Part 8 - Leases / Provision, Contingent Liabilities and Contingent Asset / non-current assets held for sale and discontinued operations / non-monetary transaction / Note Receivable

Question 1

What is finance lease? (ASPE - capital lease)

Answer 1

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

Question 2

When to classify a finance lease?

Answer 2

1) transfer of ownership/bargain purchase option
2) lease for the major part of the economic life of the asset(ASPE use > 75%)
3) PV of minimum lease payment amounts to substantially all of the FV of the lease asset (ASPE use > 90%)

Question 3

What is the minimum lease payments?

Answer 3

minimum payments per lease + guaranteed residual value + BPO (bargain purchase option)

Question 4

What’s the accounting for a finance lease? lessee

Answer 4

Record asset and obligation as PV of minimum lease payment (not to exceed FV)

• initial direct costs of the lessee are added to the asset
• allocate payment between principal reduction of liability and interest expense
• amortize asset over lease term

Question 5

What is an operating lease?

Answer 5

expense lease payments on a straight line basis over lease term

Question 6

What is the two additional conditions that must be present to be consider a capital lease for the lessor in ASPE?

Answer 6

• credit risk associated with the lease is normal when compared to the risk of collection of similar receivable
• Amount of any unreimbursement cost that are likely to be incurred by the lessor under the lease can be reasonably estimated

Question 7

What is a sale leaseback?

Answer 7

sale of property with the purchaser leasing the property back to the seller

• for finance lease - profit on sale deferred and amortized over the lease term
• if FV at inception of lease is less than carrying amount, consider if there was been a impairment in value

Question 8

How to recognize incentives for operating lease?

Answer 8

Lessor - defer and amortize as a reduction of rental income over lease term
Lessee - defer and amortize as a reduction of rental income over lease term

Question 9

For IFRS 16 leases - a lessee may elect not to apply IFRS 16 to:

Answer 9

• short term lease (lease term of 12 month or less, a lease that contains a purchase option wouldn’t qualify as short term lease)
• lease for which underlying asset is of low value

Question 10

Should apply for portfolio application for leased asset?

Answer 10

May apply to a portfolio of lease with similar characteristics if effect on FS don’t vary materially from applying on an individual lease basis

Question 11

Should combine two or more contracts if the following criteria are met:

Answer 11

• contracts are negotiated as a package with an overall commercial objective that can’t be understood without consider the two contracts together
• Amount of consideration paid to 1 contract depends on the price/performance of the other contract
• Rights to use underlying assets conveyed in the contract form a single lease component

Question 12

Customer doesn’t have the right to use an identified asset if supplier has substantive right to substitute the asset throughout the period of use - what is substantive of rights?

Answer 12

when the following condition exists:

• supplier has practical ability to substitute alternative asset throughout the period of use
• supplier would benefit economically from exercise of its right to substitute the asset
• but not when only to substitute only after a particular date or occurrence of a specified event

Question 13

What is the right to control?

Answer 13

When the customer has both of the following:

• right to substantially all of the economic benefits from the use of identified asset
• right to direct the use of the identified asset

Question 14

How to identify there is a lease?

Answer 14

• right to control
• identified asset
• Period of time

Question 15

Whats the initial measurement for a lessee for right-of-use asset?

Answer 15

At commencement date, measure the right of use asset at cost:

• lease ability
• lease payment made at or before commencement date less any lease incentives received
• initial direct costs
• cost of dismantling, removing, restoring,

Question 16

How to measure lease liability during initial measurement?

Answer 16

measure the lease liability at the present value of the lease payment, discounted using the interest rate implicit in the lease (or incremental borrowing rate if not available)

lease payment includes:

• fixed payment less incentives
• variable lease payment
• residual value guarantees
• exercise price of purchase option
• termination penalties

Question 17

What are the subsequent measurement of right of use asset?

Answer 17

• cost model
• Fair value model if investment property
• may elect revaluation model if belongs to a class of PPE

Question 18

What are the subsequent measurement for lease liability?

Answer 18

increase carrying amount for interest on lease liability
reduce carrying amount when lease payment made
remeasure carrying amount to reflect any reassessment

include in profit/loss

• interest on lease liability
• variable lease payment not include in the measurement of the lease ability

Question 19

When to remeasure the lease?

Answer 19

• change in lease term
• change in assessment of a purchase/termination option
• change in expected payments for residual value guarantee
• change in future lease payment result in change in index or rate

Question 20

How to remeasure lease liability when there is a change in lease term or purchase/termination option?

Answer 20

discounting the revised lease payments, using the revised discount rate

Question 21

how to remeasure lease liability when there is a change in residual value guarantee/change in index or rate affecting payment?

Answer 21

remeasure lease liability by discounting the revised lease payment, using the original discount rate.

except if change in lease payment result from a change in floating interest rate - use revised discount rate

Question 22

Lessee will account for a lease modification as a separate lease if both of the following are met:

Answer 22

• modification increases the scope of the lease by adding the right to use one or more underlying asset
• consideration for the lease increases by an amount commensurate with the stand alone price

Question 23

If lease modification doesn’t meet criteria to be a separate lease:

Answer 23

• allocate consideration as if it were a separate component of the contract
• determine the lease term of the modified lease
• remeasure the lease liability

Question 24

If the lease includes both land and building?

Answer 24

assess each component separately

- lease payment will be allocated based on relative fair value

Question 25

What is the recognition and measurement for lessor?

Answer 25

At commencement date, recognize finance lease as a receivable = to the net investment in lease

Subsequent

• allocate payments between principal reduction of receivable and finance income
• apply nonrecognition and impairment

Question 26

What is the recognition and measurement of a operating lease?

Answer 26

lease asset in BS and depreciate as usual
initial direct cost added to the carrying amount of the asset
lease payment - income

Question 27

What happens in a sale leaseback?

Answer 27

seller lessee transfer an asset to buyer-lessor and lease the asset back. If transaction meets requirement to be account for a sale:

• Seller measure the asset at the previous carrying amount and recognize gain/loss
• Buyer account for the purchase by using IFRS 16

Question 28

If fair value of consideration doesn’t equal to FV of the asset or the payment of the lease are not at market rate?

Answer 28

adjustment required to measure sale proceeds at fair value

• any below market term, account for as a prepayment of lease payment
• any above market term, account for as additional financing provided by the buyer to the seller

Question 29

If transfer doesn’t meet requirement to be accounted for as a sale of the asset?

Answer 29

seller will recognize a financial liability equal to transfer proceeds
Buyer will recognize financial asset equal to the transfer proceeds

Using IFRS 9 financial instruments

Question 30

What is a provision?

Answer 30

a liability of uncertain timing or aount

Question 31

When to recognize a provision?

Answer 31

When all of the following are met:

• an entity has a present obligation (legal or constructive) as a result of a past event
• it is probable that an outflow of resources will be required to settle the obligation
• a reliable estimate can be made of the amount of the obligation

Question 32

When to recognize reimbursement for a provision?

Answer 32

only when its virtually certain reimbursement will be received
- can’t exceed amount of provision

Question 33

How to recognize onerous contracts

Answer 33

• a contract in which the unavoidable costs of meeting the obligation under the contract exceed the economic benefits expected to be received under it
• recognize unavoidable cost under contract:
• lower of cost of fulfilling contract or compensation/penalties arising from failure to fulfill it

Question 34

What is restructuring and how to account for it?

Answer 34

a program that is planned by the company and materially changes either the scope of the business or the manner in which the business is conducted

Only includes direct expenses arising from the restructuring

Question 35

What is a contingent liabilities?

Answer 35

a possible obligation that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future event

Question 36

should contingent liabilities be recognize in FS?

Answer 36

no, should disclose the contingent liabilities

Question 37

What is contingent asset?

Answer 37

possible asset that arises from past event and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future event not wholly within the control of the entity.

not recognize in FS, assess contingent asset continually

Question 38

Non-current assets should be classified as held for sale if its carrying amount will be recovered prncipally through a sale transaction rather than continuing use. What’s the criteria to classify as held for sale?

Answer 38

Must meet all following criteria:

• available for immediate sale in its present condition subject only to terms that are usually and customary for sales of such assets
• mgmt commits to a plan to sell
• active program to locate a buyer and complete the plan have been initiated
• it is being actively marketed for sale a a price that is reasonable in relation to its current FV
• the sale is highly probable and is expected to occur within one year
• Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that plan will be withdrawn

Question 39

How should held for sale assets should be measured?

Answer 39

lower of its carrying amount or FV less cost to sell

Question 40

What is cost to sell?

Answer 40

includes only incremental costs directly attributable to the disposal of an asset - no finance cost/income tax expenses.
If sale happens beyond 1 yr, use PV of cost to sell

Question 41

Should asset be amortized when classified as held for sale?

Answer 41

asset should not be amortization

Question 42

If there is a change to a plan of sale?

Answer 42

Reclassify as held and used, asset will be value at lower of:

• carrying amount b4 held for sale less amortization
• Recoverable amount at the date of decision not to sell
• Recover amount is the higher of asset’s FV less cost to sell and its value in use

Question 43

What is discontinued operations?

Answer 43

a component of an entity that either has been disposed of or is classified as held for sale and:

• represent a separate major line of business or geographical area of operation
• is a part of a single co-ordinated plan to dispose of a separate major line of business
• subsidiary acquired exclusively with a view to resale

Question 44

What is the differences between ASPE 3475 and IFRS 5 for held for sale?

Answer 44

ASPE 3475 based on underlying nature of the asset and liability, IFRS 5 reclassifies all held for sale asset/liabilities as current

Question 45

What is non-monetary reciprocal transfer?

Answer 45

transfer of non monetary assets/liabilities or services without consideration

• donation of non-monetary asset
• payment of dividend in kind

Question 46

How to measure a non-monetary exchange and non-monetary reciprocal transfer?

Answer 46

measure an asset exchange or transferred in a non-monetary transaction at fair value of the asset given up (unless the FV of the asset received is a more reliable measure)

Question 47

When to consider a non-monetary transaction has commercial substance?

Answer 47

when the entity’s future CF are expected to change significantly as a result of the transaction

Question 48

How to measure a non-monetary exchange?

Answer 48

measure at the carrying amount of the asset given up adjusted by the fair value of any monetary consideration received or given

Question 49

What is a note receivable?

Answer 49

written promises to pay a specified amount by a specified date

Question 50

how to measure note receivable?

Answer 50

when cash inflow is deferred, RR criteria require revenue to be measured by discounting future receipts using the imputed rate of interest

interest revenue is recorded using the effective interest method (carrying value of note x imputed interest rate)