Leases

Question 1

What does IFRS 16 relate to?

Answer 1

IFRS 16 relates to leases which are defined as:
A contract that conveys the right to use an underlaying asset for a period of time in exchange for consideration.

Question 2

What should be recognised in the financial statements at the start of a lease?

Answer 2

Lease Liability - being the present cash value of lease payments not yet made, this will include:

• Fixed payments
• Amounts for residual value guarantees.
• Option to purchase at the end of the lease term.
• Termination penalties - if expected to be incurred.

Right of use asset - at cost = initial value of the lease plus any payments made at or before commencement, this will include acquisition costs that are normally capitalised:

• Initial direct costs
• Estimated costs of removal/dismantling pre lease agreement.

Question 3

How is the lease liability subsequently measured?

Answer 3

Generally the lease liability will increase by interest cost and decrease by payments made. Care must be taken when calculating to identify if payments are in advance or arrears;

Arrears = Bal b/f + Interest - Payments = Bal c/f

Advance = Bal b/f - Payments = Net + interest = Bal c/f

Question 4

How is a right of use asset subsequently measured?

Answer 4

Unless another model is indicated the asset is measured using the cost model = Cost less accumulated depreciation.

The period of depreciation will be:

• Over remaining useful life - if ownership transfers at the end of the lease term.
• Over the shorter of lease term and useful asset life - if ownership does not transfer at the end of the lease term.

Question 5

What about leases for low value or short periods of time?

Answer 5

The may be recognised using simplified treatment:

• Lease for less than 12 months - Recognise as an expense to the SPL
• Low value but for more than 12 months - charge as an expense over the period of the lease.
  
  • Annual lease expense = Total rentals payable/total lease period.

Bear in mind the annual lease expense may need to be time apportioned if the lease starts part way through a period.

The difference between calculated expense any payments made will need to be accrued.

Question 6

How is sale and lease back of an asset dealt with?

Answer 6

To identify the correct treatment consider which entity has control of the asset?

Sale - Lease term is for less than the useful life of the asset, sale value is greater than the carrying value, performance obligations have been met (revenue)

If the criteria above are not met then it is not a sale.

Question 7

What is the accounting treatment if the sale & lease back is to be recognised as a sale?

Answer 7

The asset will need to be de recognised, a right of use asset set up, lease liability recorded and the gain/loss on disposal recorded.

• De recognise Asset at carrying value
• Recognise lease liability at fair value of lease payments.
• Value of right of use asset = (lease liability/sales proceeds) x carrying amount
• Gain on disposal will be the balancing figure.

Question 8

How is the transaction recognised if the Sale and lease back is not a sale?

Answer 8

The consideration received will be recognised as a financial liability, any interest will be charged to the SPL as financing costs.

Question 9

What about operating leases with a rent free period?

Answer 9

Operating leases are expensed over the life of the lease, but may need to be time apportioned if the lease commences part way through a period.