5First payment Now must be treated as pure decrease in loan.
Journal entry- DR Lease Obligation
CR Cash
If lease rentals paid are at advance then at year end there are 3 liaibilities, ie- current
liability, Non current liability and accrued interest
If lease term and life both are given nd both are different then,
Dep using useful life if asset is expected to transfer to lessee.
Dep using lease term if asset is expected to remain with lessor at end of lease term.
Initial Direct Cost by lessee in lease must be capitalised ( logic Matching principle)
JE- RTU DR
Cash CR
SALE AND LEASE BACK
A) If sale meets the criteria of IFRS 15, performance obligations satisfied ( genuine
sale) then,
Derecognise ASSET
Book gain/loss on disposal upto rights transferred
Book RTU upto the rights retained as we are lessee now.
B) If sale does not meet the criteria of IFRS 15, then
Don’t Derecognise ASSET
Don’t book any gain/loss on disposal
Just recognise non current loan
EXAM APPROACH
IFRS 15 criteria is met/not
PV of Minimum lease payment
ROU (retained) – Formulae = CV of Asset * PV of Lease payments/FV of asset
Entry
Continue dep ROU asset and calculate the lease liability schedule for subsequent
liability recognition
Incase of genuine sale, if the asset is sold for more than its fair value then,
Excess of sale price over FV will be treated as a loan.
And obviously this loan repayment is included in future lease rentals.
This extra loan element has nothing to do with RTU. RTU will still be based on
Present value of pure lease payments.
The lease payments that u calculate includes the effect of loan element ( excess of
sale proceeds than fv) , so exclude the excess amount from pv of lease payments to
give pure lease payments.
However when making the journal entry include the whole lease payment value.
(value without excluding the loan ) because the seller/lessee has two obligations
now.
If sold for less than FV then excess of fair value over selling price will be treated as
a prepayment.
RTU = (CV of asset at the date of acquisition* PV of Lease payments+
prepayments)/FV of assets
Short term lease
Lease less than 12 months
Leased asset is of low value.
Scope/Conditions for IFRS 16-leases Search for IFRS box IFRS 16
Specified Asset
RTU transferred to lessee
In exchange of consideration
Exam Approach
When a question is given relate to any standard follow the approach as:
S- State the rule( rule related to the ifrs)
A- Apply the rule
C- Conclusion
Example on lease question (c)
Accounting in the books of lessor Books
Same as IAS 17 ( NO change)
Finance lease
Same as purchasing an asset using loan
Case 1 – If lessor is not a manufacturer or dealer( finance provider or bank)
Purchase the asset on behalf of client
DR Machine
CR Bank
Transfer the asset to the lessee
DR Finance Lease receivable
CR Asset
If rentals are received in arrears
DR Bank
CR FLR
CR Interest income
If lease rentals are received in advance
DR Bank
CR FLR
CASE2 – If lessor is a manufacturer or dealer
There are two types of income
a) Sales Income
Lessor purchases the inventory( inventory bec lessor is a dealer)
DR Inventory 100
CR Cash 100
Sale of inventory
DR FLR 250
CR Sales 250
Record COS in the same period as Sales
DR COS 100
CR Inventory 100
b) Interest Income( with respect to time)
If rentals are received in arrears
DR Bank
Cr FLR
CR Interest Income
Guaranteed Residual Value (GRV)
Lessee given guarantee of Residual value to lessor. If asset is sold below that amount
shortfall is paid by lessee
UGRV
If lessor expects total residual value= 15000,out of which GRV is 10000, then remaining
amount of 5000 is UGRV
If the question is silent and rv is not mentioned/it is zero then, whole GRV is collected from
lessee
Special case if lessor is a manufacture or dealer
Lessor offers its customers a 0% interest lease. In reality the stock Is outdated so this
discount is basically trade discount and trade discount always effects the sales figure.
Procedure- In this case calculate PV of Minimum lease payments using Market Interest Rate.
Then record sales at lower of
PV of MLP 24351
FV of asset 26250
Old iAS 17
Conditions for finance lease (when anyone of the below conditions are transferred it is
finance lease)
When risk and rewards of that asset has been transported to lessee.
When lease term is the major portion of assets useful life (75%)
When asset is expected to be transferred to lessee at the end of lease term
When present value of MLP is almost equal to the FV of Asset at inception
When asset is of specialised nature and cannot be used by ot hers without major
modification.
Land can be considered as operating lease only if the ownership transfers to lessee at
the end of useful life.
The lessee has the ability to continue the lease for a secondary period at a rent that
is substantially lower than market value.
