CHAPTER FIFTEEN - Leases

Under IFRS 16, a lease is when

the lessor is owner and supplier of the asset and the lessee has the right to use the underlying asset

Recognition of a Lease

• lessor owns and supplies asset

• lessee has right to use the underlying asset

Initial Measurement of Lease

recognise the asset and lease liability

• PV of future lease payments

Subsequent Measurement of Lease

depreciate over the shorter of:

• lease term

• asset’s useful life

Measurement of Making Payments

• each lease payment is made up of a repayment of capital and of a financial charge of the period

  • Dr Lease Liability

  • Cr Cash

Measurement of the Financial Charge

• amount of the interest accrued over the period, based on interest rate in the lease

  • Dr Financial Cost

  • Cr Cash

A lease is

a contract (or part pdf a contract) that conveys the right to use an asset for a period of time, in exchange for consideration

An underlying asset is

an asset that is the subject of a lease, for which the right to use that asset has been provided by a lesson to a lessee

Right of Use Asset is

an asset that represents a else’s right to use an underlying asset for the lease term.

Initial Measurement of the ROU Asset

Dr Right of Use Asset

Cr Lease Liability

Cr Cash

Cr Provisions

Right of Use Asset is made up of

• Present Value of Future Lease Payments

• Deposit

• First Instalment paid in advance

• Initial Direct Costs/Dismantling/Removal Costs

• Fees

Depreciating the Asset

Dr Depreciation Expense

Cr Accumulated Depreciation

Making the Payment

Dr Lease Liability

Cr Cash

Finance Charge

the amount of the interest accrued over the period based on the interest rate implicit in the lease

Dr Finance Cost

Cr Lease Liability

Presentation

• ROU Assets are presented as NCA

• Lease Liabilities are presented within Liabilities

Disclosures

• NCA Disclosures

• Interest expense on lease liabilities should be disclosed

• Expenses relating to lease exceptions

• Total cash outflow for leases

• Accounting policy for leases

Ethics Issues

• Competence - lack of sufficient experience could lead to errors in these judgements

• Objectivity - manipulation to minimise liabilities could affect these judgements

Optional Exceptions to Accounting for a Lease

• Short term leases

• Low Value Leases

Short Term Leases

leases with a term of twelve months or less, with no purchase option

Low Value Leases

• undefined

• an asset must not be highly dependent or interrelated with other assets

• can be determined on a lease-by-lease basis

Leases - Assurance Risks

• right to control the asset

• optional exceptions

• omission of cost from ROU asset

• finance costs inappropriate implicit interest rate

• disclosures

• assets existence

• liabilities completeness