Chapter 12 Leasing

Question 1

Finance leases (IAS 17)

Answer 1

A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset (to the lessee). Title may or may not be eventually transferred.

Question 2

IAS 17 identifies 5 situations normally classified as a finance lease.

Answer 2

1. The lease transfers ownership of the asset to the lessee at the end of the lease term.
2. The Lessee has the option to purchase the asset at a price sufficiently below fair value at exercise date, that it is reasonably certain the option will be exercised.
3. The lessee term is for a major part of the economic’s life even if title is not transferred.
4. Present value of minimum lease payments (PVMLP) amount to substantially all of the asset’s fair value at inception.
5. The leased asset is so specialised that it could only be used by the lessee without major modifications being made.

Question 3

Accounting treatment

Answer 3

DR: PPE
CR: Finance lease liability account

The leased property is capitalised at

1. Fair value of leased asset or (if lower)
2. Present value of minimum lease payments

Question 4

Depreciating the asset

Answer 4

Depreciation must be provided on the asset:

DR: Depreciation (P/L)
CR: Asset (accumulated depreciation) (SOFP)

The asset must be depreciated over the shorter of the:

1. Lease term
2. Useful life of the asset

Question 5

Statement of financial position

Answer 5

Non-current assets
Included in the carrying amount of plant and equipment is $ in respect of assets held under finance leases.
The balance remaining needs to be split between current liabilities and non-current liabilities.

Question 6

Statement of profit or loss and other comprehensive income

Answer 6

Disclosed in the notes to the statement of profit or loss and other comprehensive income:

Finance costs $
Finance charge on finance leases X

Depreciation on assets held under finance leases X

Question 7

Operating lease (IAS 17)

Answer 7

An operating lease is a lease other than a finance lease.

Question 8

Accounting treatment

Answer 8

Rentals recognised as an expense in profit or loss on a straight line basis over the lease term unless some other systematic basis is representative of the time pattern of the user’s benefit.

Question 9

Sale and leaseback transactions

Answer 9

Accounting treatment

1. Finance lease
   Substance that there was no sale

DR: Cash
CR: Finance lease liability

Any profit or loss (sales price - carrying amount) is deferred and amortised over the lease term.

2. Operating lease
   If sale proceeds = fair value
   Recognise any profit/loss immediately.

If sale proceeds < fair value
Recognise any profit/loss immediately unless the loss is compensated by future rentals at below market price (defer and amortise over period asset is expected to be used).

If sale proceeds > fair value
Defer excess over fair value and amortise over period asset expected to be used.
The operating lease rentals would need to be split between fair market rental and the repayment of the loan plus interest.

If fair value < carrying amount recognise the impairment loss (CV-FV) immediately.