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Group 1: Section 22.

4 provides that a puttable instrument is a financial instrument that gives

the holder the right to sell that instrument back to the issuer for cash or another financial asset
or is automatically redeemed or repurchased by the issuer on the occurrence of an uncertain
future event or the death or retirement of the instrument holder. Our question is, will a provision
for automatic redemption related to an uncertain future event, which can be influenced by the
company, satisfy the uncertain future event condition for a puttable instrument to be classified
as equity? For example, the company issued preference shares redeemable only if the
company's operating income falls below a certain level. The company's operating income is
partly controllable and partly uncontrollable by the company. In other words, to be considered as
an equity security, should the future uncertain event be 100% uncontrollable?
A: It should be pondered upon in Sec 22.4 (a) that a financial instrument that meet the
definition of a liability are classified as equity because they represent the residual
interest in the net asset of the company. To answer the question, it should be noted the 5
enumerated points in Sec 22.4 (a). When all of the following criteria were met, then the
puttable instrument would be considered as equity. Therefore, the redeemable
preference share is still a liability if the points pointed out in Sec 22.4 are not met.
Group 2: How do we determine an onerous operating lease?
The definition of an onerous operating lease is A contract in which the unavoidable
costs of meeting the obligations under the contract exceed the economic benefits
expected to be received under it.

Unavoidable Costs- least net cost of exiting from the contract (lower of the Cost of
fulfilling it versus Penalties arising from failure to fulfill it
Economic Benefits- normally the net cash inflows from operational use of the leased
This is outside the scope of Section 20-Leases of IFRS for SMEs. IAS 37 also has no
detailed guidance or indicators to assist in the identification process. Accordingly,
entities should apply the onerous contract definition on a case-by-case basis.

Group 3: Paragraph 20.17 states that "The gross investment in the lease is the aggregate of:
(a) the minimum lease payments receivable by the lessor under a finance lease, and (b) any
unguaranteed residual value accruing to the lessor." It has been common practice that in
determining the gross investment in a lease any residual value is added to the amount of gross
rentals. Is this practice in contradiction with what the standard states?
A: No. A guaranteed residual value is the value of the asset at the end of its life that the lessee
or a third party assures. If the asset is worth less than this amount, the lessee must pay the
lessor the difference between the GRV and the actual residual value. In effect, GRV is
considered part of minimum lease payment.

Group 5: What is the alternative approach (please show Journal Entries) of recognizing and
measuring relevant accounts in the finance lease? i.e. if lease receivable is measured at net
investment rather than gross, how would the Journal Entries amounts change (referring to your
examples in the handouts)?
A: Relevant accounts (i.e. lease receivable or payable) in a finance lease can be
recognized either at net or gross investment. The amounts ultimately recognized should
be the same under either approach. The following journal entries are applicable for the
net investment approach:
Lease Receivable
Leased Equipment
first payment:
Lease Receivable
Interest Income
Leased Equipment
Lease Liability
first payment:
Leased Liability
Interest Expense




Group 6: (a) In our discussion on leases during 114.2, the general practice was that once
indirect costs were paid by the lessor, one had to interpolate the new discount rate to equate the
cash flows. Is this situation any different for accounting for Leases for SMEs?
A: Indirect costs are expensed as incurred so they do not affect the implicit rate. Initial
direct costs for direct finance lease paid by the lessor are added to net investment,
resulting in a decrease in the implicit rate. To determine the new rate, we have to
interpolate. But for sales type lease, since initial direct costs are expensed, there will be
no change in the implicit rate.