Leases - Lessor

Question 1

Finance lease

Answer 1

Transfer substantially all the risks & rewards incidental to ownership of an underlying asset

Question 2

Operating lease

Answer 2

Does not transfer substantially all the risks & reward incidental to ownership of an underlying asset

Question 3

Gross method

Answer 3

• Gross investment account (GI)
• Unearned finance income (ufi)

Question 4

Net method

Answer 4

Net investment (NI)

Question 5

If manufacturer or dealer
Recognition

Answer 5

Recognition: Installments received represents revenue
- Sales revenue
- Interest revenue

Question 6

Finance leases:
If the lessor is a manufacturer or dealer
Measurement: Sales revenue

Answer 6

Measured at lower of fair value of the asset or the present value of the minimum lease payment

• Any costs incurred in negotiating lease simply expensed of the time that the sales revenue is recognised

Question 7

Finance leases:
If the lessor is a manufacturer or dealer
Measurement: Interest income

Answer 7

Should be measured at the rate implicit in the agreement

Question 8

Finance leases
If the lessor is not a manufacturer or a dealer
Recognition – the installments received represent:

Answer 8

-The cost of the asset disposed of; and
-Finance income – only one type of revenue is recognised, being interest income.

Question 9

Finance lease
If the lessor is not a manufacturer or a dealer
Measurement

Answer 9

-Interest income should be measured at the rate implicit in the agreement;

-Any costs incurred in securing or negotiating the lease are included in the calculation of the implicit interest rate thus decreasing the interest income over the period of the lease.

Question 10

Finance lease
Tax implications

Answer 10

• Lessor is deemed owner:
  *the asset has a tax base
• the lessor is allowed tax deductions
• Deferred tax as the assets CA = 0

Question 11

S23A Limitation

Answer 11

• Tax allowance on machinery/ plant are to taxable lease income
• Doesn’t apply to building allowance

Question 12

Operating lease
Recognition

Answer 12

• Risks & reward not transferred
  -Lessor keeps the asset on his books & recognition:
• Cost incurred on the lease expenses over the period
• Straight line: lease installments as income over the period

Question 13

Operating lease
Measurement

Answer 13

• Cost like depreciation & impairment are measured in terms of the revelant standard
• Initial direct cost is added to the leased asset & thereby be expensed as the leased asset is expensed