5/26/2017

Outcomes
Effective 1 Leasing is an important activity for many entities.
January It is a means of gaining access to assets, of
2019 obtaining finance and of reducing an entity's
exposure to risks of asset ownership.

LEASES – Lessee • Explain the scope of IFRS 16;

Accounting • Describe and apply the definitions
with regard to leases;
IFRS 16 • Classification of a lease;
• Account for a lease in the records
of a lessee and
• Account for a lease in the books of
a lessor. (next week)

Leases: the topic Main Features

 Quite topical in practice, especially finance leases:
will have to deal with this often
 Also in your personal life: car bought by way of
finance lease (able to calculate pmt, etc.)
 Will now really learn the functionality of the
financial calculator
 Very NB topic! Often examined
 Question possibilities:
• Theory question: classify between finance lease
or operating lease (lessor accounting)
• Application (journals, disclosure)
• Integrated with other topics
 IFRS 16 introduces a single lessee accounting
model and requires a lessee to recognise assets
and liabilities for all leases with a term of more
than 12 months, unless the underlying asset is of
low value.
 The new lease accounting standard (IFRS 16) will
require lessees to bring most leases onto their
statement of financial position.
 A lessee is required to recognise a right-of-use
asset representing its right to use the underlying
leased asset and a lease liability representing its
obligation to make lease payments.

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Main Features… Objective of IFRS16

 A lessee measures right-of-use assets similarly to
other non-financial assets (such as PPE) and lease
liabilities similarly to other financial liabilities. To ensure that lessees and lessors:
 Assets and liabilities arising from a lease are • provide relevant information
initially measured on a present value basis. • for users to assess the effect that
 As a consequence, a lessee recognises leases have on
depreciation of the right-of-use asset and interest
on the lease liability, and also classifies cash • the financial position,
repayments of the lease liability into a principal • financial performance and
portion and an interest portion and presents
them in the statement of cash flows applying IAS • cash flows of an entity.
7 Statement of Cash Flows.

IFRS 16 set out the principles

Recognition Exemptions
for:
Examples?
• Short-term leases
• Leases for which the underlying asset is of low Identifying

value
For such leases, the lessee shall recognise the lease
Recognition
payments associated with those leases as an
expense on either a straight-line basis over the lease
term or another systematic basis. Measurement
Meaning, the lease costs will be accounted for in the
same way as operating leases are accounted for • Initial
today. • Subsequent

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When do a contract Accounting of a Lease

contains a lease? At inception of
Initial
recognition
dt
In a nutshell: the journal entries come down to:
“Right-of-use “ Asset Asset measured
contract, assess at PV of lease
whether contract is cr Long-term liability pmts
or contains a lease.
A contract is, or contains, a lease
if the contract: dt Depreciation
cr Accumulated depreciation
 conveys the right to control the Subsequent
measurement
use dt Long-term liability
 of an identified asset for a dt Finance charges
cr Bank – finance lease installment
 period of time
 in exchange for consideration.

But, before you can process the Identification of a lease in

initial recognition, the following contract – parB9-B33 No
needs to be determined first: Identified asset?

Yes

1. Lessee obtains No
 Does the contract contains a lease Identify and classify - par9 the econ benefits
No lease
Right to control Yes
 Commencement date When – par22 the use 2. Lessee directs the No
use of asset

 Amounts to be recognised How calculated – par 23-46 Yes

Contract is or contains a
lease

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Identified asset? 1. Lessee obtains the

Par B14-B15 economic benefits
 Explicitly specified in contract or par B21-B23
 Implicitly specified at the time made available
for use Has the customer the right to:
• However, even if asset is specified, lessee doesn’t
control the use if lessor has a substantive right to
 obtains substantially all of the
substitute the asset for an alternative asset economic benefits from use of asset
throughout the period of use. throughout the period of use
• Substantive - if lessor has practical ability to
substitute asset Includes primary output,
• And would benefit economically by exercising its by-products and other
economic benefits
right

2. Lessee directs the use 2. Lessee directs the use…

par B24-B30 par B24-B30
Question:
• Lessee has the right to direct the how and
for what purpose the asset is used; or Can a lessee change how and for what
• if the decisions about how and for what is purposes the asset is used throughout the
predetermined and
period of use?
- lessee has the right to operate the asset,
lessor has no right to change those operating Decision making rights Supplier’s Protective rights
instructions; or
• Right to change the type of output produced by • Rights to protect personnel
- lessee designed the asset in a way that asset • To ensure compliance with laws
predetermines how and for what purpose. • Rights to change when output is produced and regulations
• Rights to change where the output is produced • Scope of customer’s right of use

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Commencement date Amounts to be recognised

Initial recognition and measurement
• The date on which a lessor makes an
Dt “Right-of-
asset available for use by a lessee use” asset
Ct Lease liability

• the lease term starts Par 23-25 Par 26-28

 Then you start to recognise Lease liability

+
Present value of
lease payments
Initial direct cost
+
pp
Prepaid lease payments, less Present value of
any lease incentives received expected fixed
+ payment at end of
Estimated future cost lease

In calculating PV of lease pmt, Subsequent measurement

consider the following: par 29-38
• Payments to receive –
• Lease term – par18-21 and B34-41 “right of use asset” Lease liability
Measurement according
• Discount rate Fixed payments less lease incentives
+ to • Measured @
amortised cost
Variable lease pmts depending on index/rate IAS 16 and model
+ adopted Meaning that
Residual guarantees
- cost or revaluation • Minimum lease
+ When does payments
Exercise price of purchase option by lessee depreciation start? apportioned
or
+ Period of depreciation between finance
Use implicit i or incremental Payments for termination of lease IAS 40 – fair value model (beware )
borrowing rate if the former charges and
Non–cancellable period (enforceable period) and reduction of
not practically determinable
+ Must apply IAS 36 outstanding
Optional renewable periods liability
+
Periods after optional termination date

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Subsequent measurement Subsequent measurement par

29-38
dt Depreciation According to measurement model
and depreciation policy calculated
cr Accumulated depreciation
in accordance with IAS16 & 40 In the second year a company do not:
Reassess the lease liability
and Par 36- 38

dt Lease liability
Apportioned between finance lease modifications
dt Finance charges charge and reduction in
cr Bank – lease installments outstanding liability

Example Suggested solution

On 1 January 2009, UNAM Ltd entered into a five year
lease agreement over a machine. Lease payments are I = 11
N$ 40 000 per annum in arrears and the guaranteed PMT = 40 000
residual value at the end of the lease term is N$ 55
FV = 55 000
000. The interest rate implicit in the lease is 11% per
annum. The asset is assumed to have a useful life of N=5
five years and a residual value of N$ 55 000. Comp PV= (180 475)
Marks for
Required: all inputs
in test!
Prepare the journal entries of UNAM Ltd for the years
ended 20.9 and 20.10.

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Suggested solution… Suggested solution…

Journal entries:
Amortisation Table
Yr Op bal Interest Capital Cl. bal
01/01/2009:
1. 180 475 19 852 20 148 160 327 Dr Right of Use Asset 180 475
2. 160 327 17 636 22 364 137 963 Cr Lease Liability: Machine 180 475
3. 137 963 15 176 24 824 113 139 (Acquisition of the machine and the related liability)
4. 113 139 12 445 27 545 85 584
5. 85 584 9 414 30 586 54 998

Suggested solution… Suggested solution…

31/12/2009 How will the answer differ if
question stated:
Dr Lease Liability: Machine 20148 Diminishing balance method?

Dr Interest expense 19 852 31/12/2009

Cr Bank 40 000 Dr Depreciation expense: 25095
(Payment of instalment) Cr Accumulated depreciation 25 095
(180 475 – 55 000)/5 yrs
(Depreciation for the year)

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Suggested solution… Suggested solution…

31/12/2010 31/12/2010
Dr Lease Liability: Machine 22 364 Dr Depreciation expense: 25095
Dr Interest expense 17 636 Cr Accumulated depreciation 25 095
Cr Bank 40 000 = N$ (180 475 – 55 000)/ 5 yrs
(Payment of instalment) (Depreciation for the year)

Presentation Disclosure
par 47-50 par 51-60

Statement of Financial Position Objective of disclosure for leases:

- “Right-of use” asset separate from other assets  To disclose information in the notes that
- Lease liability separate from other liabilities
gives a basis for users of financial
Statement of Profit or Loss and Other Comprehensive Income
statements to assess the effect that leases
- Interest expense on lease liability (component of finance
cost)
have on financial statements.
- Depreciation charge
Do not duplicate information that is
Statement of Cash flow However!!! already presented elsewhere in the
- Cash payments for principal part financial statements.
- Cash payments for interest part