IFRS 16- LEASES

Question 1

what are the advantages of leasing vs buying?

Answer 1

-payments are spread over the years
-may be cheaper than borrowing costs if u take loan
-easier to upgrade/ replace

Question 2

what is the scope of IFRS 16?

Answer 2

Applies to all leases except specific standards ones eg. leasing biological assets. covered in IAS 41

Question 3

define
LEASE
RIGHT OF USE ASSET
INTEREST RATE IMPLICIT IN THE LEASE
FAIR VALUE
SHORT TERM LEASE
UNDERLYING ASSET
LEASE TERM

Answer 3

Lease – a contract for the right to use an asset for a period of time.

Right-of-use asset – The asset being used by the lessee

Interest rate implicit in the lease
– this is the rate of interest at which the PV of the lease payments is calculated
AND also
-PV of residual value equals
-the internal rate of return of the lessor’s cash flows.

Fair value – the amount for which an asset could be exchanged, or liability settled, between knowledgeable, willing parties in an arm’s-length transaction.

Short-term lease – a lease that has a lease term of 12 months or less. A lease with a purchase option is not a short-term lease.

Underlying asset – an asset that is the subject of a lease.

Lease term – the non-cancellable period for which a lessee has the right to use an underlying asset.

Question 4

at what point is a lease inception considered real and assessed?

Answer 4

the earliest of:
-date of lease agreement
-date of parties’ committment to the main terms and conditions of lease

Question 5

how can we tell if a contract is a lease or contains a lease?

Answer 5

criteria: if the contract conveys the right to control the use of an identified asset in exchange for a consideration.

identified asset: if the supplier of asset has the right to substitute the asset (except when necessary, like repair) the asset will not be IDENTIFIED. so it wont meet the criteria.

right to control: means the entity has the right to:
-direct the use of the asset (marzi) - if bus route is predetermined in contract then right to control isnt there
-the entity receives the economic benefit

Question 6

what are the components of a lease contract?

Answer 6

-may have more than one lease component
-may have non lease components

if there is more than one lease component, they are combined and considered in total.

Question 7

what are the components of a lease contract?

Answer 7

-may have more than one lease component
-may have non lease components

if there is more than one lease component, they are combined and considered in total.

Question 8

what is the accounting treatment of a lease?

Answer 8

a right of use asset is recognised
a lease liability is recognised

Question 9

what is the single accounting model?

Answer 9

it means all leases are FINANCE LEASES- recognised on balance sheet (unless there is an exception)

Question 10

what are the exceptions for single accounting model?

Answer 10

single accounting model may not be applied if:
-it’s a short term lease
-it’s a low value asset (when new) (5000 usd)
It is then called operating lease

Question 11

what happens if entity elects to exempt from finance lease and choose operating lease instead?

Answer 11

in this case, rental agreement are recognised in PnL on a straight line or some other basis.
no asset or liability is recognised other than premayment or accruals.

Question 12

how is the lease liability initially and then subsequently measured in the FS?

Answer 12

initially, the liability is measured at the present value of all future lease payments.

future lease payments include:
-fixed payments
-variable payments
-purchase options if reasonably certain to exercise it
-penalty of ending contract earlier if expecting to be paid

SUBSEQUENTLY:
LIABILITY IS INCREASED BY UNWINDING OF DISCOUNT
AND DECREASED BY LEASE PAYMENTS MADE.

https://www.youtube.com/watch?v=oN8Xd5V5m2Q&ab_channel=OpenTuition

study hub 14.3.3

Question 13

what is the initial and subsequent measurement of right of use asset?

Answer 13

initial measurement includes:
-liability amount
-any payment made before lease commenced
-direct costs incurred by the lessee (installation cost)
-estimated cost to dismantle asset for which provision is made.

SUBSEQUENT:
-if we are reasonably certain that we will not own asset in the end, we will depreciate the lease over the shorter of:
-useful life
-lease term

if we are reasonably certain that we will own asset in the end, we depreciate it over its useful life.

if its an asset that is usually revalued, co. may choose to apply revaluation model on it.
if it’s an investment property, it also MUST be on revaluation model.

Question 14

what is a sale and leaseback arrangement?

Answer 14

this is when a lessee sells an asset to a leasing company/ lender. then leases it from them.

Question 15

what is the criteria for sale according to IFRS 16?

Answer 15

it is a sale when the lessee:
-recognises cash received
-derecognises asset sold
-recognises lease liability
-recognises right of use asset
-recognises the gain or loss on the asset transferred

Question 16

how is gain or loss on asset transferred in a sale or leaseback arrangement calculated?

Answer 16

first we allocate the carrying amount.

step 1) carrying amount * initial lease liability / fair value of the asset

check 14.4.2

Question 17

what happens when the transfer does not qualify for a sale?

Answer 17

the parties account for it as a financing transaction.
-the seller continues to recognise the asset in SOFP
-the “proceeds” are recognised as a liability
-lease payments are treated as loan payments
-the buyer doesnt recognise the underlying asset.
-buyer recognises a financial asset.

Question 18

what disclosures are required in SOFP according to IFRS 16?

Answer 18

-Right of use asset should be shown separately in SOFP or disclosure notes.
-A ROU asset that is investment property should be shown with other owned investment properties
-lease liability should be shown separately in SOFP or disclosure notes, and separated into current and non current liabilities (IAS1)

Question 19

what disclosures are required in PnL according to IFRS 16?

Answer 19

Must disclose that:
-depreciation of ROU and Rent payments for short term and low cost asset are expensed as operating costs
-Interest related to ROU is included in Finance costs.

Question 20

what disclosure is required in cash flow statement?

Answer 20

-Repayment of the capital element of a lease is classified under financing activities.
-Interest paid may be classified as an operating or financing cash flow (IAS 7).
-Payments relating to short-term leases and low-cost assets are classified as an operating cash flow.

Question 21

what should be disclosed and why?

Answer 21

Extensive disclosure requirements allow users of financial statements to assess how leases affect financial performance, financial position and cash flows. Disclosures include:

Depreciation of right-of-use assets;
Interest expense on lease liabilities;
Expense relating to short-term leases and lease of low-cost assets; and
Any gains or losses on sale and leaseback contracts.
Disclosures should also include qualitative information such as the nature of leasing activities and any restrictions or covenants included in leasing contracts.