Chapter 12 - Leases

Question 1

What is a lease?

Answer 1

contract that conveys the rights to use an underlying asset for a period of time in exchange for consideration

Question 2

What is the lessor?

Answer 2

the entity that provides the right to use an underlying asset in exchange for consideration

Question 2

What payments would be included when recognising a lease liability?

Answer 2

• fixed payments
• amounts expected to be paid under residual value guarantees
• options to purchase that are reasonably certain to be exercised
• Termination penalties if lease term reflects expectation that they will be incurred

Question 2

What is a right of use asset?

Answer 2

represents a lessee’s right to use an underlying asset for the lease term

Question 2

What is the lessee?

Answer 2

entity that obtains the right to use an underlying asset in exchange for consideration

Question 3

What does a lease term comprise of?

Answer 3

• non-cancellable periods
• periods covered by an option to extend the lease if reasonably certain to be exercised
• periods covered by an option to terminate the lease if these are reasonable certain not to be excerised

Question 3

How do we recognise a lease liability?

Answer 3

• at present value of payments not yet made that will probably be made.

Question 3

How is the table laid out for lease payments made in arrears?

Answer 3

Balance b/f. Interest. paid. balance c/f

Question 3

How do we recognise right-of-use asset?

Answer 3

Recognise at cost, which equals:
- initial value of lease liability
- payments made at or before commencement
Together with any acquisition costs normally capitalised, such as:
- initial direct costs
- estimated costs of asset removal or dismantling as per lease conditions

Question 3

What is the double entry for cash payments that reduce the lease liability?

Answer 3

Dr Lease Liability
Cr Cash

Question 3

How is the subsequent measurement of the right-of-use asset measured?

Answer 3

unless another model is chosen then the cost model. cost - acc depn and impairement losses

Question 3

The increase of the liability by the interest charge is recorded how?

Answer 3

Dr Finance Costs (SPL)
Cr Lease Liability

Question 3

How is the table laid out for payments made in advance?

Answer 3

Balance b/f Paid. Net. Interest. Balance c/f

Question 4

The asset is depreciated if what?

Answer 4

• if ownership transfers to the leassee at the end of the lease, over the remaining useful life of the asset
• if ownership does not transfer to the leassee at the end of the lease, over shorter of the lease term and useful life of the asset

Question 5

If lease payments are made in advance when are they made?

Answer 5

start of the year, so must be deducted before calculating interest

Question 6

What happens if the initial liability is based on the present value of future lease payments

Answer 6

there will be no lease payment in the first year

Question 7

If lease payments are made in arrears, they are made when?

Answer 7

made at the end of the year, so interest must be calculated, and added to the liability before deducting the lease payment

Question 8

If the lease is short-term (12 months or less at the inception date) or of a low value how can it be recognised?

Answer 8

lessee can choose to recognise the lease payments in profit or loss on a straight line basis.

Question 9

How is the annual expense in the SPL calculated for a short term lease?

Answer 9

total lease payments over the life of the lease / total lease period

Question 10

If a company enters into a lease part-way through the year, how do we recognise it?

Answer 10

we will need to time apportion

Question 11

How is the lease liability shown in the SFP?

Answer 11

split between its current and non current elements

Question 12

How is the non current element calculated?

Answer 12

by calculating the liability remaining immediately after next year’s lease payment

Question 13

What is the accounting treatment if a transfer is not a sale?

Answer 13

Continue to recognise as asset
Recognise a financial libaility equal to proceeds received

Question 14

What is the accounting treatment if a transfer is a sale?

Answer 14

De-recognise the asset.
Recognise a right-of-use asset as the proportion of the previous carrying amount that relates to the rights retained.
Recognise a lease liability at F.V of lease payments.
P or L on disposal

Question 15

how is the right-of-use asset calculated?

Answer 15

(lease liability/sale proceeds) x carrying amount of asset