer of ownership of asset at end of lease
Option to purchase as lower than FV
Term = major party of useful life
Lease payments = most of FV of asset
Specialty nature = not useful in other circumstances

Question 7

Sale and lease back

Answer 7

If in substance this is a sale (think about IFRS 15 revenue recognition, has it met a performance obligation)

Seller/lessee
Derecognise the asset (as its sold)
Recognise a right of use and lease liability
Gain(or loss) is recognised
If consideration received for asset is below FV then difference is added as a prepayment of lease payments (added to right of use). If its above FV then treated as additional financing as a loan.

Buyer/lessor
Normal purchase of asset and then either finance or operating lease.

Question 8

If sale and lease back is not a sale in substance

Answer 8

Seller
Keep asset on BS and add consideration received as a loan in liabilities
Buyer
Recognise a loan receivable not the asset