Leases

Question 1

What were the three main issues with IAS17 - Leases

Answer 1

Off balance sheet reporting - only saw a rental payment, no liability or asset

Understanding the risk - no liability shown, understanding the gearing or risk is unclear

Comparability - Operating lease not on BS vs a finance lease which was

Question 2

What are the three elements to determine the scope requirements of IFRS 16 - Leases

Answer 2

All a matter of professional judgement

1. Is there an identified asset without substitution rights
2. Does the lessee assume substantially all the economic benefits of the assets
3. Lessee directs the use of the asset

SAD - Subs, All Benefits, Directs Use

Question 3

What are the exemptions for Lease reporting?

Answer 3

If lease length < 12 months

If low value (

Question 4

How do we account for leases?

Answer 4

Present value of the minimum lease payments (both actual and variable rates based on an indexed rate)

Right of use asset and balancing operating / finance lease liability

If discount factor not given, use average cost of incremental borrowing to the business

Question 5

When do we include an optional period?

Answer 5

When there is a substantial incentive to take the option (i.e. a nominal / much reduced payment at the end)

Consider all the facts and circumstances

Question 6

How do we account for a lease with lease and non-lease components

Answer 6

Account for the two separately unless you don’t want to (they may be unsubstantial, cost may be disproportionate to the relevance they add to the financial statements)

Question 7

How do we treat leases subsequently

Answer 7

Write off the asset over its useful life through depreciation. Deal with liability through amortise cost (Discount Factor X Closing Liability)

If the future payments go up, adjust the liability in the year of change

Question 8

How do we present leases?

Answer 8

Balance Sheet

• Right of Use Asset
• Lease Liability

Income Statement

• Depreciation
• Interest Charge

Disaggregation required either on face of the accounts or in the notes to the accounts

Question 9

What is the disadvantages of leases on the financial statements

Answer 9

Increase cost in the earlier years
Increased gearing (banking covenants at risk)
Interest cover (Operating Profit vs Finance Charges)

Question 10

How does the lessor account for a lease they have leased out?

Answer 10

If Finance Lease then the PV of the Minimum Lease Payments, Sale of Asset

Operating Lease - Rental Income and Keep Asset on the Balance Sheet

Question 11

How do we deal with a sale and leaseback agreement?

Answer 11

First we need to understand the substance, has a sale occurred? If so;

Derecognise the asset
Recognise a right of use Asset
Recognise a gain or loss on disposal

If not;

Dr Cash, Cr Liability , no impact on existing asset