Scribd
Upload
45 views4 pages

Chapter 5 - Leases (IPK)

Uploaded by

Ramesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
45 views4 pages

Chapter 5 - Leases (IPK)

Uploaded by

Ramesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

IPK COLLEGE

1664, JALAN KULIM, 14020 BUKIT MERTAJAM, PENANG


TEL : 012-5203212 / 0125113212 / 04-5512588
www.ipk.edu.my

___________________________________________________________________________________________________________________

CHAPTER 4: LEASES (IFRS 16)

IFRS 16 Leases is to be adopted for accounting periods starting on or after 1 January 2019. It
can be adopted earlier but only if the entity has already adopted IFRS 15 Revenue from
contracts with customers.

The new standard on leases is replacing the old standard (IAS 17) where the existence of
operating leases meant that significant amounts of finance were held off the balance sheet. In
adopting the new standard all leases will now be brought on to the statement of financial
position, except in the following circumstances:

๏ leases with a lease term of 12 months or less and containing no purchase options – this
election is made by class of underlying asset; and
๏ leases where the underlying asset has a low value when new (such as personal computers or
small items of office furniture) – this election can be made on a lease-by-lease basis.

The accounting for low value or short-term leases is done through expensing the rental through
profit or loss on a straight-line basis.

Example 1 – Low-value assets

Banana leases out a machine to Mango under a four year lease and Mango elects to apply the
low-value exemption. The terms of the lease are that the annual lease rentals are $2,000
payable in arrears. As an incentive, Banana grants Mango a rent-free period in the first year.

Explain how Mango would account for the lease in the financial statements.

Subject: Financial Accounting and Reporting II (BBAA1023) Page 1 of 4


Prepared by N.Thacharyane
Email : [email protected]
IPK COLLEGE
1664, JALAN KULIM, 14020 BUKIT MERTAJAM, PENANG
TEL : 012-5203212 / 0125113212 / 04-5512588
www.ipk.edu.my

___________________________________________________________________________________________________________________

1. Lessee accounting

1.1. Initial recognition


At the start of the lease the lessee initially recognizes a right-of-use asset and a lease liability.
[IFRS 16:22]

1.2. Subsequent measurement

Subject: Financial Accounting and Reporting II (BBAA1023) Page 2 of 4


Prepared by N.Thacharyane
Email : [email protected]
IPK COLLEGE
1664, JALAN KULIM, 14020 BUKIT MERTAJAM, PENANG
TEL : 012-5203212 / 0125113212 / 04-5512588
www.ipk.edu.my

___________________________________________________________________________________________________________________

Example 2 – Lessee accounting

On 1 January 2015, Plum entered into a five year lease of machinery. The machinery has a
useful life of six years. The annual lease payments are $5,000 per annum, with the first
payment made on 1 January 2015. To obtain the lease Plum incurs initial direct costs of $1,000
in relation to the arrangement of the lease but the lessor agrees to reimburse Pear $500 towards
the costs of the lease.

The rate implicit in the lease is 5%. The present value of the minimum lease payments is
$22,730.

Demonstrate how the lease will be accounted in the financial statements over the five year
period.

2. Sale and leaseback


A sale and leaseback transaction occurs when one entity (seller) transfers an asset to another
entity (buyer) who then leases the asset back to the original seller (lessee).

The companies are required to account for the transfer contract and the lease applying IFRS 16,
however consideration is first given to whether the initial sale of the transferred asset is a
performance obligation under IFRS 15.

Subject: Financial Accounting and Reporting II (BBAA1023) Page 3 of 4


Prepared by N.Thacharyane
Email : [email protected]
IPK COLLEGE
1664, JALAN KULIM, 14020 BUKIT MERTAJAM, PENANG
TEL : 012-5203212 / 0125113212 / 04-5512588
www.ipk.edu.my

___________________________________________________________________________________________________________________

Example 3 – Sale and leaseback (1)

Apple required funds to finance a new ambitious rebranding exercise. It’s only possible way of
raising finance is through the sale and leaseback of its head office building for a period of 10
years. The lease payments of $1 million are to be made at the end of the lease period

The current fair value of the building is $10 million and the carrying value is $8.4 million. The
interest rate implicit in the lease is 5%.

Advise Apple on how to account for the sale and leaseback in its financial statements if the
office building were to be sold at the fair value of $10 million and:

(a) Performance obligations are not satisfied; or,


(b) Performance obligations are satisfied.

Note: If the proceeds are less than the fair value of the asset or the lease payments are less than
market rental the following adjustments to sales proceeds apply:
๏ Any below-market terms should be accounted for as a prepayment of the lease payments; and,
๏ Any above-market terms should be accounted for as additional financing provided to the
lessee.

Example 4 – Sale and leaseback (2)

Apple required funds to finance a new ambitious rebranding exercise. It’s only possible way of
raising finance is through the sale and leaseback of its head office building for a period of 10
years. The lease payments of $1 million are to be made at the end of the lea se period

The current fair value of the building is $10 million and the carrying value is $8.4 million. The
interest rate implicit in the lease is 5%.

Advise Apple on how to account for the sale and leaseback in its financial statements if the
performance obligations are satisfied and the building is sold for the following:

(a) $9 million; or,


(a) $11 million.

Subject: Financial Accounting and Reporting II (BBAA1023) Page 4 of 4


Prepared by N.Thacharyane
Email : [email protected]

You might also like