What is a lease?
A contract that conveys the right to use an underlying asset for a period of time in exchange for consideration
What is the definition of a lessor?
The entity that provides the right-of-use asset and, in exchange, receives consideration
What is the definition of a lessee?
The entity that obtains use of the right-of-use asset and, in exchange, transfers consideration
What is the definition of a right-of-use asset?
The lessee’s right to use an underlying asset over the lease term
How does IFRS 16 leases require a lessee to recognise a lease?
Recognise an asset and a liability unless the lease is short term or of a minimum value
When does a contract contain a lease?
The right to control the use of an identified asset for a period of time in exchange for consideration
What must a contract give the customer?
The right to substantially all of the identified asset’s economic benefits or the right to direct the identified asset’s use
How do you recognise a lease liability?
Fixed payments + variable payments, amounts expected to be paid
How do you recognise a right of use asset?
Initial value of the lease liability + deposits + direct costs + removal costs
What does the lease term compromise of?
Non-cancellable periods, periods covered by an extension or termination
What is the definition of a finance lease?
Where the risks and rewards of the underlying asset substantially transfer to the lessee
What is the definition of a operating lease?
Lease that is not a finance lease
When is a lease a finance lease rather than a operating lease?
- Ownership transfers
- Option to purchase
- Lease term is the major part of the assets economic life
- Present value of the lease payments amounts to substantially all of the fair value of the asset
- Specialised asset
How does a lessor account for an operating lease?
Operating lease on a straight line basis over the lease term
How does a lessor account for a finance lease at inception?
Present a receivable, should be equal to net investment in the lease
How do you calculate the net investment is the present value?
- Fixed payments, variable payments, residual value guarantees, unguaranteed residual values, termination penalties
How should a seller-lessee record a transfer if its not a sale?
Continue to recognise asset, and recognise a financial liability equal to proceeds received
How should a seller-lessee record a transfer if it is a sale?
Recognise the asset, recognise a right-of-use asset as the proportion of the previous carrying amount, recognise a lease liability