IFRS16 - Leases

Question 1

Finance Lease

Answer 1

Initial Recognition

Question 2

Lessor Accounting: Finance Lease

Answer 2

Classified as a finance lease if one or more apply:

• Transfers substantially all the risks and rewards associated with the asset to the lessee
• Lessee has the option to purchase the asset < expected fair value.
• Reasonably certain the option will be exercised.
• Present value of the lease payments amounts to all of the fair value of the asset.
• Specialised assets that can only be used by the lessee without major changes.
• Cancelled lease - Lessee compensates Lessor
• Gains and losses from fluctuations in the fair value falls on the lessee.
• Lessee can continue the lease for a secondary period for a rate substantially lower than market value.

Notes:

• Asset de-recognised in financial accounts
• Lease receivable is recognised as the right to receive payments from the lessee.

Initial Recognition

Question 3

Lessor Accounting: Operating Lease

Answer 3

Classified as a finance lease if does not fit finance lease criteria.

• Risk and rewards have not been transferred over to the lessee ( i.e. responsibility for maintenance)
• Option for purchase at end of lease is not
• Asset remains in financial statements and payments are recognised as rental income in SPL

Question 4

Lessor accounting: Finance Lease Recognition

Answer 4

Initial Recognition - Net Investment Value (NIV)

• Fixed Payments
• Index or rate dependent variable payments at the lease commencement date (@ implicit rate of interest)
• Residual value guarantees
• Unguaranteed residual values
• Purchase options that are reasonably certain to be exercised
• Termination penalties.

Initial Recognition Journal Entries

Dr Lease Receivable x,xxx (NIV)
Cr PPE x,xxx (NBV of asset)
(Dr) / Cr P/L x,xxx (Balancing Value)

NIV - NBV = Balancing Value (Loss Dr) / Gain Cr

Subsequent Recognition
To calculate the remaining receivables balance will require a table

Bal b/f + interest % - (Payments amount) = Bal c/f.

Subsequent Recognition Journal Entries
Dr Cash [Payments Amount]
Cr Lease Receivable

Question 5

Lessor Accounting: Operating Lease Recognition

Answer 5

Initial Recognition

• Leave asset in the SFP
• Recognise the lease payments as income on the P/L in a straight line basis over the lease term.
• Any costs in negotiating the lease are added to the underlying asset.
• Asset depreciated as normal in accordance with IAS16 - PPE.

Subsequent recognition
How much lease income to recognise each year?
- [(annual payments * lease term)+ one-off payments] / Lease term = annual recognition.

Dr Cash - Cash received in period
Cr P/L Lease Rental - Income (Annual Recognition)
Cr Deferred Income - Balancing value

Recognise depreciation
Dr Depreciation
Cr Accumulated Depreciation