SGS Mock Flashcards
The treatment of the lease is incorrect. IFRS 16, Leases requires all leases
(except those of 12 months or less or of low-value assets) to be recognised in the
statement of financial position.
A right-of-use asset must be recognised consisting of the present value of future lease payments (initial value of the lease liability).
The right-of-use asset will be depreciated over the shorter of the lease term and
the useful life of the asset, that is over four years. The interest rate implicit in the
lease is 7% and therefore the right-of-use asset and the lease liability should be
recognised in the SOFP at £16 million (£4.72m 3.387 = £16m).
A finance cost of (£16m 7%) 3/12 = £0.28m and depreciation of £16m/4 3/12 = £1m will be recognised in profit or loss. The charge to operating profit of £1.2 million will be reversed out of the statement of profit or loss and debited to provisions.
This adjustment will also affect the statement of cash flows. The interest element
will be added back to cash flow from operating activities. However, no interest paid
will be shown in respect of the lease as no payment has yet been made. The
repayment of the capital element should be shown as part of financing activities
The convertible bond is a compound financial instrument per IAS 32, Financial
Instruments: Presentation. IAS 32 para. 28 requires separation of the equity and liability components. This has not been done in the financial statement extracts of
BathKitz.
The liability component should be measured first at the present value of the capital and interest payments.
The discount rate used should be the prevailing market
interest rate for an instrument with the same terms and conditions except for the ability to convert to shares. At the date of issue the value of the liability is therefore:
