What rights does a lease give?
If a lease agreement essentially gives the parties rights and obligations similar to those arising from a legal purchase, then the accounting proceeds as if it were a legal purchase. This gives rise to a fixed asset and an obligation.
What is a lease?
They are controllability, future economic benefits and reliable measurement
What are the two categories of a lease.
-Financial lease
-Operating lease
What is a financial lease?
A lease is considered a finance lease when it transfers substantially all the risks and rewards incidental to ownership of an asset.
What is a operating lease?
An operating lease was a lease other than a finance lease.
Why did the IASB introduce IFRS 16?
(1) to ensure that a company’s assets and liabilities were more faithfully represented,
(2) to increase transparency and
(3) to improve comparability between companies that lease and companies that borrow to buy assets.
What is the commencement date of a lease?
The commencement date of the lease contract is the date on which the lessor makes an underlying asset available for use by a lessee.
How does IFRS 16 define a lease?
IFRS 16 defines a lease contract as follows: a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for some time in exchange for consideration.
Why is it essential to distinguish four items in the definition of recognition of a lease?
1) an entity has the right to control the use of
(2) an identified asset
(3) for some time in exchange for
(4) a consideration.
What happens when a contract or element of a contract qualifies as a lease?
he lessee has to recognize a right-of-use asset and a lease liability in their books at the commencement date of the lease. The right-of-use asset will be recognized at initial recognition at cost in the books of the lessee.
What does the cost of the right-of-use asset compromise?
- the amount of the initial measurement of the lease liability
- any lease payments made at or before the commencement date, less any lease incentives received
- any initial direct costs incurred by the lessee and
- an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease unless those costs are used to produce inventories.
Which amounts needs to be included in the present value of the lease payments to determine the lease liability?
- fixed payments, less any lease incentives receivable
- variable lease payments that depend on an index or a rate (e.g. payments linked to the consumer price index, a benchmark interest rate, change in market rentals), initially measured using the index or rate as at the commencement date
- amounts expected to be payable by the lessee under residual value guarantees (from the viewpoint of the lessee, the guaranteed residual value is that part of the residual value which is guaranteed by the lessee or by a party related to the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable))
- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option
- payments or penalties for terminating the lease if the lease term reflects the lessee exercising an option to terminate the lease.
What happens after the commencement date of the lease contract?
After the commencement date of the lease contract, i.e. after initial recognition, the right-of-use asset shall be measured at cost less (a) any accumulated depreciation and any accumulated impairment losses and (b) adjusted for any remeasurement of the lease liability.
What are the two exceptions for using the cost model by lease contracts?
- If the leased asset qualifies as an investment property.
- When the leased asset relates to a class of property, plant and equipment to which the lessee applies the revaluation model.
Where doe the period consist of when it relates to the lease term?
The non-cancellable period of a lease together with both: (a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise that option and (b) periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.
