8. Leases Flashcards
What is a lease?
A contract conveys the right to use an asset for a period of time in exchange for consideration
What is an operating lease?
A lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset
What is a finance lease?
A lease that transfers substantially all the risks and rewards incidental to ownership of an asset
What are the 5 situations which would normally lead to a lease being classified as a finance lease?
- Ownership is transferred at the end of the lease
- The lessee has the option to purchase the asset at a price below fair value that is likely to be exercised
- The lease term is a major part of the UEL
- The PV of the payments amounts to almost the fair value
- Specialised lease asset
What is the substance of a finance lease transaction?
The lessor is providing the lessee with an asset and a loan to finance its purchase
What is the entry in the lessor’s financial statements at the commencement of the lease?
Dr Lease Receivable - Net investment in the lease
Dr Cash (any deposit/first payments made)
Cr Asset
Cr P&L balancing figure
How is the net investment in the lease calculated?
PV of future lease payments + discounted unguaranteed residual value
What are the entries for lease repayments/interest?
Dr Receivable Int %
Cr Finance Income Int %
Dr Cash Instalment
Cr Receivable Instalment
What is the substance of an operating lease transaction?
The lessor rents out an asset for a limited period of time, keeping the risks and rewards
How are operating lease payments recognised in the financial statements of the lessor?
As income on a straight line basis over the lease term
How is the asset treated in an operating lease?
Remains in the SFP of the lessor
How are direct costs incurred in obtaining an operating lease treated by the lessor?
Added to the carrying amount of the asset in the SFP and recognised as an expense over the lease term
