Leases

Question 1

Lessee

Answer 1

• user of the asset
• under IFRS lease always capitalized and recognized as an ROU asset and lease liability

Question 2

ROU Asset initial measurement

Answer 2

• initially recognized at cost, which includes:
• initial measurement of lease liability
• any payments made on or before commencement date
• any direct costs incurred by lease
• estimated costs at end/termination of lease (dismantle/removal costs of asset)

Question 3

Lease liability

Answer 3

• initially measured at PV of all future payments

Question 4

Future payments (for lease liability)

Answer 4

• fixed lease payments (regular interval payments)
• variable payments that are dependent on an index or rate (inflation rate) (variable payments are payments that vary depending on some future circumstance (rate or future event not included in initial measurement))
• exercise price of reasonable BPO (BPO is an option at the end to allow the lessee to purchase the asset at a bargain)
• guaranteed RV (guaranteed RV is the lessee guarantees to the lessor that they can sell the asset for at least the RV, if not guaranteed it is not included in initial measurement) (unguaranteed RV is when there is no guarantee of the value at the end of the leasure)
• termination penalties is expected to be paid

Question 5

Non-lease components

Answer 5

• non-lease component costs are excluded from lease liability value unless otherwise told to

Question 6

BPO in PV formula

Answer 6

BPO = FV if there is one, otherwise FV = 0

Question 7

ROU asset subsequent measurement

Answer 7

1) cost model (most common)
2) revaluation model
3) FV model (investment property only)

Question 8

Cost model

Answer 8

• measure at cost less depreciation
• must depreciate over useful life if ownership transferred at the end
• DR. dep exp. , CR. acc. dep - ROU asset

Question 9

Lease liability subsequent measurement

Answer 9

1) cost model
2) revaluation model
- lease liabilities recorded when paid (DR. lease liability, CR. cash)
- each year interest expense on the lease obligation should also be recognized (DR. int. exp., CR. lease liability)

Question 10

Interest expense when Payment due at beginning of year

Answer 10

• interest expense = the balance of obligation at the end of the PY - CY payments x interest rate used to record lease

Question 11

Interest expense when payment due at the end of the year

Answer 11

• interest expense = lease obligation at the end of the year before payment x interest rate used to capitalize lease

Question 12

When there is a change to future lease payments

Answer 12

• the change in value is discounted and revised to lease liability and ROU asset

Question 13

When lease for less than 1 year, and low value: payments can be expensed if…

Answer 13

• asset of low value when new
• the lessee can benefit from the use of asset on its own with available resources
  AND
• the lease assets is not highly integrated/dependent with other assets

Question 14

Derecognition

Answer 14

• lease terminates and asset returned to lessor (Dr. acc. dep - ROU asset, CR. ROU asset)
• lease terminates and asset returned and residual guarantee (DR. acc dep - ROU asset, CR. ROU asset & DR. lease liability, DR/CR G/L on derecognition, CR. cash)
  -lease agreement extended with new terms (remeasure and adjust current balances)
• transfer to lessee when BPO has no payment at end (DR. asset, DR. acc dep- ROU asset, CR. ROU asset)
• transfer to lessee when BPO to be paid (DR. lease liability, CR. cash)

Question 15

Disclosures

Answer 15

• depreciation and interest expense of ROU asset
• expenses relate to short term/low value leases expensed
• additions to ROU assets
• G/L on sale leasebacks
• details of lease agreement (terms, restrictions, commitments, nature of activities, termination, etc)

Question 16

Lessor POV of recording lease

Answer 16

1) operating lease
2) financing lease

Question 17

Financing lease if…

Answer 17

• title transfer to lessee at end of lease
• BPO exists and at commencement date it is reasonably assured to be exercised
• lease terms that gives the lessee all of the economic benefits derived from asset
• PV of minimum lease payments = FV of asset (or substantively equals)
• asset is specialized and only the lessee can use without modifications

Question 18

If financing lease criteria not met

Answer 18

= operating lease

Question 19

financing lease – initial recognition

Answer 19

DR. lease receivable
DR. COGS
CR. revenue
CR. inventory (net)

Question 20

Financing lease – when payments received

Answer 20

DR. cash
CR. lease receivable

Question 21

Financing lease – interest income recorded each year

Answer 21

• if payment due at the beginning of year: balance of lease receivable at the end of the PY - CY payment x implicit rate
• if payment due at the end of the year: lease receivable at PY before payment x implicit rate
• DR. lease receivable, CR. interest income

Question 22

Operating lease

Answer 22

• no asset recorded
• recorded CY payments to income
• if prepayment at beginning of year, record as obligation and lower each time payment received/revenue recognized

Question 23

Financing lease – derecognition

Answer 23

• if title transfer/BPO used: lease receivable is derecognized
• if asset returned: G/L recognized

Question 24

Sale and lease back

Answer 24

Please see notes in note book

Question 25

Disclosures

Answer 25

• financing lease: lease income, significant changes, maturity and analysis, details of agreement
• operating lease: lease income, undiscounted payments to be received for the next 5 years and remaining after, details of agreement

Question 26

IFRS vs ASPE

Answer 26

Please see notes in note book