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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
asset
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:
Lessor
inception:
Lease Receivable
1,584,950
Leased Equipment
1,584,950
first payment:
Cash
Lease Receivable
Interest Income
Lessee
inception:
Leased Equipment
Lease Liability
first payment:
Leased Liability
Interest Expense
Cash
500,000
341,505
158,495
1,584,950
1,584,950
341,505
158,495
500,000
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.