Week 6 Everything Flashcards
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.
For accounting purposes there are some issues with leases
- Who is the asset’s owner?
- 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
A lease exists when
the customer controls the use of the underlying asset throughout the period of use
A lease exists when the customer controls the use of the underlying asset throughout the period of use, meaning that the customer:
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.
Lease contracts: key terms
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).
Lessor
The individual/firm providing the asset and receiving a payment at established dates
Lessee
The individual/firm acquiring the right to use the asset and having an obligation to pay the lessor at established dates
Lease payments
Fixed payments + (if included in the lease contract) residual value guarantee and/or price of a purchase option
Lease term
The period for which a lessee has the right to use the underlying asset, from the
commencement date of the contract.
Can the right-of-use the asset acquired under the lease contract be considered an asset?
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
Can the obligation to make lease payments in the future be considered a liability?
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
AASB16
An entity shall recognise assets and liabilities arising from a lease
ALL LEASES are represented in
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…)
AASB117 (the old one) was criticised because:
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.
AASB16 is an improvement because:
1) ALL LEASES are represented in the statement of financial position (only with 2 exemptions)
2) Reduced complexity of application
The core principle of the new accounting standard is
that
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.”
AASB16 requires assets and liabilities to be recognised for all leases of more than 12 months, with:
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
When is a lease contract recognised?
At the commencement date, a lessee shall recognise a right-of-use asset and a lease liability.
Commencement date is defined as:
The date on which a lessor makes an underlying asset available for use by a lessee.
Accounting for leases by the lessee
2 photos 11/4/19
How are the ‘lease liability’ and the ‘right-of-use asset’ measured?
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
What is present value?
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.
The lessee shall measure the right-of-use asset at
COST
The lessee shall measure the right-of-use asset at COST.
The cost comprises:
(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
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
The lease liability is treated like other financial liabilities, it generates interest expense and requires principal repayments.
Accounting for leases by the lessee
Each period the lease asset needs to be depreciated (like other property, plant, and equipment)
Accounting for leases by the lessee
General Principle
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
Subsequent measurement – Lease liability
11/4/19 3 photos
The exemption: leases of 12 months or less
lessees do not need to recognise lease assets and liabilities
the lessee shall simply recognise the lease payments as an expense.
