Leases

Question 1

Off balance sheet financing

Answer 1

A borrower can raise finance without showing any associated liability on the balance sheet

Published financial statements may not provide a true and fair representation of the underlying activity of the company

Companies may prefer to show leases as operating rather than finance because the omission of liabilities make the ratios look better

Question 2

Issues with IAS 17

Answer 2

IFRS 16 prevents businesses hiding lease liabilities by removing the distinction between operating and finance leases for lessees. All leases assets are shown as right to use asset with the corresponding liability

There are two exceptions for this - short term leases - leases of low value assets

Question 3

An election can be made for

Answer 3

Short term leases - no longer than 12 months

Leases of low value assets - on absolute (personal computers example)

Elect not to have a right to use asset and lease liability, instead payments are shown as an expense spread over the term
Of the lease

Question 4

Lessors accounts

Answer 4

The rules under IAS17 have been incorporated into IFRS16 for lessors.

Finance lease
- initial receivables = PV or lease payments receivable
Payments received - these are divided into finance income and amounts reducing receivables

Operating lease = asset in balance sheet, dep as usual
Payments received are income in profit and loss

Question 5

IFRS16 definition of a lease

Answer 5

“ a 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 6

Aims of IFRS16

Answer 6

IFRS16 was developed jointly by the IASB and the US Financial Accounting Standards Board to replace the IAS17.

Aim: provide a more faithful representation (fundamental qualitative characteristic of CF) of the lessee’s financial position and provide greater transparency in the financial statements

It must be used for accounting period starting on or after 1 Jan 2019

Question 7

Right to use asset

Answer 7

Valued at cost which includes:

Initial lease liability
Lease payments at/before commencement of lease
Initial direct costs to lessee
Estimated cost to lessee of dismantling the asset at the end of the lease and restoring the site as required by the lease

Question 8

Lease liability

Answer 8

PV of lease payments due after commencement

Use interest rate implicit in the lease