Topic 4 - Accounting for Leases Flashcards
Define the term lease.
- a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
Define the term underlying asset.
- an asset that is the subject of a lease, for which a right to use that asset has been conveyed to a lessee
(this must be a SPECIFIC asset)
Define the term lessor.
- an entity that enters into a contract to provide the right to use an underlying asset for a period in exchange for consideration
Define the term lessee.
- an entity that enters into a contract to obtain the right to use an underlying asset for a period of time in exchange for consideration
Define the term lease “commencement date”.
- the date on which the lessor makes the underlying asset available to the lessee
Define the term lease term.
- the non-cancellable period for which the lessee has the right to use the underlying asset:
· PLUS any extension options IF the lessee is reasonably certain to exercise the option
· MINUS any early termination options IF the lessee is reasonably certain to exercise the option
When must the leases of assets and liabilities be recognised and where?
Define the term lease liability.
- the present value of all unpaid unavoidable lease payments that will be made by the lessee during the lease term
The lease asset (“right-of-use-asset”) is the total of:
-
-
-
-
- the recorded lease liability, PLUS
- all lease payments made at/before the commencement date, PLUS
- all initial indirect costs incurred by the lessee, PLUS
(all costs that are ONLY incurred due to the lease)
- all costs incurred for dismantling/removing/returning the underlying asset (usually estimated)
The following items are unavoidable lease payments unless they are paid on (or before) the commencement date:
1.
2.
3.
4.
5.
The discounting of unavoidable lease payments use:
1.
2.
- The interest rate implicit in the lease, OR (if this rate is not identifiable)
- The incremental borrowing rate of the lessee
What is the exemption for a lease that exists for the lessee?
If an exemption exists, how may the lessee recognise the lease payments?
- recognise the lease payments as expenses
- may choose to apply the normal capitalisation rules and recognise the lease payments on the balance sheet
How does the lessee recognise the payment of interest during the lease period?
How does the lessee recognise the (re-)payment of the principal (lease liability reduction)?
- recognised as the difference between total lease payment (excluding reimbursement of costs to the lessor) MINUS interest expense for the period:
REMEMBER!!
- the payment made by the lessee may include reimbursement of costs incurred by the lessor, this component is NOT part of the actual lease payment
Write the journal entry for how a lessee would recognise the commencement of a finance lease.
Write the journal entry for how a lessee would recognise the annual lease payment including interest.
How are assets depreciated by the lessee?
Write the journal entry for how a lessee records depreciation of a leased asset.
Differentiate between the carrying value of the asset and the lease liability for the lessee.
The exemption for leases allows lessees to avoid the capitalisation of lease assets/liabilities, and to treat lease payments as expenses if:
- the lease is for a period of 12 months or less
- the lease is for a “low value” item
Write the journal entry for how a lessee would recognise the exemption of lease payments as expenses in each period.
How does a lessor distinguish between an operating and a finance lease?
What is the main consideration indicating the existence of a finance/operating lease?
What are the other 3 considerations indicating the existence of a finance/operating lease?
The lease receivable of the lessor is calculated in the same way as the lessees’ lease liability:
Finance leases from a lessor’s perspective could be classified as a direct finance lease.
Define this term.
Finance leases from a lessor’s perspective could be classified as a manufacturer or retailer lease.
Define this term.
The valuation of a lease receivable is recognised in the statement of financial position of the lessor.
What is a lease receivable equal to?
For direct finance leases, how is the amount of interest received with each payment calculated?
(manufacturer/retailer lease is the same)
For direct finance leases, how is the amount by which the lease receivable is reduced with each payment calculated?
(manufacturer/retailer lease is the same)
Write the journal entry for how to record:
- the purchase of an asset that will be leased
- -* the recognition of lease contract
- the recognition of lease payment
What is included in the sales transaction of a manufacturer/retailer lease?
The lease receivable for a manufacturer/retailer lease is equal to:
-
-
Write the journal entries for a manufacturer/retailer lease for:
- Sale of the asset from the entity to itself and inception of the lease
- Recognition of lease payment
Write the journal entry for the recognition of ongoing lease payments of an operating lease.
