Masterclass 3 (Topic 9,11,12)

Question 1

Definition: A lease

Answer 1

An agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time

Question 2

Definition: The lessor

Answer 2

The entity that provides the right to use an asset

Question 3

Definition: The lessee

Answer 3

The entity using the asset and making the payment

Question 4

Definition: A right of use asset

Answer 4

Recognises the lessees right to use an asset under the terms of their agreement

Question 5

Definition: The Lease Term

Answer 5

The length of time the agreement is for. It compromises of:

• Non-cancellable periods
• Periods covered by an option to extend the lease if reasonably certain to be excercised
• Periods covered by an option to terminate the lease if these are resonably certain not to be excercised.

Note: in a question if there is an option to extend a lease, unless it specifies otherwise assume the lease will be used for the extended period.

Question 6

At the start of a lease what should the leasee recognise?

Answer 6

A lease liability and

A right of use asset

Question 7

How is a lease liability initially measured?

Answer 7

The lease liability is firstly recognised at the present value of the lease payments that have not yet been paid. This will include:

• Fixed payments
• Amounts expected to be paid under residual agreements
• Options to purchase the asset that are reasonably certain to be excercised
• Termination penalties, if the lease ter reflects the expectation that these will be incurred

Question 8

How is a right of use asset initially measured and what does this include?

Answer 8

At cost, this will include:

• The amount of the initial measurement of the lease liability
• Lease payments made at or before the commencement date
• Any initial direct costs
• The estimated costs of removing or dismantling the underlying asset as per the conditions of the lease

Question 9

How is the asset depreciated?

Answer 9

Using a systematic basis.

If it is likely the lessee will obtain legal title at the end of the lease, the assets useful life is used to depreciate.

If it is not then the asset is depreciated over the shorter of the lease term and the useful life

Question 10

What happens with interest & depreciation if a lease is entered into part way through the year?

Answer 10

The interest and depreciation is time apportioned accordingly

Question 11

How do you split the current & non-current liability of a lease from the table where payments are made in arrears?

Answer 11

The current liability is the difference between the Bal c/f of the year just finished & the bal c/f of the next year

Question 12

How do you split the current & non-current liability of a lease from the table where payments are made in advance

Answer 12

The current liability is the difference between the Bal c/f of the year just finished & the sub-total before interest of the next year

Question 13

How do you account for Short-life / Low value asset

Answer 13

If a lease is less than 12 months at the inception date or considered to be low value you recognise the cost in the P&L on a straight line basis.

No asset or liability is recognised

Question 14

Examples of low value assets as per IFRS 16: Leases

Answer 14

IFRS 16 does not specifiy a particular monetary amount below which an asset would be considered low value. Examples are give as:

• Tablets
• Small personal computers
• Telephones
• Small items of furniture