How To Do Leases

Question 1

If payments at the start of the year

Answer 1

Then do liability - payment = balance

Then interest of that balance

Question 2

Payments at end of year

Answer 2

Initial liability then + interest based on initial liability - payment

Equals liability at end of year

Question 3

Step 1

Answer 3

Initial lease liability

Discount factor x payment

Do for each year

Add all up to get present value of initial liability for the lease payments due after commencement

Question 4

Step 2

Answer 4

Organise into

Year. /Liability b/f /payment /balance / interest / liability end of year

(Payments at start of year )

And

Year / liability b/f / interest / payment / liability c/f / CL / NCL

Initial liability + (Initial liability x interest rate ) - payment (since lease payments are paid at year end so interest accrues on the liability before subtracting the payment

To work out CL you take away the finance charge for the next away from the yearly payment

NCL is the liability cf from the next year

Question 5

Step 3

Answer 5

Initial asset = initial liability + payment before/at commencement

Depreciation over shorter of useful life and lease term

Initial asset / useful life or lease term = dep per annum

Question 6

Step 4 entries into financial statement

Answer 6

SOFP

Non current assets

• Right to use assets at cost (value of initial asset from Step 3) same for all years
• Accumulated depreciation year one = annum dep, year two annum dep x 2 etc
• NBV - right to use asset - accum dep = NBV per year

- lease liability 
Non current (step 2) list values 

Current (step 2) list values

Add cl and ncl

PL

Expenses :
Depreciation on right to use assets - just the figure for annum dep, list as same for every year. Eg yr1 53 yr 2 53 yr 3 53 etc

Finance cost (interest on rugby to use leases )
(Step 2) - list the interest values for each year

Question 7

Issues with IAS 17

Answer 7

Two types of lease

Finance lease - “transfers substantially all the risks and rewards of ownership” to lessee

Risks
Carrying out repairs, insuring asset, risk of idle time losses, risk of technological obsolence

Rewards
Use of asset

Operating lease - any other lease

Question 8

Accounting treatment for lessee

Answer 8

Operating lease :

No asset or liability

Snow payments as an expense

Finance lease :

Asset

Liability

Businesses prefer to show assets under operating lease to avoid having liability in their accounts as liability has a detrimental effect on gearing

Legal form - legally the lessor owns the asset so why should it be shown as an asset in the lessees balance sheet m

Substance over form - if the lessee is borrowing to acquire the asset, but does this in the form of a lease instead of taking a loan and then buying the asset, the commercial reality of the transaction is a liability and asset for the lessee