12. Leases

Question 1

What is a lease?

Answer 1

• A contract or part of a contract
• That conveys the right to use an asset for a period of time
• In exchange for consideration

Question 2

Who is the lessor?

Answer 2

The entity that provided the right to use the asset in exchange for consideration

Question 3

Who is the lessee?

Answer 3

The entity that obtains the right to use an asset in exchange for consideration

Question 4

What is a right of use asset?

Answer 4

The lessee’s right to use an underlying asset for the lease term

Question 5

What are the two things the lessee should recognise at the commencement of a lease?

Answer 5

• A lease liability

- A right of use asset

Question 6

How should a lease liability be initially measured?

Answer 6

Present value of the lease payments not yet paid

Question 7

What should lease payments include? 4 things

Answer 7

• Fixed payments
• Amounts expected to be paid under residual value guarantees
• Options to purchase the asset that are reasonable and certain to be exercised
• Termination penalties, if lease term expects that these will be incurred

Question 8

What is a residual value guarantee?

Answer 8

When the lessor is guaranteed that the underlying asset at the end of the lease term will not be worth less than a specified amount.

Question 9

If the discount rate cannot be determined then what rate should the entity use?

Answer 9

The incremental borrowing rate

The rate at which it could borrow funds to purchase a similar asset

Question 10

How do we initially measure a right of use asset?

Answer 10

At cost

Question 11

What does the initial cost of a right of use asset comprise of?

Answer 11

• The amount of the initial measurement of the lease liability
• Lease payments made at or before the commencement date
• Any initial direct costs
• The estimated costs of removing or dismantling the underlying asset as per the conditions of the lease.

Any incentive payments received by the lessee are deducted from the initial value of the right-of-use asset.

Question 12

What does the length of a lease term comprise of?

Answer 12

• Non-cancellable periods
• Periods covered by an option to extend the lease if reasonably certain to be exercised
• Periods covered by an option to terminate the lease if these are reasonably certain not to be exercised.

Question 13

How do we recognise short term low value assets on lease?

Answer 13

In profit or loss on a straight line basis

Question 14

What is the guide amount for low value assets?

Answer 14

$5000

Question 15

Give four examples of low value assets

Answer 15

• Tablets
• Small personal computers
• Telephones
• Small items of furniture

Question 16

When can we simplify the lease treatment?

Answer 16

When its 12 months or less

Question 17

Does an old product that is now low value count as a low value item under IFRS 16?

Answer 17

Nope