Week 6 Everything

Question 1

Lease

Answer 1

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.

Question 2

For accounting purposes there are some issues with leases

Answer 2

1. Who is the asset’s owner?
2. Who has the control over the asset?

A firm may recognise assets it does not own as long
as it is able to control their use

Question 3

A lease exists when

Answer 3

the customer controls the use of the underlying asset throughout the period of use

Question 4

A lease exists when the customer controls the use of the underlying asset throughout the period of use, meaning that the customer:

Answer 4

obtains substantially all of the economic benefits from the use of the identified asset throughout the period of use

directs the use of the asset through the period of
use, which means the customer has the ability to
change how, and for what purpose, the asset is used
during the contractual term.

Question 5

Lease contracts: key terms

Answer 5

With the lease contract a supplier (LESSOR) conveys the right to use an asset to a customer (LESSEE) in exchange for consideration (LEASE PAYMENTS) throughout a period of time (LEASE TERM).

Question 6

Lessor

Answer 6

The individual/firm providing the asset and receiving a payment at established dates

Question 7

Lessee

Answer 7

The individual/firm acquiring the right to use the asset and having an obligation to pay the lessor at established dates

Question 8

Lease payments

Answer 8

Fixed payments + (if included in the lease contract) residual value guarantee and/or price of a purchase option

Question 9

Lease term

Answer 9

The period for which a lessee has the right to use the underlying asset, from the
commencement date of the contract.

Question 10

Can the right-of-use the asset acquired under the lease contract be considered an asset?

Answer 10

Right to use machinery during the lease term. It is a legally enforceable right established by the lease contract. It arose as a result of a past event (delivery following signing of the lease contract). It will result in future economic benefits

Therefore an asset

Question 11

Can the obligation to make lease payments in the future be considered a liability?

Answer 11

Obligation to pay rentals. It is a legally enforceable obligation
established by the lease contract. It arose a result of a past event (delivery following signing of the lease contract. It will result in an outflow of economic benefits (cash).

Therefore an liability

Question 12

AASB16

Answer 12

An entity shall recognise assets and liabilities arising from a lease

Question 13

ALL LEASES are represented in

Answer 13

the statement of financial position

With 2 exemptions:

1) Leases with a duration of 12 months or less
2) Leases of low value assets (tablets, phones, etc…)

Question 14

AASB117 (the old one) was criticised because:

Answer 14

1) Many leases were not represented on the entity’s balance sheets;
2) The accounting model failed to meet the needs of users of financial statements;
3) The requirements for recognition of leases were too complicated.

Question 15

AASB16 is an improvement because:

Answer 15

1) ALL LEASES are represented in the statement of financial position (only with 2 exemptions)
2) Reduced complexity of application

Question 16

The core principle of the new accounting standard is

that

Answer 16

an entity shall recognise assets and liabilities arising from a lease “to ensure that lessees and lessors provide relevant information in a manner that faithfully represents those transactions.”

Question 17

AASB16 requires assets and liabilities to be recognised for all leases of more than 12 months, with:

Answer 17

the asset being of the nature of a ‘right-of-use asset’ that provides a right to use the leases asset for the term of the lease

the liability would be for lease payments that are economically unavoidable over the lease term

Question 18

When is a lease contract recognised?

Answer 18

At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.

Question 19

Commencement date is defined as:

Answer 19

The date on which a lessor makes an underlying asset available for use by a lessee.

Question 20

Accounting for leases by the lessee

Answer 20

2 photos 11/4/19

Question 21

How are the ‘lease liability’ and the ‘right-of-use asset’ measured?

Answer 21

The amount of the lease liability is based on the future
payments required by the lease agreement. We are calculating the VALUE TODAY of the cash flows pertaining to FUTURE years, which is called PRESENT VALUE

Question 22

What is present value?

Answer 22

The value of 1 $ today (present value) is more than the value of a $ at a future date. The reasons are several: time value of money, inflation, uncertainty/risk about future cash flows. Every receipt or payment is calculated as a VALUE TODAY, even though it is received or paid in the FUTURE, by DISCOUNTING the receipt or payment using an interest (discount) rate which takes into consideration time value of money, risk etc.

Question 23

The lessee shall measure the right-of-use asset at

Answer 23

COST

Question 24

The lessee shall measure the right-of-use asset at COST.

The cost comprises:

Answer 24

(a) The initial lease liability
(b) any lease payments made at or before the commencement date
(c) any initial direct costs incurred by the lessee
(d) an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset

Question 25

A leased asset is treated like other PPE assets and is depreciated by the lease term or the useful life. If the asset is going to be purchased by lessee at the end of the lease, the economic life is to be used to calculate depreciation

Answer 25

The lease liability is treated like other financial liabilities, it generates interest expense and requires principal repayments.

Question 26

Accounting for leases by the lessee

Answer 26

Each period the lease asset needs to be depreciated (like other property, plant, and equipment)

Question 27

Accounting for leases by the lessee

General Principle

Answer 27

If the lessee is not going to retain the asset at the end of the lease term the leased asset shall be depreciated over the life of the lease. If the lessee is expected to retain the leased asset at the end of the lease term (perhaps by way of making an additional payment) then the leased asset shall be depreciated over its expected useful life

Question 28

Subsequent measurement – Lease liability

Answer 28

11/4/19 3 photos

Question 29

The exemption: leases of 12 months or less

Answer 29

lessees do not need to recognise lease assets and liabilities

the lessee shall simply recognise the lease payments as an expense.