week 4

Question 1

Finance lease

Answer 1

A lease that transfers substantially all the risks and rewards incidental to ownership of an asset (equivalent to having transferred the control over the asset to the lessee).

Question 2

what part of AASB provides indicators that a lease transaction is classified as a financial lease

Answer 2

AASB 117 paragraphs 10 and 11

Question 3

5 guidelines provided by AASB 117 paragraphs 10 and 11

Answer 3

1. Lease is non-cancealleable
2. Ownership of lease transferred at the end of lease term
3. Lease term major part of leased asset’s economic life
4. PV of MLP is substantially all of the fair value of the leased asset
5. Lease arrangement is such that substantially all the risks and rewards incidental to wonership is transferred to the lessee

Question 4

cancellable leases with the following characteristics are deemed to be non-canceallable:

Answer 4

1. cancelled only upon the occurrence of some remote contingency (Mary Smith can return the computer only if damaged in an earthquake)
2. only cancelled with the permission of the lessor
3. lessee, upon cancellation, is committed to enter into a further lease for the same or equivalent asset with the same lessor (Mary Smith can return the computer provided she agrees to lease another computer instead of the current one)
4. large penalty is imposed on cancelleation

Question 5

why is cancealleability of lease an indicator

Answer 5

locks both parties into the agreement and ensures that the exchange of risks and rewards will occur.

A lease from which both parties or either party could walk away at any time may result in only a limited transfer of risks and rewards.

Question 6

when might there be a reasonable expectation at lease inception date that the lessee will purchase the asset

Answer 6

when there is a favourable purchase option clause at the end of the lease term

In this case, the lessee effectively holds the asset for all (or the balance remaining) of the asset’s economic life

Question 7

Lease term is major part of economic life of leased asset

describe

Answer 7

If expected benefits were receivable evenly over the asset’s useful life, it would be argued that the lease arrangement is for the major part of the asset’s life; that is, a major part of the benefits associated with the asset have been transferred to the lessee.

Question 8

present value of the minimum lease payments substantially all of the fair value of the leased asset?

describe

Answer 8

a major part of the benefits associated with the asset has been transferred to the lessee.

the fair value of the asset measures the present value of the total benefits associated with the asset. (Future rewards available to user)

The minimum lease payments represent payments for benefits transferred to the lessee. This test therefore indicates the proportion of benefits being paid for by the lessee.

Question 9

Minimum lease payments include:

Answer 9

• the rental payments
• the bargain purchase option (term where lessee can purchase the asset at the end of the lease for a pre-set amount, significantly lower than expected residual)
• • the guaranteed residual.

Question 11

Contingent rent

Answer 11

Not included in MLP

Additional payments made when a certain event occurs

e.g. increased rent payment when rented car drives on unsealed roads

Question 12

reimbursement of costs paid by lessor

Answer 12

excluded from MLP

a charge for using the asset, and a charge to reimburse the lessor for executory expenses paid on behalf of the lessee

Question 13

direct financing lease

Answer 13

lessor provides the financial resources to acquire the asset.

Lessor typically acquires the asset, giving the lessor legal title, then enters a lease agreement to lease the asset to the lessee, who subsequently controls the asse

financier lessors, the lessor acquires the asset from the manufacturer/dealer at fair value and then enters into a lease arrangement with the lessor.