Leases

Question 1

IFRS 16 def of a lease

Answer 1

“ contract that conveys the right to use an asset… for a period of time in exchange for consideration”

Lessor (legal owner) —-> lessee (right to use )

Question 2

IFRS 16

Answer 2

Aim:
Provide a more faithful representation of the lessee’s financial position and provide greater transparency in the financial statements

Must be used for accounting periods starting on or after 1 jan 2019

Question 3

Lessee’s accounts : initial measurement

Answer 3

Recognise

1) right to use asset and
2) a corresponding liability

Right to use asset
Valued at cost which includes:
1) initial lease liability
2) lease payments at/ before commencement of lease (deposit)
3) initial direct cost to lessee
4) estimated cost to lessee of dismantling the asset at the end of the lease and restoring the site as required by the lease

(Note : fair value is not used (was under IAS17 - this is consistent with the valuation of other non current assets at cost )

Lease liability :
Present value of lease payments due after commencement
Use interest rate implicit in the lease

Right to use asset :
Cost less Accumulated depreciation less impairment losses

Depreciation - over the shorter of the remaining useful life and the period of lease

If ownership passes to the lessee at the end of the lease,use useful life (if the asset belongs to a class where the revaluation model is used, use this instead )

Lease liability :
Each payment has two elements :
- reduction to the liability
Payment|
- finance charge - cost of borrowing, and expense. Same interest as for measuring the liability

Question 4

Steps

Answer 4

1) calculate initial lease liability
2) calculate interest and subsequent lease liability
3) calculate the asset and depreciation
4) entries in financial statements

Question 5

Issues with IAS 17

Answer 5

Under ias 17 there were two types of lease :

Finance lease
“
Transfer substantially all the risks and rewards of Ownership “ to lessee