Lease

Question 1

What is the lease?

Answer 1

• is a contract, or part of a contract, that conveys the right to use an asset ( the underlying asset) for a period of time in exchange for consideration.

Question 2

Who is the lessor?

Answer 2

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

Question 3

Who is the lessee?

Answer 3

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

Question 4

What is the right-of-use?

Answer 4

• represents the lessee’s rights to use an underling asset for the lease term

Question 5

What is the basic principle lessee accounting?

Answer 5

At the commencement of the lease, the lessee should recognise a lease liability and a right-of-use asset.

Question 6

What is an initially measure of the lease?

Answer 6

• is initially measured at the present value of the lease payments that have not yet been paid.

Question 7

What should include be included in lease payments?

Answer 7

• fixed payments
• amounts expected to be payable under residual value guarantees
• options to purchase the asset that are reasonably certain to be exercised
• termination penalties, if the lease term reflects the expectation that these will be incurred

Question 8

What is a residual value guarantee?

Answer 8

• is when the lessor is guaranteed that the underlying asset at the end of the lease term will not be worth less than a specified amount

Question 9

What can compromise the initial cost of the right-of-use asset?

Answer 9

• the amount of the initial measurement of the lease liability
• lease payments made at or before the commencement date
• any initial direct costs
• the estimated costs of removing or dismantling the underlying asset as per the conditions of the lease

Question 10

When calculating the initial value of the liability, the lessee must consider the length of the lease term, what can compromise the lease term?

Answer 10

• 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 are reasonably certain not to be exercised

Question 11

Journal entry for interest

Answer 11

DR Finance costs (SPL)
CR Lease liability (SFP)

Question 12

Journal entry for cash repayment

Answer 12

DR Lease liability
CR Cash

Question 13

Right-of-use asset is measured

Answer 13

• asset is measured at its initial cost less accumulated depreciation and impairement losses

Question 14

Calculation of depreciation?

Answer 14

• if ownership of the asset transfers to the lessee at the end of the lease term then depreciation should be charged over the asset’s useful life
• otherwise, depreciation is charged over the shorter of the useful life and the lease term

Question 15

Example of low value assets

Answer 15

• tablets
• small personal computers
• telephones
• small items of furniture

Question 16

If transfer is not a sale?

Answer 16

• the seller-lessee continues to recognise the transferred asset and will recognise a financial liability equal to the transfer proceeds

Question 17

If transfer is a sale

Answer 17

• the seller-lessee must measure the right-of-use asset as the proportion of the previous carrying amount that relates to the rights retained
• (fair value of lease liability/sale proceeds) x previous carrying amount