12. Leases

Question 1

Leases: Definition

Answer 1

1. Substantially all economic benefits
2. identified asset
3. Right to direct its use
   (Even with restrictions)

Question 2

Leases: When would a customer not have the right to use an identified asset?

Answer 2

Possible & economically beneficial to provide alternative

Question 3

Leases: What might an agreement be if it isn’t a lease?

Answer 3

Contract for a service

Question 4

Leases: At start of lease: Treatment: Lease liability

Answer 4

Present value of payments not made:

1. Fixed payments

2. Residual value guarantees
3. Expected purchase options
4. Expected termination penalties

Question 5

Leases: At start of lease: Treatment: ROU asset

Answer 5

At cost

1. Initial value

2. Pre-commencement payments
   (E.g. deposit, advance payment)
3. Initial direct costs
4. Estimated removal costs per conditions

Question 6

Leases: Journal to record a ROU asset

Answer 6

DR ROU Asset

CR Lease liability
(PV of payments not yet made)

(CR Cash/Payables)
(initial costs etc.)

(CR Provision)
(Dismantlement etc.)

Question 7

Leases: Lease term length calculation

Answer 7

1. Non-cancellable periods

2. Expected extension/reduction

Question 8

Leases: Lease payments: How are they discounted?

Answer 8

Interest rate implicit in lease

If unavailable:
Lesee’s incremental borrowing rate

Question 9

Leases: Calculating lease liability: In arrears: Table (horizontal)

Answer 9

1. B/f
2. Interest accrued
   (Finance costs)
3. Payment
4. C/f

Question 10

Leases: Calculating lease liability: In advance: Table (horizontal)

Answer 10

1. B/f
2. Payment
3. Balance
4. Interest accrued
   (Finance costs)
5. C/f

Question 11

Leases: Calculating lease liability: In arrears: Where to put initial lease liability?

Answer 11

Year one B/f

Question 12

Leases: Calculating lease liability: In arrears: Where is TOTAL liability?

Answer 12

Year one C/f

Question 13

Leases: Calculating lease liability: In arrears: Where is NON-CURRENT liability?

Answer 13

Year 2 c/f

Question 14

Leases: Calculating lease liability: In advance: Where to put the initial lease liability?

Answer 14

Year 1 balance
(First 2 are empty)

Question 15

Leases: Calculating lease liability: In advance: Where is TOTAL liability?

Answer 15

Year 1 C/F

Question 16

Leases: Calculating lease liability: In advance: Where is non-current liability?

Answer 16

Year 2 Balance
(Last 2 are empty)

Question 17

Leases: Calculating lease liability: Rule for finding NCL for both arrears and advance?

Answer 17

Balance to the right of payment (in 2nd year)

Question 18

Leases: Calculating lease liability: What if payments not annual?

Answer 18

Each line is a period (e.g. quarter)

Question 19

Leases: Deposit: DE

Answer 19

DR ROU Asset

CR Cash

Question 20

Leases: Incentives (received before/on commencement) treatment?

Answer 20

Deducted to arrive at initial asset figure

Question 21

Leases: How is the asset depreciated?: Ownership doesn’t transfer at end of lease

Answer 21

Over SHORTER of:

1. Lease term
2. Useful life

Question 22

Leases: How is the asset depreciated?: Ownership does transfer at end of lease

Answer 22

Over useful life

Question 23

Leases: is a ROU asset subject to an impair review?

Answer 23

Yes

Question 24

Leases: IF lease part of a revalued class of asset: Which value is relevant?

Answer 24

FV of ROU
(Not underlying asset’s FV)

Question 25

Leases: Short-term (less than 12m) leases: Treatment

Answer 25

CHOICE for simplified treatment: Expense lease payments on straight-line basis

Question 26

Leases: Where do you present the ROU?

Answer 26

Either separately or as part of PPE

Question 27

Leases: Disclosures:

Answer 27

1. Depn' charge for ROUs 2. Finance cost on LLs 3. (Short-term low value lease expenses) 4. Total lease cash outflow 5. ROU additions 6. ROU carrying amount by class (if not on face)

Question 28

Leases: Low value lease: Treatment E.g. computers, small office furniture, phones (No specific value given)

Answer 28

Same as short leases

Question 29

Leases: Sale and leaseback: How to decide if a sale is made?

Answer 29

Generally a sale Exception: Lessee has substantive right to *repurchase* asset

Question 30

Leases: Sale and leaseback: No sale: Treatment

Answer 30

1. Continue to recognize asset 2. Recognize financial liab for proceeds received

Question 31

Leases: Sale and leaseback: No sale: DE

Answer 31

DR Cash CR Loan (secured)

Question 32

Leases: Sale and leaseback: Yes sale: Treatment

Answer 32

1. Derecongise asset 2. Reconise ROU asset 3. Reconise a lease liability 4. Note profit/loss on disposal

Question 33

Leases: Sale and leaseback: Yes sale: Treatment: What to recongise the new ROU asset as?

Answer 33

The *proportion* of *previous carrying amount* that relates to rights *retained*

Question 34

Leases: Sale and leaseback: Yes sale: DEs: (proceeds at FV - will always be for exam)

Answer 34

DR cash CR PPE DR ROU asset CR Lease liability **DR/CR Loss/Profit on disposal** (*Balancing figure)

Question 35

Leases: Sale and leaseback: Yes sale: DEs: What is the cash amount?

Answer 35

Proceeds

Question 36

Leases: Sale and leaseback: Yes sale: DEs: What is the PPE amount?

Answer 36

Carrying amount

Question 37

Leases: Sale and leaseback: Yes sale: DEs: What is the ROU amount?

Answer 37

Carrying amount X (Lease Liability / Fair value = Proceeds)

Question 38

Leases: Sale and leaseback: Yes sale: DEs: What is the Lease liability amount?

Answer 38

PV of lease payments

Question 39

Leases: Sale and leaseback: Yes sale: DEs: What is the profit/loss amount?

Answer 39

BALANCING FIGURE

Question 40

Leases: UK GAAP differences: Operating lease DE

Answer 40

DR Fixed asset (depreciate) CR Finance lease liability (Same as with ROU)

Question 41

Leases: UK GAAP differences: Operating lease amount

Answer 41

Lower of FV (cash) and PV of minimum lease payments