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RRP 300: IFRS 16 Leases - Class Notes, Examples &

Homework Guide
Responsible reporting (University of Pretoria)

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RESPONSIBLE REPORTING 300 (RRP 300)

IFRS 16: LEASES DEPARTMENT

PRESCRIBED WORK, NOTES, CLASS EXAMPLES
OF ACCOUNTING
AND HOMEWORK QUESTIONS
- Leases in the books of the lessee
UP
C Wright

CONTENTS
PRESCRIBED WORK ........................................................................................................ 2
1.International Financial Reporting Standards............................................................. 2
2. Notes and class examples ....................................................................................... 3
3. Homework questions ............................................................................................... 3
4. RRP 200 knowledge ................................................................................................ 4
SPECIFIC OUTCOME – IFRS 16 ...................................................................................... 4
1. Assessment criteria.................................................................................................. 4
2. Sources .................................................................................................................... 5
NOTES AND CLASS EXAMPLES .................................................................................... 6
1. Background .............................................................................................................. 6
2. Outline of IFRS 16 ................................................................................................... 6
3. Financial statements line items affected by leases.................................................. 7
Class example 1 – Revision example (leases in the books of the lessee) ................ 10
4. Re-measurement / reassessment of lease liability (IFRS 16.36 - 43) ................... 23
Class example 2 – Reassessment of lease liability - change in lease term .............. 24
Class example 3 – Reassessment of lease liability - change in option to purchase . 29
Class example 4 – Reassessment of lease liability - change in the amount payable
under a residual value guarantee .............................................................................. 32
Class example 5 – Change in lease payments caused by change in an index or a rate
used to determine lease payments ............................................................................ 35
Class example 6 – Change in lease payments caused by change in interest rate where
lease has floating interest rate ................................................................................... 38
5. Presentation (IFRS 16.47 - .50 and IFRS 18)........................................................ 40
6. Disclosure (IFRS 16.51 - .60) ................................................................................ 41
7. Income tax implications.......................................................................................... 46
Class example 7 – Income tax implications of lease contract for lessee .................. 47
HOMEWORK QUESTIONS ............................................................................................. 55

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PRESCRIBED WORK

1.International Financial Reporting Standards

Read and study IFRS 16 but ignore the following paragraphs:

• para 7
• para 11
• Para 15: ignore ONLY the last sentence of the paragraph
• para 34
• para 35
• para 36(c): ONLY from “or lease modifications….” to the end of the paragraph
• para 37: ignore ONLY references to para 45(c)
• para 44 – 46
• para 46A – 46B
• para 48
• para 53(f) and (i)
• para 56
• para 57
• para 59(b)(iv) and (d)
• para 60A
• para 68: ignore ONLY from 2nd sentence to end of paragraph
• para 71(b): ignore ONLY “less the present value of the unguaranteed residual value”
• para 73
• para 79 – 80
• para 87
• para 98 – 103
• para 104 –106

Paragraph .3 (Scope) is included at level 1, which means that you must be aware of
specific inclusions and exclusions in respect of IFRS 16. This paragraph refers you to
other IASs/IFRSs where guidance will be found for leases not within the ambit of
IFRS 16.

In Appendix A, ignore the following definitions:

• effective date of modification
• lease modification
• sublease

In Appendix B, ignore the following paragraphs:

• B7
• B9 – B31
• B41: ignore only part (c)
• B43 – B47
• B52
• B55 –B58

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IFRS 9 (Financial Instruments)

Lease receivables are financial assets. IFRS 16 does not address impairment of lease
receivables as this is addressed in IFRS 9 (refer to handouts for IFRS 9). Make sure
that you have revised impairments as far as they are applicable to lease receivables.

2. Notes and class examples

Work through the notes and class examples carefully and in detail, and make sure that
you understand all of the principles and issues dealt with so that you can gain insight
into this topic.

3. Homework questions

All the homework questions included in the handout should be done. Additional
questions are available on clickUP if you still feel uncomfortable with a concept or for
revision before tests. The suggested allocation of the prescribed questions is as
follows:

LECTURE QUESTIONS
• Lecture 1 1 (part a)
2 (part a)
• Lecture 2 1 (part b)
2 (part b)
3
• Lecture 3 4
5
• Lecture 4 6
7
8 (part a and b)
• Lecture 5 8 (part c)
9
10
11
• Lecture 6 12

The following homework question may be taken in via clickUP on Monday,

19 May 2025:

- Question 9.

If the question is to be taken in, you will be notified in an announcement on clickUP in

the morning and you will have until 23:59 on the day to upload your solution.

You must upload the solution in PDF format, as a scanned PDF of a handwritten
solution.

The suggested solution to homework question 9 will be made available on clickUP after
the homework submission date.

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4. RRP 200 knowledge

You are required to know and understand the content of IFRS 16 dealt with in
RRP 200.

SPECIFIC OUTCOME – IFRS 16

IFRS 16: Leases

IFRS 9: Financial Instruments

IAS 12: Income Taxes

You should be able to account for, present and disclose all aspects relating to leases
for the lessee and lessor on an integrated basis, including the income tax implications.
The following specific matters are not addressed in RRP 300:
 Whether the contract contains a lease (in RRP 300, it will always be assumed that
the contract does contain a lease);
 Lease modifications related to the lessee and the lessor;
 Sale and leaseback transactions and
 VAT implications of leases;
 Sub-lease arrangements; and
 Leases of land AND buildings (i.e. RRP 300 does deal with just the lease of a
building).
 IAS 8 disclosure of reassessments of the lease liability.
 The income tax implications of manufacturer / dealer lessors.
 The presentation of manufacturer / dealer lessors.

1. Assessment criteria

In order to reach the specific outcome, you should:

1. know and be able to apply the definitions, principles and concepts contained in the
Conceptual Framework for Preparation of Financial Statements to leases from the
perspective of both parties to the lease contract;

2. know and be able to apply the recognition exemptions to short-term leases and
leases for underlying assets of low-value and know how to account for these;

3. know and be able to identify and account for the lease and non-lease components
of a lease contract and know how to apply the practical expedient to such contracts
in the books of the lessee;

4. know and be able to identify what the lease term of a lease contract is;

5. for the lessee, you should:

 know when to recognise the lease contract;
 know and be able to measure the right-of-use asset both initially and
subsequently;
 know and be able to measure the lease liability both initially and subsequently;

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 know and be able to measure the adjustments required to the lease liability and
the right-of-use asset for reassessments of the lease liability;
 be able to prepare the accounting entries to account for the lease contracts;
 know and be able to present all information for lease contracts in the financial
statements;
 know be able to prepare the notes disclosing all information related to lease
contracts in the financial statements; and
 know and be able to calculate the current income tax expense and deferred tax
expense and be able to prepare the notes required in terms of IAS 12, Income
Taxes, related to lease contracts.

6. For the lessor, you should:

 know when to recognise the lease contract;
 know and be able to classify a lease contract as either a finance lease or an
operating lease;
 know and be able to measure the gross investment in the lease, the net
investment in the lease and the unearned finance income both initially and
subsequently for the financing lessor and the manufacturer / dealer lessor;
 know and be able to measure the effect of changes in interest rates where the
lease contract contains a variable interest rate;
 know and be able to measure the effect of changes to the unguaranteed residual
value and be able to prepare the disclosure required in terms of IAS 8, Changes
in Accounting Policies, Changes in Estimates and Errors;
 know and be able to measure the revenue and cost of sales of the manufacturer
/ dealer lessor;
 be able to prepare the accounting entries to give effect to lease contracts;
 know and be able to present all information for lease contracts in the financial
statements;
 know and be able to prepare the notes disclosing all information related to lease
contracts in the financial statements; and
 know and be able to calculate the current and deferred tax expenses and prepare
the notes required in terms of IAS 12, Income Taxes, related to lease contracts
(i.e. not for the manufacturer / dealer lessor).

7. be able to apply the impairment criteria given in IFRS 9. Financial Instruments, to

lease receivables as they are financial assets and IFRS 16 does not deal with
impairment and be able to account for impairments and reversals of impairments.

2. Sources

1. IFRS 16: Leases

2. IFRS 9: Financial Instruments

3. IAS 12: Income Taxes

4. IFRS 16 Prescribed work, notes, class examples and homework questions

5. IFRS 16 Suggested solutions

6. RRP 200 Study material

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NOTES AND CLASS EXAMPLES

1. Background

Most of IFRS 16 with regard to accounting for leases in the books of the lessee has
already been addressed in RRP 200. It is assumed that you already know, understand
and can apply all of the content covered in RRP 200. None of the RRP 200 content will
be addressed again in RRP 300 lectures other than a brief revision. Some homework
questions address some of the issues already covered in RRP 200. You should also
refer to the material provided to you in RRP 200 where necessary. Note that all the
RRP 200 IFRS 16 content may also be tested at any time in any RRP 300 tests.

For RRP 300, the following additional content with regard to accounting for leases in
the books of the lessee will be covered:

• Reassessment of the lease liability (IFRS 16.39 – .43); and

• The income tax implications of leases in the books of the lessee.

2. Outline of IFRS 16

The table below outlines IFRS 16, referencing the relevant paragraphs and
B paragraphs of the standard. Please refer to your prescribed work document for
paragraphs excluded from the RRP 300 scope.

Topic Paragraphs Notes

OBJECTIVE 1–2 Covered in RRP 200
SCOPE 3–4 Covered in RRP 200
RECOGNITION EXEMPTIONS 5 – 8; B3 – B8 Covered in RRP 200
(only applicable to the lessee)
IDENTIFYING A LEASE 9 – 11 Covered in RRP 200
Components of a lease contract 12 – 17; B32 – B33 Covered in RRP 200
LEASE TERM 18 – 21; B34 – B40 Covered in RRP 200
LESSEE 22
Recognition 22 Covered in RRP 200
Measurement 22 Covered in RRP 200
Initial measurement 23 - 28; B42 Covered in RRP 200
Subsequent measurement 29 - 43 Par 39 - 43 will be covered
in RRP 300. All other
paragraphs were covered in
RRP 200
Presentation 47 - 50 Covered in RRP 200
Disclosure 51 - 60; B48 – B51 Covered in RRP 200

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3. Financial statements line items affected by leases

Note: The impact on the line items of the statement of cash flows will be
addressed in the lecture material of IAS 7, Statement of Cash Flows, later in the
year.
Example Limited Lessee’s
Statement of financial position as at ……….. books
R
Assets
Non-current assets
Property, plant and equipment
Investment property
Goodwill
Other intangible assets
Right-of-use assets √
Financial assets
Net investment in finance leases / Finance lease receivables
Prepaid expenses related to lease agreements (if the recognition
exemption is applied) √
Accrued rental income related to operating lease agreements
Deferred tax (if debit balance) √

Current assets
Inventories
Trade receivables
Short-term portion of net investment in finance lease / Short-term
portion of finance lease receivables
Prepaid expenses related to lease agreements (if the recognition
exemption is applied) √
Accrued rental income related to operating lease agreements
Other current assets
Cash and cash equivalents
Current tax prepaid (if current tax owing by SARS) √
Total assets

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Lessee’s
books
R
Equity and liabilities
Total equity
Share capital
Retained earnings/Accumulated loss
Other components of equity
Non-current liabilities
Long-term borrowings
Lease liabilities √
Income in advance related to operating lease
Accrued expenses related to lease agreements (if the recognition √
exemption is applied)
Deferred tax (if credit balance) √
Long-term provisions
Current liabilities
Trade and other payables
Short-term borrowings
Short-term portion of long-term borrowings
Short-term portion of lease liabilities √
Income in advance related to operating lease
Accrued expenses related to lease agreements (if the recognition √
exemption is applied)
Current tax payable (if current tax owing to SARS) √
Short-term provisions
Bank overdraft

Total equity and liabilities

Example Limited Lessee’s

Statement of profit or loss and other comprehensive income for books
the year ended ……….. R
Revenue
Cost of sales (refer to note 1 below) √
Gross profit
Other operating income (e.g. profit on sale of PPE)
Selling expenses (refer to note 2 below) √
Administrative expenses (refer to note 2 below) √
Other operating expenses (refer to note 3 below) √
Impairment losses (credit losses) on trade receivables
Gains / (losses) on derecognition of trade receivables
Operating profit
Finance income using the effective interest method
Other finance income
Dividend income
Fair value adjustments on financial instruments
Net rental income
Rental income
Expenses incurred to generate rental income
8

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R
Impairment losses (credit losses) on financial assets (other than trade
receivables)
Gains/ (losses) on the derecognition of financial assets at amortised
cost (other than trade receivables)
Other investment income / (expenses)
Profit before financing and income taxes
Interest on liabilities that involve only the raising of finance
Other expenses on liabilities that involve only the raising of finance
Other income on liabilities that involve only the raising of finance
Interest on liabilities that involve more than only the raising of finance √
(refer to note 4 below)
Profit before income taxes
Income tax expense √
Profit from continuing operations
Loss from discontinued operations
Profit for the year

Black line items represent line items that must be presented separately on the face of
the SPLOCI.
Red/italic line items are only suggestions – these items may be combined /
disaggregated as appropriate.

(1) Depreciation of right-of-use asset OR costs related to the service component of

lease agreement OR lease expense if recognition exception is applied, if the
asset is part of the manufacturing activity.

(2) Depreciation of right-of-use asset OR costs related to the service component of

lease agreement OR lease expense if recognition exception is applied, if the
asset is part of the selling / administrative activity.

(3) Depreciation of right-of-use asset OR costs related to the service component of

lease agreement OR lease expense if recognition exception is applied not already
included in (1) or (2) above.
(4) Finance costs incurred related to leases of the lessee.

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Class example 1 – Revision example (leases in the books of the lessee)

On 1 January 20X16 (commencement date), ZINFANDEL LIMITED (Zinfandel)

entered into a lease agreement with Nebbiolo Limited (Nebbiolo) to lease a new factory
building from Nebbiolo for a non-cancellable period of 15 years. The lease does not
include any options to extend or terminate the lease, and ownership of the factory
building will not be transferred to Zinfandel at the end of the lease term.
The following information has been extracted from the lease contract:
• The lease payments payable annually in arrears are calculated at R1 500 per unit
of finished goods manufactured in the factory.
• A minimum amount of R3 050 000 is payable annually in arrears.
• If the fair value of the factory building at the end of the lease term is less than
R4,5 million, then Zinfandel must pay Nebbiolo an amount calculated as the
difference between that fair value and the amount of R4,5 million.
As an incentive to encourage Zinfandel to enter into this lease agreement, Nebbiolo
paid Zinfandel R28 750 on 1 January 20X16.
On 1 January 20X16, Zinfandel paid R300 000 as a deposit to secure the lease
agreement with Nebbiolo.
On the commencement date of the lease, Zinfandel expects that the fair value of the
factory building at the end of the 15-year lease term will be R3,2 million.
Zinfandel expects that 2 200 units of finished product will be manufactured per year in
the factory building.
The interest rate implicit in the lease is not readily determinable. The incremental
borrowing rate of Zinfandel on 1 January 20X16 is 12,25% per annum.
Zinfandel incurred initial direct costs of R35 000 related to this lease agreement that
were paid to the company’s external legal advisor on 1 January 20X16. The company
also has an employee that is actively involved in the negotiation and arrangement of
all of its lease agreements and the total cost to company of this employee is R40 000
per month (assume each month has four weeks). This employee was involved in the
negotiation and arrangement of this lease agreement for a week.
Zinfandel had to modify some parts of the factory building to meet its specific
requirements and incurred total costs of R1,8 million in this regard that it paid in cash
on 30 June 20X16. The lease agreement made provision for leasehold improvements
to be made by the lessee, but also requires that at the end of the lease term, the lessee
must return the factory building to the lessor in its original condition. On
1 January 20X16, Zinfandel estimated that the costs related to the restoration of the
factory building would amount to R2 501 635 at the end of the lease term. An
appropriate pre-tax discount rate on 1 January 20X16, is 12,5% per annum. Assume
that the criteria for the recognition of a provision for these costs in terms of IAS 37,
Provisions, Contingent Liabilities and Contingent Assets have been met on
1 January 20X16.

10

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Additional information:

• The reporting date of Zinfandel is 31 December.

• Zinfandel does have another factory building that it owns. It accounts for this factory
building in accordance with the cost model. Depreciation is calculated in
accordance with the straight-line method over the estimated useful life of the
factory building.

• The estimated economic life of the underlying asset is 25 years.

• During the years ended 31 December 20X16 and 31 December 20X17, Zinfandel
manufactured 2 020 units and 2 580 units of finished products, respectively.

• All lease payments were paid on 31 December of each year.

Required:

a) Prepare the journal entries (cash transactions included) in the books of

Zinfandel Limited for all of the transactions entered into by Zinfandel Limited
related to the initial recognition of the lease contract with Nebbiolo Limited in
accordance with IFRS 16, Leases.

Note: - Round calculated amounts to the nearest Rand.

- Journal narrations are required.
- The journal entries must be dated.

b) Prepare the journal entry in the books of Zinfandel Limited for the subsequent
measurement of the lease contract with Nebbiolo Limited in accordance with
IFRS 16, Leases for the year ended 31 December 20X16 and
31 December 20X17.

Note: - Round calculated amounts to the nearest Rand.

- Journal narrations are required.
- The journal entries must be dated.
- Journals for the depreciation of leasehold improvement and
interest on the provision are not required.

c) Present the information in the statement of financial position and the statement
of profit or loss and other comprehensive income of Zinfandel Limited for the
year ended 31 December 20X17, in accordance with IFRS 16, Leases and
IAS 18, Presentation and Disclosure in Financial Statements.

Note: - Round calculated amounts to the nearest Rand.

- The presentation of the leasehold improvements and provision
is not required.

11

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d) Assume that Zinfandel Limited has recognised the following lease expenses
related to:

• Short-term leases for desk top computers: R125 400 for each of the years
ended 31 December 20X16 and 20X17. The actual cash outflows for these
leases during both reporting periods was also R125 400. The portfolio of
short-term leases to which the company is committed at each of the reporting
dates is similar to the portfolio for which the short-term leases expense was
recognised during each of the periods; and

• Low-value lease for office furniture: R15 000 and R30 000 for the years
ended 31 December 20X16 and 20X17 respectively. The actual cash
outflows for these leases amounted to R18 000 for the year ended
31 December 20X16 and R33 000 for the year ended 31 December 20X17.

Zinfandel Limited uses the following time bands to disclose its lease liabilities:
- Not later than 1 year
- Later than 1 year but not later than 5 years
- Later than 5 years

Disclose the information related to the leases entered into by Zinfandel Limited
for the year ended 31 December 20X17, in accordance with IFRS 16, Leases.
Zinfandel Limited chooses to disclose all matters related to leases in which it is
the lessee in a single note.

Note: - Round calculated amounts to the nearest Rand.

12

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Suggested solution:

a) Journal entries in books of Zinfandel Limited (lessee)

Dr Cr
R R
1 January 20X16
1. Bank (SFP) 28 750
Right-of-use asset – factory building (SFP) 28 750
Lease incentive received from lessor
2. Right-of-use asset – factory building (SFP) 20 728 505
Lease liability (SFP) (calc 1) 20 728 505
Recognition of right-of-use asset at initial
measurement of lease liability
3. Right-of-use asset – factory building (SFP) 300 000
Bank (SFP) 300 000
Lease deposit allocated to right-of-use asset
4. Right-of-use asset – factory building (SFP) 427 500
Provision for restoration costs (SFP) 427 500
Initial recognition of restoration costs
provision
5. Right-of-use asset – factory building (SFP) 35 000
Bank (SFP) 35 000
Fees paid to external legal advisors
recognised as initial direct costs
30 June 20X16
6. Leasehold improvements to factory building
(SFP) (see comment below) 1 800 000
Bank (SFP) 1 800 000
Leasehold improvements recognised

Comment:

• The leasehold improvements to the factory building are property, plant and
equipment and would be accounted for in accordance with IAS 16, Property, Plant
and Equipment.

13

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b) Suggested solution:
Dr Cr
R R
31 December 20X16
7. Depreciation (P/L) 1 430 817
Right-of-use asset - factory building (SFP) 1 430 817
Depreciation for year ended 31/12/20X16
(R21 462 255 (calc 2) / 15 years)
8. Interest expense / Finance costs (P/L) 2 539 242
Lease liability (SFP) 2 539 242
Interest for year on lease liability
(AMORT 1 INT = R2 539 242)
9. Lease liability (SFP) 3 050 000
Bank (SFP) 3 050 000
Payment of lease liability made for year
10. Lease expense (P/L) -
Bank (SFP) -
Variable lease payment based on finished goods
manufactured for the year not included in lease liability
([2 020 units x R1 500] = R3 030 000 compared to
R3 050 000 minimum amount, thus no additional
amount payable)
31 December 20X17
11. Depreciation (P/L) 1 430 817
Right-of-use asset - factory building (SFP) 1 430 817
Depreciation for year ended 31/12/20X17
(R21 462 255 (calc 2) / 15 years)
12. Interest expense / Finance costs (P/L) 2 476 674
Lease liability (SFP) 2 476 674
Interest for year on lease liability
(AMORT 2 INT = R2 476 674)
13. Lease liability (SFP) 3 050 000
Bank (SFP) 3 050 000
Payment of lease liability made for year
14. Lease expense (P/L) 820 000
Bank (SFP) 820 000
Variable lease payment based on finished goods
manufactured for the year
([2 580 units x R1 500] = R3 870 000 compared to
R3 050 000 minimum amount, thus additional amount
payable = R820 000 [R3 870 000 – R3 050 000])

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Comments:

• Since the lease does not transfer ownership of the factory building, the useful life of
the right-of-use asset (factory building) will be limited to the lease term of 15 years.

• If there was reasonable certainty at the commencement date of the lease that the
lessee would obtain ownership of the factory building at the end of the lease term,
the useful life would be 25 years, and depreciation would be written off over this
period.

• If there were an indicator of impairment / reversal of impairment of the factory

building at the end of the reporting period (i.e. 31 December), then the lessee would
need to apply IAS 36, Impairment of Assets, to the recognition, measurement and
accounting for any impairment loss or reversals of impairment loss. Refer to the
study material for IAS 36 in this regard.

• Note that the depreciation charge is accounted for directly against the carrying
amount of the right-of-use asset. It is not accounted for in a separate general ledger
account called “Accumulated depreciation”. We have treated it in this way as: when
the right-of-use asset is disclosed, IFRS 16 only requires that the carrying amount
at the beginning of the year must be reconciled to the carrying amount at the end of
the year. No mention is made that this carrying amount must be presented as the
difference between the gross carrying amount and accumulated depreciation and
impairment losses. It would thus seem that the accounting for depreciation can be
made directly against the carrying amount of the right-of-use asset.

• The additional amount of Rnil for 20X16 and R820 000 for 20X17 is a variable
payment that is not dependent on an index or a rate. This variable payment will not
be included in the initial measurement of the lease liability. It will be recognised as
an expense in the year the units are produced.

• If the lease contract's payment dates and the entity's reporting date do not coincide,
the interest expense accrual must be accounted for using the lease liability account
only. NO separate expense accrual account can be used. Suppose a separate
expense accrual account is used. In that case, the methodology per IFRS 16.36 is
not complied with (i.e., the carrying amount of the lease liability must be increased
by the interest on the liability and decreased by the lease payments made.) In other
words, the lease liability amount must include any unpaid interest.

• Net journals may be done for journals 8 & 9 (for 20X16) and journals 12 and 13.

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c)
Zinfandel Limited
Statement of financial position as at 31 December 20X17

20X17 20X16
R R
Assets

Non-current assets
Right-of-use asset (calc 3) 18 600 621 20 031 438

Equity and liabilities

Non-current liabilities
Lease liability (calc 4) 19 000 863 19 644 421

Current liabilities
Short-term portion of lease liability (calc 4) 643 558 573 326

Zinfandel Limited
Statement of profit or loss and other comprehensive income for the year ended
31 December 20X17

20X17 20X16
R R
Cost of sales (20X17: 1 430 817 + 820 000) (2 250 817) (1 430 817)
Interest on liabilities that involve more than only
the raising of finance (2 476 674) (2 539 242)
(20X17: AMORT 2 INT /
20X16: AMORT I INT)

d)
Zinfandel Limited
Notes for the year ended 31 December 20X17

18. Lease contracts in which the company is the lessee

18.1 Right-of-use asset

Factory building
20X17 20X16
R R

Carrying amount at the beginning of the year 20 031 438 -

Additions (calc 2) - 21 462 255
Depreciation (1 430 817) (1 430 817)
(journals 7 & 11)
Re-measurement of lease liability - -
Carrying amount at the end of the year 18 600 621 20 031 438

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18.2 Income and expenses related to leases

20X17 20X16
R R
Expenses

Variable lease payment expense 820 000 -

(journal 14)

Short-term leases expense 125 400 125 400

(given in additional information provided)

 The company has elected to apply the

recognition exemption for its short-term leases
of computers.
Low-value assets lease expense 30 000 15 000
(given in additional information provided)
 The company has elected to apply the
recognition exemption for its low-value office
furniture lease.
Finance cost related to lease liabilities 2 476 674 2 539 242
(refer to the amortisation table in calculation 5
below)

18.3 Lease liabilities

Undiscounted cash flows for lease liabilities outstanding are payable as follows:
(refer to calculation below for detail)

20X17 20X16
R R
Not later than 1 year 3 050 000 3 050 000
Later than 1 year but not later than 5 years 12 200 000 12 200 000
(20X16 and 20X17: R3 050 000 x 4)
Later than 5 years 25 700 000 28 750 000
(20X16: [R3 050 000 x 9] + R1 300 000)
(20X17: [R3 050 000 x 8] + R1 300 000)
40 950 000 44 000 000

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18.4 Additional information

 There are lease agreements for a factory building for which right-of-use assets and
lease liabilities have been recognised.
 There are future cash flows to which the company is potentially exposed that are not
reflected in the measurement of the lease liabilities, which include:
- Variable lease payments of approximately R250 000 per year for another
13 years (20X16: 14 years);
(calculation: [2 200 units x R1 500] - R3 050 000 minimum payment)
- Residual value guarantees are payable if the fair value of the factory building at
the end of the lease term falls below R4,5 million. An amount of R1,3 million in
respect of this guarantee has been included in the measurement of the lease
liability.

18.5 Total cash outflow for leases for reporting period

20X17 20X16
R R

Total cash outflows during reporting period 4 028 400 3 493 400
(refer calculation 6)

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Calculations
1. Lease liability
PMT = 3 050 000
FV = 1 300 000 (R4,5 million – R3,2 million)
N = 15
I/YR = 12,25
Thus PV = R20 728 505
Thus, lease liability will be initially measured at R20 728 505.
Comments:
The lease liability must be measured at the present value of the lease payments that
are NOT PAID at the commencement date of the lease, discounted at the interest rate
implicit in the lease or, if that is not known, the lessee’s incremental borrowing rate.
Thus, the following explanation is provided for amounts included / excluded from this
amount:
• The R3 050 000 is an in-substance fixed payment and is thus included in the initial
measurement of the lease liability.
• The additional amount of R250 000 ([2 200 units x R1 500] – R3 050 000) that the
lessee expects to pay each year is a variable payment. This variable payment is not
dependent on an index or a rate. Thus, this variable payment will not be included in
the initial measurement of the lease liability and will be recognised as an expense
in the year in which the units are produced.
• The amount payable in terms of the residual value guarantee of R1,3 million is
included in the initial measurement of the lease liability since the lessee will be
required to pay the difference between the amount of R4,5 million per the lease
contract and the amount that the lessee expects the fair value to be at the end of
the lease term (if this is less than R4,5 million).
• The deposit of R300 000 paid on 1 January 20X16 is not included in the initial
measurement of the lease liability as it is not unpaid at the commencement of the
lease.
2. Right-of-use asset
R
Initial measurement of lease liability (calc 1) 20 728 505
Lease incentive amount received (refer to 1 below) (28 750)
Initial direct costs incurred by lessee relating to payment made to
an external legal advisor (given) 35 000
Employee cost incurred relating to arrangement and negotiation
of lease agreement (refer to 2 below) -
Deposit paid to secure lease (given) 300 000
Restoration provision (refer to 3 below) 427 500
(FV = 2 501 635; N = 15; I/YR = 12,5, thus PV = ?)
Leasehold improvement costs (refer to 4 below) -
Total cost of right-of-use asset 21 462 255
Comments:

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1. It should be noted here that the lease incentive is deducted when calculating the
cost of the right-of-use asset as the amount was received at or before the
commencement date of the lease per IFRS 16.24(b). If the amount was receivable
(not yet received in cash) at the commencement date, the amount would be
deducted from the lease liability per IFRS 16.27(a).
2. The costs related to the employee involved in the arrangement and negotiation of
the lease agreement are excluded since they are not incremental costs incurred.
This cost to the company would be incurred regardless of whether this lease
agreement was entered into.
3. The restoration provision cost is capitalised to the right-of-use asset since it does
not arise from the production of inventories.
4. Leasehold improvement costs of R1,8 million would not be included in the right-of-
use asset. This amount would be included in “Leasehold improvements” in terms
of IAS 16, Property, Plant and Equipment.

NB: If the following information was provided in this example related to lease
incentives, the full amount of R180 000 would be recognised as a reduction of the cost
of the right-of-use asset, and the R250 000 would be recognised as an expense.
Nebbiolo Limited, as an incentive to encourage Zinfandel Limited to enter into this lease
agreement, agreed to partially reimburse the relocation costs of Zinfandel Limited of
R250 000 and paid R180 000 directly to Zinfandel Limited on the commencement date
of the lease. Zinfandel Limited incurred and paid for these relocation costs on
1 January 20X16.

3. Carrying amount of right-of-use asset

R
Cost (calc 2) 21 462 255
Depreciation (journal 7) (1 430 817)
Carrying amount on 31 December 20X16 20 031 438
Depreciation (journal 11) (1 430 817)
Carrying amount on 31 December 20X17 18 600 621

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4. Carrying amount of lease liability

Using the following information, the lease liability was initially measured at
R20 728 505:
PMT = 3 050 000
FV = 1 300 000
N = 15
I/YR = 12,25
Thus. PV = R20 728 505

R
Total capital balance outstanding 31 December 20X16 20 217 747
(AMORT 1 BAL)
Short-term portion (AMORT 2 PRIN) (573 326)
Long-term portion on 31 December 20X16 19 644 421

Total capital balance outstanding 31 December 20X17 19 644 421

(AMORT 2 BAL)
Short-term portion (AMORT 3 PRIN) (643 558)
Long-term portion on 31 December 20X17 19 000 863

5. Lease liability balance outstanding

PMT = 3 050 000

FV = 1 300 000
N = 15
I/YR = 12,25
Thus PV = 20 728 505

Payment date Payment Interest Capital Capital

R R R outstanding
R
Bal 1/1/20X16 20 728 505
31/12/20X16 3 050 000 2 539 242 510 758 20 217 747
31/12/20X17 3 050 000 2 476 674 573 326 19 644 421
31/12/20X18 3 050 000 2 406 442 643 558 19 000 863
31/12/20X19 3 050 000 2 327 606 722 394 18 278 469
31/12/20X20 3 050 000 2 239 112 810 888 17 467 581
31/12/20X21 3 050 000 2 139 779 910 221 16 557 360
31/12/20X22 3 050 000 2 028 276 1 021 724 15 535 636
31/12/20X23 3 050 000 1 903 115 1 146 885 14 388 751
31/12/20X24 3 050 000 1 762 622 1 287 378 13 101 373
31/12/20X25 3 050 000 1 604 918 1 445 082 11 656 291
31/12/20X26 3 050 000 1 427 896 1 622 104 10 034 187
31/12/20X27 3 050 000 1 229 188 1 820 812 8 213 375
31/12/20X28 3 050 000 1 006 138 2 043 862 6 169 513
31/12/20X29 3 050 000 755 765 2 294 235 3 875 278
31/12/20X30 3 050 000 474 722 2 575 278 1 300 000
1 300 000 - 1 300 000 -

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6. Total cash outflows during reporting period for all leases

20X17 20X16
R R

Lease liability (calc 1) 3 050 000 3 050 000

Variable lease payments not included in initial
measurement of lease liability (journal 14) 820 000 -
Short-term leases (given) 125 400 125 400
Low-value asset leases (given) 33 000 18 000
Deposit paid by lessee to secure lease (given) - 300 000
4 028 400 3 493 400

Comment:
• IFRS 16 does not clearly indicate what “total cash flows” imply; for RRP 300, we
limit this to only amounts payable to the lessor (including deposits, residual value
guarantees and balloon payments).

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4. Re-measurement / reassessment of lease liability (IFRS 16.36 - 43)

When does the lease liability need to be re-measured / reassessed? (IFRS 16.39)

There are four (4) instances where it will be necessary to re-measure the lease liability
after the commencement date of the lease as part of the subsequent measurement
thereof:

→ The lease liability shall be re-measured by discounting the revised lease

payments using a revised discount rate if:

1. The lease term changes. (IFRS 16.40a)

 The lease term shall be revised if there is a change in the non-cancellable

lease period (IFRS 16.21 and IFRS 16.B41).

2. There is a change in the assessment of the option to purchase the

underlying asset (IFRS 16.40b)

o The revised discount rate (IFRS 16.41) is the:

 interest rate implicit in the lease for the remainder of the lease term
or

 the lessee’s incremental borrowing rate at the date of

reassessment if the interest rate implicit in the lease cannot be
readily determined

→ The lease liability shall be re-measured by discounting the revised lease

payments using an unchanged discount rate if:

3. There is a change in the amount expected to be paid under a residual value

guarantee (IFRS16.42a).

4. There is a change in the future lease payments because of a change in an

index or rate (IFRS16.42b).

When the lease liability is re-measured, the other leg of the journal will be processed
to the right-of-use asset.

Sometimes, a lease contract includes a floating interest rate, such as an interest rate
linked to the prime lending rate. This means that the interest rate applied to the lease
contract will also change whenever the prime lending rate changes. Changes in the
interest rate will also result in changes to the lease payment amount. However, there
will be no reassessment of the lease liability and, thus, no change to the carrying
amount of the right-of-use asset. Only the new payment allocation between the finance
cost component and the principal (capital) component to reduce the lease liability will
change (IFRS 16.43).

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Class example 2 – Reassessment of lease liability - change in lease term

CARMENERE LIMITED entered into a lease agreement to lease a floor of an office

building on 1 January 20X16, the commencement date of the lease. The lease is for
ten years with an option to extend the lease term for another five years.

The lease payments are R50 000 per year during the initial ten-year term and R55 000
per year for the optional extension period of five years. The lease payments are
payable in advance, with the first such payment payable on 1 January 20X16.

Carmenere Limited incurred initial direct costs of R20 000, which comprises R15 000
paid to a former tenant occupying a floor of the building and R5 000, which relates to
a commission paid to an estate agent who arranged the lease. These amounts were
paid on 1 January 20X16. As an incentive to Carmenere Limited for entering into the
lease, the lessor agreed to reimburse the estate agent’s commission. This amount was
received from the lessor on 1 January 20X16.

The interest rate implicit in the lease is not readily determinable. On 1 January 20X16,
the incremental borrowing rate of Carmenere Limited was 5% per annum.

On 1 January 20X16, there was no reasonable certainty that Carmenere Limited would
exercise the option to extend the lease for the additional term of five years.

On 31 December 20X21 (i.e. the end of the sixth year of the initial term of the lease),
Carmenere Limited decided that it would exercise the option to extend the lease term
for an additional five years. On this date, the incremental borrowing rate of Carmenere
Limited was 6% per annum.

Required:

Prepare the journal entries (cash transactions included) in the books of Carmenere
Limited for the years ended 31 December 20X16, 20X17, 20X21 and 20X22 to account
for this lease agreement in accordance with IFRS 16, Leases.

Note: • Round calculated amounts to the nearest Rand.

• Journal narrations are required.
• Closing journal entries are not required.

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Suggested solution
Dr Cr
R R
1 January 20X16
Right-of-use asset – office building (SFP) 355 391
Lease liability (SFP) 355 391
Initial recognition of lease liability and a right-
of-use asset (refer to calc 1)
Right-of-use asset – office building (SFP) 50 000
Bank (SFP) 50 000
Lease payment paid on 1/1/20X16 included in
initial measurement of right-of-use asset
Right-of-use asset – office building (SFP) 20 000
Bank (SFP) 20 000
Initial direct costs incurred by lessee included
in initial measurement of right-of-use asset
Bank (SFP) 5 000
Right-of-use asset – office building (SFP) 5 000
Lease incentive received on commencement
date included in initial measurement of right-of-
use asset
31 December 20X16
Depreciation (P/L) 42 039
Right-of-use asset – office building (SFP) 42 039
Depreciation for year
(R[355 391 + 50 000 + 20 000 – 5 000] =
R420 391 / 10 years)
Interest expense / Finance cost (P/L) 17 770
Lease liability (SFP) 17 770
Increase in CA of lease liability for interest for
year (using calc 1: AMORT 2 INT = R17 770)
1 January 20X17
Lease liability (SFP) 50 000
Bank (SFP) 50 000
Decrease in carrying amount of lease liability
for payment made at beginning of year
31 December 20X17
Depreciation (P/L) 42 039
Right-of-use asset – office building (SFP) 42 039
Depreciation for year (refer to calc above)
Interest expense / Finance cost (P/L) 16 158
Lease liability (SFP) 16 158
Increase in carrying amount of lease liability for
interest for year
(using calc 1: AMORT 3 INT = R16 158)

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Dr Cr
R R
1 January 20X21
Lease liability (SFP) 50 000
Bank (SFP) 50 000
Decrease in carrying amount of lease liability
for payment made at beginning of year
31 December 20X21
Depreciation (P/L) 42 039
Right-of-use asset – office building (SFP) 42 039
Depreciation for year (refer to calc above)
Interest expense / Finance cost (P/L) 8 865
Lease liability (SFP) 8 865
Increase in carrying amount of lease liability for
interest for year
(using calc 1: AMORT 7 INT = R8 865)
Right-of-use asset – office building (SFP) 192 011
Lease liability (SFP) 192 011
Re-measurement of lease liability for change in
lease term
(R378 174 calc 4 - R186 163 calc 2)
1 January 20X22
Lease liability (SFP) 50 000
Bank (SFP) 50 000
Decrease in carrying amount of lease liability
for payment made at beginning of year
31 December 20X22
Depreciation (P/L) 40 019
Right-of-use asset – office building (SFP) 40 019
Depreciation for year
(R168 156 calc 3 + R192 011 jnl above) / (4 yrs
remaining 31/12/20X21 + 5 yrs option)
Interest expense / Finance cost (P/L) 19 690
Lease liability (SFP) 19 690
Increase in carrying amount of lease liability for
interest for year
(refer to amort table at calc 5)

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Calculations
1. Initial measurement of lease liability and right-of-use asset on 1/1/20X16
BGN
PMT = 50 000
FV = 0
N = 10
I/YR = 5
Thus PV = 405 391
However, the first payment was paid on 1/1/20X16, so the lease liability will be
measured at the present value of the payments not yet paid on the commencement
date. This amount is R355 391 (R405 391 – R50 000).

2. Carrying amount of lease liability on 31/12/20X21

AMORT 6 BAL = R177 298 + R8 865 interest accrued = R186 163

Year end Date of Payment Interest Capital Capital O/S

payment (5% pa) reduction R
R R R R
405 391
31/12/20X16 1/1/20X16 50 000 - 50 000 355 391
31/12/20X17 1/1/20X17 50 000 17 770 32 230 323 161
31/12/20X18 1/1/20X18 50 000 16 158 33 842 289 318
31/12/20X19 1/1/20X19 50 000 14 466 35 534 253 785
31/12/20X20 1/1/20X20 50 000 12 689 37 311 216 474
31/12/20X21 1/1/20X21 50 000 10 824 39 176 177 298
31/12/20X22 1/1/20X22 50 000 8 865 41 135 136 163

3. Carrying amount of right-of-use asset on 31/12/20X21

R420 391 – [R420 391 / 10 years x 6 years expired] = R168 156 or

R420 391 / 10 years x 4 years remaining = R168 156

4. Re-measurement of lease liability on 31/12/20X21

CF0 = 50 000 (as amounts are paid in advance)

CF1 = 50 000 payments for remaining portion of original lease term
CF2 = 50 000
CF3 = 50 000
CF4 = 55 000
CF5 = 55 000 payments for option period
CF6 = 55 000
CF7 = 55 000
CF8 = 55 000
I/YR = 6 (new discount rate)

Thus NPV = 378 174

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5. Amortisation table for remaining period of lease with interest now calculated at 6%
per annum on the re-measured lease liability amount of R378 174 as at
31/12/20X21
Payment Lease Lease Interest Lease
date liability payment (6% pa) liability
balance (1 Jan) balance
(1 Jan) R (31/12)
R R R
(A) (B) (C)
31/12/20X22 1/1/20X22 378 174 (50 000) 19 690 347 864
31/12/20X23 1/1/20X23 347 864 (50 000) 17 872 315 736
31/12/20X24 1/1/20X24 315 736 (50 000) 15 944 281 680
31/12/20X25 1/1/20X25 281 680 (50 000) 13 901 245 581
31/12/20X26 1/1/20X26 245 581 (55 000) 11 435 202 016
31/12/20X27 1/1/20X27 202 016 (55 000) 8 821 155 837
31/12/20X28 1/1/20X28 155 837 (55 000) 6 050 106 887
31/12/20X29 1/1/20X29 106 887 (55 000) 3 113 55 000
31/12/20X30 1/1/20X30 55 000 (55 000) - -
C = (A – B) x 6% = Interest
(adapted from Example 13 of Illustrative Examples of IFRS 16)
Comment:
• A change in the lease term is a change in estimate. The disclosure required per
IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, would
be applicable in such cases. The change in estimate note would be made in the
year ended 31 December 20X21. However, this is excluded from the RRP 300
syllabus.
• For RRP 300 you will not be expected to identify the “significant event” or
“significant change in circumstances” that brought about the change in lease term
(IFRS 16.B41).

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Class example 3 – Reassessment of lease liability - change in option to

purchase

CARMENERE LIMITED entered into a lease agreement to lease a printing machine on

1 January 20X16, the commencement date of the lease. The lease is for four years. In
terms of the lease agreement, the lease payments are payable annually in arrears. The
annual lease payment is R350 000.
The lease contains a purchase option that will enable the lessee to purchase the
printing machine at the end of the lease term of four years for R45 000.
On 1 January 20X16, there was no reasonable certainty that Carmenere Limited would
exercise this purchase option.
There were no initial direct costs incurred and there were also no lease incentives,
prepayments or restoration costs.
The interest rate implicit in the lease is not readily determinable. On 1 January 20X16,
the incremental borrowing rate of Carmenere Limited is 8,5% per annum.

During 20X16, the local currency weakened significantly which would result in a
significant increase in the cost related to the importation of similar printing machines.
As a result of this, on 31 December 20X16, the management of Carmenere Limited
decided that instead of purchasing a new printing machine at the end of the lease term,
they should rather exercise the option to purchase this printing machine at the end of
the lease term. On this date, the incremental borrowing rate of Carmenere Limited is
9,5% per annum.
The reporting date of Carmenere Limited is 31 December.
On 1 January 20X16, the estimated useful life of the printing machine was 8 years.
This estimate has remained unchanged.
Required:
Prepare the journal entries (cash transactions included) in the books of Carmenere
Limited for the years ended 31 December 20X16 and 20X17 to account for this lease
agreement in accordance with IFRS 16, Leases.
Note: • Round calculated amounts to the nearest Rand.
• Journal narrations are required.
• Closing journal entries are not required.

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Suggested solution
Dr Cr
R R
1 January 20X16
Right-of-use asset – printing machine (SFP) 1 146 459
Lease liability (SFP) 1 146 459
Initial recognition of lease liability and right-of-
use asset (refer calc 1)
31 December 20X16
Interest expense / Finance cost (P/L) 97 449
Lease liability (SFP) 97 449
Increase in carrying amount of lease liability for
interest for year
(using calc 1: AMORT 1 INT = R97 449)
Lease liability (SFP) 350 000
Bank (SFP) 350 000
Decrease in carrying amount of lease liability
for payment made at end of year
Depreciation (P/L) 286 615
Right-of-use asset – printing machine (SFP) 286 615
Depreciation for year
(R1 146 459 / 4 years)
Right-of-use asset – printing machine (SFP) 18 484
Lease liability (SFP) 18 484
Re-measurement of lease liability for purchase
option in lease (R912 392 – R893 908) below
Lease liability before option Amort 1 BAL =
R893 908 (using calc 1 info)
Lease liability with option = R912 392 (calc 2)
31 December 20X17
Interest expense / Finance cost (P/L) 86 677
Lease liability (SFP) 86 677
Increase in carrying amount of lease liability for
interest for year
(using calc 2: AMORT 1 INT = R86 677)
Lease liability (SFP) 350 000
Bank (SFP) 350 000
Decrease in carrying amount of lease liability
for payment made at end of year
Depreciation (P/L) 125 475
Right-of-use asset – printing machine (SFP) 125 475
Depreciation for year
([R1 146 459 – R286 615] + R18 484 =
R878 328 / [8 years – 1 year expired])

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Calculations:
1. Initial measurement of lease liability on 1/1/20X16
PMT = 350 000
FV = 0
N=4
I/YR = 8,5
Thus PV = R1 146 459
2. Re-measurement of lease liability on 31/12/20X16
PMT = 350 000
FV = 45 000 (purchase option exercise price)
N = 3 (years remaining of lease term)
I/YR = 9,5 (revised discount rate)
Thus PV = R912 392
Comment:
• A change in the decision to exercise a purchase option is a change in estimate.
The disclosure required per IAS 8, Accounting Policies, Changes in Accounting
Estimates and Errors, would be applicable in such cases. The change in estimate
note would be done in the year ended 31 December 20X16. However, this is
excluded from the RRP 300 syllabus.

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Class example 4 – Reassessment of lease liability - change in the amount

payable under a residual value guarantee

CARMENERE LIMITED enters into a lease agreement to lease a retail building on

1 January 20X16, the commencement date of the lease. The lease is for five years. In
terms of the lease agreement, the lease payments of R155 000 are payable annually
in arrears on 31 December.

In terms of the lease agreement, if the fair value of the retail building at the end of the
lease term is less than R450 000, then Carmenere Limited must pay to the lessor an
amount calculated as the difference between that fair value and the amount of
R450 000.

On 1 January 20X16, it was estimated that the fair value of the retail building will be
R400 000 at the end of the lease term whilst on 31 December 20X16, this estimated
amount had increased to R410 000.

There were no initial direct costs incurred and there were also no lease incentives,
prepayments or restoration costs.

The reporting date of Carmenere Limited is 31 December.

The interest rate implicit in the lease is not readily determinable. The incremental
borrowing rate of Carmenere Limited on 1 January 20X16 was 10,5% per annum whilst
it was 10,75% per annum on 31 December 20X16.

Required:

Prepare the journal entries (cash transactions included) in the books of Carmenere
Limited for the years ended 31 December 20X16 and 31 December 20X17 to account
for this lease agreement in accordance with IFRS 16, Leases.
Note: • Round calculated amounts to the nearest Rand.
• Journal narrations are required.
• Closing journal entries are not required.

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Suggested solution
Dr Cr
R R
1 January 20X16
Right-of-use asset – retail building (SFP) 610 493
Lease liability (SFP) 610 493
Initial recognition of lease liability and right-of-
use asset
31 December 20X16
Depreciation (P/L) 122 099
Right-of-use asset – retail building (SFP) 122 099
Depreciation for year
(R610 493 / 5 years)
Interest expense / Finance cost (P/L) 64 102
Lease liability (SFP) 64 102
Increase in carrying amount of lease liability for
interest for year
(using calc 1: AMORT 1 INT = R64 102)
Lease liability (SFP) 155 000
Bank (SFP) 155 000
Decrease in carrying amount of lease liability
for payment made for year
Lease liability (SFP) 6 708
Right-of-use asset – retail building (SFP) 6 708
Re-measurement of lease liability and right-of-
use asset due to change in residual value
guarantee
(R512 887 calc 4 – R519 595 calc 2) or calc 4
31 December 20X17
Depreciation (P/L) 120 422
Right-of-use asset – retail building (SFP) 120 422
Depreciation for year
(R488 394 calc 3 – R6 708 jnl above) / 4 years)
Interest expense / Finance cost (P/L) 53 853
Lease liability (SFP) 53 853
Increase in carrying amount of lease liability for
interest for year
(using calc 4: AMORT 1 INT = R53 853)
Lease liability (SFP) 155 000
Bank (SFP) 155 000
Decrease in carrying amount of lease liability
for payment made for year (refer calc 4)

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Calculations

1. Initial measurement of lease liability and right-of-use asset on 1/1/20X16

PMT = 155 000

FV = 50 000 (R450 000 – R400 000)
N=5
I/YR = 10,5
Thus PV = 610 493

2. Carrying amount of lease liability on 31/12/20X16

AMORT 1 BAL = R519 595 or

R610 493 + R64 102 – R155 000 = R519 595 or
R610 493 – R90 898 = R519 595

3. Carrying amount of right-of-use asset on 31/12/20X16

R610 493 – R122 099 = R488 394 or

R610 493 x 4/5 years = R488 394

4. Re-measurement of lease liability on 31/12/20X16

PMT = 155 000

FV = 40 000 (R450 000 – R410 000)
N = 4 (remaining term of lease)
I/YR = 10,5 (unchanged discount rate)
Thus PV = 512 887

The adjustment to the lease liability (and the right-of-use asset) could also be
calculated as follows using the change in the payment amount:

FV = 10 000 (50 000 – 40 000)

N = 4 (remaining term of lease)
I/YR = 10,5 (unchanged discount rate)
Thus PV = 6 708

Comment:

• A change in the residual value guarantee is a change in estimate. The disclosure

required per IAS 8, Accounting Policies, Changes in Accounting Estimates and
Errors, would thus be applicable in such cases. The change in estimate note would
be done in the year ended 31 December 20X16. However, this is excluded from
the RRP 300 syllabus.

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Class example 5 – Change in lease payments caused by change in an index or

a rate used to determine lease payments

CARMENERE LIMITED enters into a lease agreement to lease a bulldozer on

1 January 20X16, the commencement date of the lease. The lease is for eight years.
In terms of the lease agreement, the lease payments are payable annually in arrears
on 31 December. The initial lease payment amount is R800 000.

In terms of the lease agreement, the lease payments will increase every two years on
the basis of the increase in the Consumer Price Index (CPI) for the preceding 24 month
period (i.e. the first reassessed lease payment will be payable on
31 December 20X18). The CPI on 1 January 20X16 was 110 and this increased to 130
on 31 December 20X17.

There were no initial direct costs incurred and there were also no lease incentives,
prepayments or restoration costs.

The reporting date of Carmenere Limited is 31 December.

The interest rate implicit in the lease is not readily determinable. The incremental
borrowing rate of Carmenere Limited on 1 January 20X16 was 9,5% per annum whilst
it was 10,25% per annum on 31 December 20X17.

Required:

Prepare the journal entries (cash transactions included) in the books of Carmenere
Limited for the years ended 31 December 20X17 and 31 December 20X18 to account
for this lease agreement in accordance with IFRS 16, Leases.
Note: • Round calculated amounts to the nearest Rand.
• Journal narrations are required.
• Closing journal entries are not required.

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Suggested solution
Dr Cr
R R
31 December 20X17
Depreciation (P/L) 543 344
Right-of-use asset – bulldozer (SFP) 543 344
Depreciation for year
(calc 2)
Interest expense / Finance cost (P/L) 376 171
Lease liability (SFP) 376 171
Increase in carrying amount of lease liability for
interest for year
(using calc 1: AMORT 2 INT = R376 171)
Lease liability (SFP) 800 000
Bank (SFP) 800 000
Decrease in carrying amount of lease liability
for payment made for year
1 January 20X18
Right-of-use asset – bulldozer (SFP) 642 886
Lease liability (SFP) 642 886
Re-measurement of lease liability and right-of-
use asset due to change in lease payments
caused by change in index
(calc 8)
31 December 20X18
Depreciation (P/L) 650 491
Right-of-use asset – bulldozer (SFP) 650 491
Depreciation for year
(R3 260 061 calc 3 + R642 886 jnl above) / 6 years
remaining lease term
)
Interest expense / Finance cost (P/L) 396 981
Lease liability (SFP) 396 981
Increase in carrying amount of lease liability for
interest for year
(using calc 7: AMORT 1 INT = R396 981)
Lease liability (SFP) 945 455
Bank (SFP) 945 455
Decrease in carrying amount of lease liability
for payment made for year (refer calc 7)

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Calculations

1. Initial measurement of lease liability and right-of-use asset on 1/1/20X16

PMT = 800 000

N=8
I/YR = 9,5
Thus PV = 4 346 749

2. Annual depreciation of right-of-use asset (before effect of lease liability

reassessment)

R4 346 749 / 8 years (lease term) = R543 344

3. Carrying amount of right-of-use asset on 31/12/20X17 or 1/1/20X18

R4 346 749 calc 1 – (R543 344 calc 2 x 2 years 1/1/X16 to 31/12/X17 ) = R3 260 061

4. Carrying amount of lease liability on 31/12/20X17 or 1/1/20X18

AMORT 2 BAL = R3 535 860 or

R4 346 749 + R412 941 Interest 20X16 – R800 000 Payment 20X16 + R376 171 Interest 20X17
–
R800 000 Payment 20X17 = R3 535 861 (R1 difference)

5. Re-measurement of lease liability on 1/1/20X18

PMT = 945 455 (800 000 x 130/110) or ((800 000 x 20/110) + 800 000)
N = 6 (remaining term of lease)
I/YR = 9,5 (unchanged discount rate)
Thus PV = 4 178 746

6. Reassessment amount on 1/1/20X18

R
Lease liability before reassessment (calc 4) 3 535 861
Lease liability after reassessment (calc 5) 4 178 746
Thus increase in/adjustment to lease liability (and right-of-use asset) 642 886

The adjustment to the lease liability (and the right-of-use asset) could also be
calculated as follows using the change in the payment amount:

PMT = 145 455 (945 455 – 800 000)

N = 6 (remaining term of lease)
I/YR = 9,5 (unchanged discount rate)
Thus PV = 642 886

Comment:

• A change in the lease payment amount caused by a change in an index is not a

change in estimate. The disclosure required per IAS 8, Accounting Policies,
Changes in Accounting Estimates and Errors, would thus not be applicable in such
cases.

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Class example 6 – Change in lease payments caused by change in interest rate

where lease has floating interest rate

CARMENERE LIMITED entered into a lease agreement on 1 January 20X16 (the

commencement date of the lease) to lease a delivery vehicle. The lease is for three
years. In terms of the lease agreement, the lease payments are payable annually in
arrears. The annual lease payment is R195 600.

There were no initial direct costs incurred and there were also no lease incentives,
prepayments or restoration costs.

The interest rate in the lease varies with the prime lending rate. On 1 January 20X16,
the interest rate implicit in the lease is 7,75% per annum which is the same as the
prime lending rate on this date. On 1 January 20X17, the prime lending rate increased
to 9,25% per annum. You may assume that Carmenere Limited is able to determine
the interest rate implicit in the lease.

Required:

Prepare the journal entries (cash transactions included) in the books of Carmenere
Limited for the years ended 31 December 20X16 and 20X17 to account for this lease
agreement in accordance with IFRS 16, Leases.

Note: • Round calculated amounts to the nearest Rand.

• Journal narrations are required.
• Closing journal entries are not required.

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Suggested solution
Dr Cr
R R
1 January 20X16
Right-of-use asset – delivery vehicle (SFP) 506 363
Lease liability (SFP) 506 363
Initial recognition of lease liability and right-of-
use asset (refer calc 1)
31 December 20X16
Interest expense / Finance cost (P/L) 39 243
Lease liability (SFP) 39 243
Increase in carrying amount of lease liability for
interest for year
(using calc 1: AMORT 1 INT = R39 243)
Lease liability (SFP) 195 600
Bank (SFP) 195 600
Decrease in carrying amount of lease liability
for payment made at end of year
Depreciation (P/L) 168 788
Right-of-use asset – delivery vehicle (SFP) 168 788
Depreciation for year
(R506 363 / 3 years)
1 January 20X17
No journal entry required as lease liability amount -
does not change (it is measured at the PV of future
payments). Lessee will only need to calculate the
interest expense using the new interest rate and
then allocate the new payment amount between
the interest and capital portions.
31 December 20X17
Interest expense / Finance cost (P/L) 32 376
Lease liability (SFP) 32 376
Increase in carrying amount of lease liability for
interest for year
(using calc 2: AMORT 1 INT = R32 376)
Lease liability (SFP) 199 642
Bank (SFP) 199 642
Decrease in carrying amount of lease liability
for payment made at end of year
Depreciation (P/L) 168 788
Right-of-use asset – delivery vehicle (SFP) 168 788
Depreciation for year (R506 363 / 3 years)

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Calculations:
1. Initial measurement of lease liability on 1/1/20X16
PMT = 195 600
FV = 0
N=3
I/YR = 7,75
Thus PV = R506 363
2. Calculation of new payment amount for change in interest rate on 1/1/20X17
PV = - 350 006 (using calc 1 above, AMORT 1 BAL = 350 006)
FV = 0
N = 2 (years remaining of lease term)
I/YR = 9,25 (revised discount rate)
Thus PMT = R199 642

Comment:

• A change in the interest rate where the interest rate in the lease is a floating rate,
is not a change in estimate since the interest rate is not estimated. The disclosure
required per IAS 8, Accounting Policies, Changes in Accounting Estimates and
Errors, would thus not be applicable in such cases.

5. Presentation (IFRS 16.47 - .50 and IFRS 18)

How are the assets and liabilities of a lease presented in the statement of
financial position?

• The following items must be presented separately either in the statement of

financial position or in the notes (IFRS 16.47):

 Right-of-use assets must be presented separately from other assets.

 Lease liabilities must be presented separately from other liabilities.

NB: For RRP 300 purposes, separate presentation on the face of the
statement of financial position will be used.

• Refer IFRS 18, Presentation and Disclosure in Financial Statements, for

presentation of the elements of financial statements.

How are expenses arising from a lease presented in the statement of profit or
loss and other comprehensive income?

• The following items must be included in applicable line items (IFRS 16.49):

 Interest expense on the lease liability. This is a component of “Interest

on liabilities that involve more than only the raising of finance” in the
financing category of profit or loss.

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 Depreciation charge for the right-of-use asset. This will be included in

cost of sales, selling expenses, administrative expenses or other
operating expenses, depending on the nature of the underlying asset.

How are the cash flows arising from a lease presented in the statement of cash
flows?

• A lessee shall classify (IFRS 16.50):

 Cash payments for the principal portion of the lease liability within
financing activities.

 Cash payments for the interest portion of the lease liability by applying
the requirements of IAS 7, Statement of Cash Flows, for interest paid.
Interest paid is presented on the face of the statement of cash flows as
a separate line item and is included in cash flows from financing
activities.

 Payments for short-term leases, payments for leases of low-value

assets and variable lease payments not included in the measurement
of the lease liability, within operating activities.

NB: Refer to the study material for IAS 7, Statement of Cash Flows
regarding the treatment of cash flows from leases.

6. Disclosure (IFRS 16.51 - .60)

What is the objective of providing disclosure in the financial statements of the

lessee?

→ The information provided in the notes (i.e. disclosure) read together with the
information presented on the face of the statement of financial position,
statement of profit or loss and other comprehensive income and statement of
cash flows will enable the users of the financial statements to assess the
effect of leases from the lessee’s perspective (IFRS 16.51)

How should this information be disclosed?

→ Information can be disclosed in a single note or separate section of the

financial statements. (IFRS 16.52) (Note: In RRP 300, disclosure in a
single note will be used.)

→ If the information required by IFRS 16 is disclosed elsewhere in the financial

statements, it need not be included in this single note or separate section of
the financial statements. However, there must be a reference provided in the
single note or separate section of the financial statements as to where that
information is disclosed. (IFRS 16.52)

→ The information should be disclosed using a tabular format unless another

format is more appropriate. (IFRS 16.54)

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What information must be disclosed?

→ The following information must be disclosed (for RRP 300 syllabus purposes
only):

 depreciation charge [NB: the total depreciation for the year and not just
the depreciation expense recognised in profit or loss for the year] for the
right-of-use asset by class of underlying asset; (IFRS 16.53(a) and
IFRS 16.54)

 interest expense [NB: the total interest expense for the year and not just
the interest expense recognised in profit or loss for the year] on lease
liabilities; (IFRS 16.53(b) and IFRS 16.54)

 expense relating to short-term leases (other than those leases that have
a lease term of one month or less) accounted for by applying IFRS 16.6
[i.e.: where this is the accounting policy choice applied to all such
leases]; (IFRS 16.53(c))

 expense relating to low-value asset leases accounted for by applying

IFRS 16.6. Excluded from this amount would be any amount that is
included in the expense relating to short-term leases. Remember that
this choice is available on a lease-by-lease basis; (IFRS 16.53(d))

 expense relating to the variable lease payments not included in the

measurement of the lease liability; (IFRS 16.53(e))

 total cash outflow for leases; (IFRS 16.53(g)

IFRS 16 requires the disclosure of “total cash outflow for leases”. This
has been interpreted literally to mean that the following amounts would
be included in the amount disclosed here:

 total cash outflows related to the lease liability;

 total cash outflows related to short-term leases;
 total cash outflows related to low-value asset leases;
 total cash outflows related to variable lease payments that were not
included in the initial measurement of the lease liability; and
 cash flows related to any deposits paid upfront by the lessee.

 additions to right-of-use assets; (IFRS 16.53(h))

 the carrying amount of the right-of-use assets at the end of the reporting
period by class of underlying asset; (IFRS 16.53(j))

 the amount of lease commitments for short-term leases accounted for

per IFRS 16.6 if the portfolio of these leases at the end of the reporting
period is not similar to that for which the expense has been disclosed;
(IFRS 16.55)

 a maturity analysis of lease liabilities that is separate from the maturity

analysis of other liabilities; (IFRS 16.58)

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 The maturity analysis shall be prepared in accordance with

IFRS 7.39 and IFRS 7.B11.

 IFRS 7.39 requires that the maturity analysis shows the remaining
contractual maturities. Thus, the maturity analysis is based on the
undiscounted CASH FLOWS and not on the present value amounts
as recorded in the general ledger and presented on the face of the
statement of financial position.

 IFRS 7.B11 states that in preparing this maturity analysis, the entity
must use its judgement to determine the appropriate number of time
bands to be used. For example, an entity may determine that the
following time bands are appropriate:

- Not later than one month

- Later than one month and not later than three months
- Later than three months and not later than one year
- Later than one year but not later than five years.

For RRP 300 purposes, the time bands selected by the entity will
always be given to you in the information.

 the following qualitative and quantitative information must also be

disclosed:(IFRS 16.59)

 nature of the lessee’s leasing activities;

 future cash outflows that the lessee is potentially exposed to that are
not included in the lease liability, such as variable lease payments,
extension options; termination options; residual value guarantees;
and
 restrictions or covenants imposed by leases.

 if short-term leases or leases of low value assets are accounted for per
IFRS 16.6, then that fact must be disclosed. (IFRS 16.60)

The following format of this disclosure in a note related to leases in the books of the
lessee is illustrated below:

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Illustration Limited
Notes for the year ended …………

28. Lease agreements in which the company is the lessee

28.1 Right-of-use assets

Machinery Equipment Total IFRS 16.54

R R R
Carrying amount No specific
beginning of year xxx xxx xxx requirement
Additions xx xx xx IFRS 16.53(h)
Adjustments for No specific
lease liability re- requirement
assessments xxx (xxx) xx
Depreciation (xx) (xx) (xx) IFRS 16.53(a)

Carrying amount
end of year xxx xxx xxx IFRS 16.53(j)

28.2 Income and expenses related to leases

R
Expenses

Variable lease payment expense xxx IFRS 16.53(e)

Short-term leases expense xxx IFRS 16.53(c)

 The company has elected to apply the IFRS 16.60
recognition exemption for its short-term leases
of computer equipment.
 The portfolio of short-term leases to which the IFRS 16.55
company is committed at the reporting date is
dissimilar to the portfolio for which the short-
term leases expense was recognised during the
period. The total undiscounted future cash flows
in accordance with these lease contracts on the
reporting date is Rxxxx.
Low-value assets lease expense xxx IFRS 16.53(d)
 The company has elected to apply the IFRS 16.60
recognition exemption for its low-value leases
of office furniture.
Finance cost related to lease liabilities xxx IFRS 16.53(b)

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28.3 Lease liabilities

The undiscounted cash flows for lease liabilities outstanding are payable as
follows:
R IFRS 16.58 &
Not later than 1 month xxx IFRS 7.39 &
Later than 1 month and not later than 3 months xxx IFRS 7.B11
Later than 3 months and not later than 1 year xxx
Later than 1 year but not later than 5 years xxx
Later than 5 years xxx
xxx

28.4 Additional information (IFRS 16.59)

 There are lease agreements for machinery and equipment for which right-of-use
assets and lease liabilities have been recognised.
 There are future cash flows to which the company is potentially exposed that are not
reflected in the measurement of the lease liabilities, which include:
- Variable lease payments of Rxxx;
- Extension options payments of Rxxxx;
- Termination options payments of Rxxx; and
- Residual value guarantees of Rxxx.
 The lease agreements related to machinery prohibit the company from the
declaration and payment of ordinary dividends throughout the lease term.
28.5 Total cash outflow for leases for reporting period
R IFRS 16.53(g)

Total cash outflows during reporting period xxx

Comments:

• All notes must have comparative information unless it is the first set of financial
statements prepared.

• For RRP 300 purposes, the “Right-of-use asset” is presented as a separate line item
on the face of the statement of financial position under “Non-current assets”.

• The maturity analysis required for lease liabilities is as per IFRS 7.39 read with B11
of IFRS 7. IFRS 7 requires that when the entity prepares the maturity analysis, it
must use its judgement to determine the appropriate number of time bands that must
be used. For RRP 300 purposes, the time bands selected by the entity will always
be given to you in the information provided.

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7. Income tax implications

The accounting treatment of leases in the books of the lessee is not the same as the
income tax treatment of these agreements.

Lease contract for income tax purposes

The lessor is the legal owner of the asset subject to the lease agreement and the
lessee is merely renting the asset from the lessor.
The total lease payment amount paid by the lessee is considered to be the rent amount
paid by the lessee to the lessor for the use of the asset. Thus, the deduction given for
income tax purposes to the lessee in this situation is limited to the actual amount of the
lease payments paid in cash in any tax year. (In RRP 300, we assume that all lease
payments are paid timeously in terms of the lease contract). The total lease payments
are thus granted as a rent expense deduction. Note that SARS makes no distinction
between the capital portion and the interest portion of the lease payment amount.
Since SARS does not accept that the lessee is the legal owner of the leased asset, the
lessee will not qualify for any capital allowances in respect of the leased asset. The
income tax implications related to the lessee acquiring ownership of the asset at the
end of the lease term for an amount that is less than its fair value, are not considered
in this material. For RRP 300 purposes, the lessee will always acquire ownership of
the asset at the end of the lease term at its fair value (where applicable).
Initial direct costs incurred by the lessee may be deductible if they are of a revenue
nature. If they are of a capital nature, they will not be deductible for tax purposes. In an
RRP 300 example or question, it will always be assumed that these expenses incurred
will be deductible for income tax purposes in the year in which they are incurred.
If the initial direct costs are deductible for income tax purposes in the year in which
they are incurred, this will result in a temporary difference. The temporary differences
arise because these initial direct costs are recognised for accounting purposes in the
profit or loss over the lease term as part of the depreciation expense of the right-of-use
asset. For income tax purposes, these costs are deductible in full in the year in which
they are incurred.
Since there are differences in the accounting treatment and tax treatment of a lease
contract, temporary differences will arise which will result in the recognition of deferred
tax. The difference between the accounting treatment and income tax treatment will
also have implications when calculating the current tax expense of the lessee.

At the commencement date of a lease, a lessee typically recognises a lease liability

and the corresponding amount as part of the cost of a right-of-use asset. It may happen
that the right-of-use asset recognised is equal to the lease liability recognised. This
will result in equal taxable and deductible temporary differences on initial recognition
of the asset and liability in such a transaction. This means that the IAS 12.15(b)
exemption cannot apply, and deferred tax must be recognised. IAS12.22A furthermore
clarifies that the exemption provided by paragraph 15 does not apply to lessee
accounting, and an entity must recognise any resulting deferred tax liability and asset.
The VAT implications are not considered for RRP 300 purposes.

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Class example 7 – Income tax implications of lease contract for lessee

Use the information provided in Example 1 for Zinfandel Limited related to the lease
agreement for the factory building.
The following additional information is provided related to the short-term leases and
the low-value asset leases for which Zinfandel Limited has elected to apply the
recognition exemption:
 Short-term leases of desk top computers: Zinfandel Limited entered into four lease
agreements for desk top computers. Each of these leases is for a 12 month period
and the lease terms commenced on 1 January 20X16. Lease payments are paid
monthly in arrears and the total of the lease payments is R31 350 per year for each
of the four lease agreements.
 Low-value asset lease of office furniture: Zinfandel Limited entered into a lease
agreement for office furniture on 1 July 20X16. The lease term is three years and
the lease payments are payable monthly in arrears. The accountant has provided
calculations related to this lease agreement as well as an extract from the journal
entries that have been processed for the years ended 31 December 20X16 and
20X17.
Calculation of monthly lease expense amount to be recognised over term of lease:
R
1/7/20X16 – 30/6/20X17 R3 000 x 12 months 36 000
1/7/20X17 – 30/6/20X18 R2 500 x 12 months 30 000
1/7/20X18 – 30/6/20X19 R2 000 x 12 months 24 000
Total cash payments 90 000

Thus monthly expense R90 000/36 months 2 500

Extract from journals related to lease agreement:

Dr Cr
R R
1. 31 December 20X16
Lease expense (P/L) 15 000
(R2 500 x 6 months)
Prepaid lease expense (SFP) 3 000
Bank (SFP) 18 000
(R3 000 x 6 months)
2. 31 December 20X17
Lease expense (P/L) 30 000
(R2 500 x 12 months)
Prepaid lease expense (SFP) 3 000
Bank (SFP) 33 000
(R3 000 x 6 months) + (R2 500 x 6 months)

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Further information:
• The income tax rate has remained unchanged at 28%.
• The profit before income taxes after all of the lease agreements have been taken
into account is R20 593 070 for the year ended 31 December 20X16 and
R30 145 690 for the year ended 31 December 20X17. During the year ended
31 December 20X16, Zinfandel Limited received dividend income of R150 000
whilst during the year ended 31 December 20X17, Zinfandel Limited paid traffic
fines of R23 000.
• The deposit of R300 000 paid by Zinfandel Limited on 1 January 20X16 to secure
the lease is deductible for tax purposes when it is paid in cash.
• The initial direct costs of R35 000 paid by Zinfandel Limited on 1 January 20X16
are deductible for tax purposes when paid in cash.
• Costs incurred related to the restoration provision (included in the cost of the right-
of-use asset) are only deductible for tax purposes when they are paid in cash.
• The lease incentive received on 1 January 20X16 of R28 750 is taxable in the year
received in cash.
• There are no non-taxable income items, non-deductible items or temporary
differences other than those that arise from the information provided above. If
necessary, assume that there are tax planning opportunities that will create
sufficient taxable income in the future for the recognition of any deferred tax assets.
• The balance on the deferred tax account on 1 January 20X16 was Rnil.
• Zinfandel Limited uses the Rand value format for the disclosure of any tax rate
reconciliation, should one be necessary.
• Ignore the leasehold improvements.

Required:

a) Prepare the current tax calculations of Zinfandel Limited for the years ended
31 December 20X16 and 20X17 in accordance with IAS 12, Income Taxes.
Note: Round amounts calculated to nearest Rand.

b) Prepare the deferred tax calculations of Zinfandel Limited for the years ended
31 December 20X16 and 20X17 in accordance with IAS 12, Income Taxes.
Note: Round amounts calculated to nearest Rand.

c) Prepare the deferred tax note and the income tax expense note of Zinfandel
Limited for the year ended 31 December 20X17 in accordance with International
Financial Reporting Standards (IFRS).
Note: Round amounts calculated to nearest Rand.

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Suggested solution:

a) Current tax calculation of Zinfandel Limited (lessee)

31/12/20X17 31/12/20X16
R R
Accounting profit before income taxes (given) 30 145 690 20 593 070
Non-taxable income / Non-deductible expenses:
• Dividend income (given) - (150 000)
• Fines (given) 23 000 -
Temporary differences:
Lease of factory building:
• Depreciation 1 430 817 1 430 817
• Finance cost 2 476 674 2 539 242
• Lease payments paid in cash (rent expense) (3 050 000) (3 050 000)
• Deposit paid to secure lease (300 000)
• Initial direct costs (35 000)
Lease incentive received 28 750
Short-term leases:
• Lease expense (R31 350 x 4 contracts) 125 400 125 400
• Lease payments paid in cash (rent expense) (125 400) (125 400)
Low-value lease:
• Lease expense 30 000 15 000
• Lease payments paid in cash (rent expense) (33 000) (18 000)
Restoration provision:
• Interest expense
(FV = 2 501 635; N = 15; I/YR = 12,5, thus PV = 60 117 53 437
427 500)
(20X16: AMORT INT 1 = R53 437)
(20X17: AMORT INT 2 =R60 117)
Taxable profit 31 083 298 21 107 316
Current tax expense
20X16: (R21 107 316 x 28%) 5 910 048
20X17: (R31 083 298 x 28%) 8 703 323

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 b) Deferred tax calculation of Zinfandel Limited (lessee)

Deferred tax calculation and movement in deferred tax for year ended 31/12/20X16

CA TB TD DT (SFP) Movement
(28%) (P/L)
(dr) / cr dr / (cr)
R R R R R
31/12/20X15 -

31/12/20X16
(a) (b) (i)
Right-of-use asset 20 031 438 - 20 031 438 5 608 803
(c) (d) (i)
Lease liability (20 217 747) - (20 217 747) (5 660 969)
lOMoARcPSD|53277556

Prepaid lease expense of low-

(e) (f)
value assets 3 000 - 3 000 840
(g) (h)
Restoration provision (480 937) - (480 937) (134 663)

(185 989) (185 989)

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(a) Carrying amount of right-of-use asset on 31/12/20X16 (from class example 1).

(b) The carrying amount of the right-of-use asset consist of two components. The reasons why the tax base is zero will be different
for each component:
a. Deposit and initial direct cost - No future tax deduction as the full amount of R35 000 for initial direct costs and R300 000
for the deposit to secure the lease already deducted in current tax calculation for the year ended 31/12/20X16
b. Rest of carrying amount - No future tax deduction for the asset as the lessee is not the owner of the asset for tax
purposes

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 (c) Lease liability (capital amount outstanding) on 31/12/20X16 (from class example 1).

(d) TB = CA – amount of this CA deductible for tax in future = R20 217 747 – R20 217 747 = Rnil [explanation: The future tax
deduction will be the total amount of the lease payments paid in cash in the future. SARS makes no distinction between the
capital and finance cost portions of these payments. The carrying amount of the lease liability on 31/12/20X16 represents the
capital portion of these total future cash payments that will be deductible for tax in the future when paid in cash. Thus, the whole
amount of the lease liability amount (the capital amount) will be tax deductible in the future when the payments are paid in cash
in the future.]

(e) Refer extract from journal entries provided in the information given in the example

(f) Tax deduction in future is Rnil as all deductible in current tax calculation of 31/12/20X16 as the amount is less than R100 000
(refer S23H of Income Tax Act). Net deduction in current tax calculation is R3 000 (R15 000 – R18 000).

(g) Balance on restoration provision on 31/12/20X16 is R427 500 refer cost of right-of-use asset + R53 437 refer current tax calc = R480 937
lOMoARcPSD|53277556

(h) TB = CA – amount of this CA deductible for tax in future = R480 937 – R480 937 = Rnil. The restoration cost will only be
deductible for tax purposes when paid in cash in the future.

(i) On initial recognition, when only considering the lease liability component of the right-of-use asset, it appears if the deferred tax
exemption of IAS 12.15(b)(ii) would be applicable as a taxable temporary difference arises that at the time of the transaction
affects neither accounting profit nor taxable profit. However, IAS 12.15(b)(iii) specifically excludes this scenario from the

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exemption as the transaction (at initial recognition) gives rise to equal taxable and deductible temporary differences in the form
of the lease liability and the right-of-use asset.

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 Deferred tax calculation and movement in deferred tax for year ended 31/12/20X17

CA TB TD DT (SFP) Movement
(28%) (P/L)
(dr) / cr dr / (cr)
R R R R R
31/12/20X16 (185 989)

31/12/20X17
(a) (b)
Right-of-use asset 18 600 621 - 18 600 621 5 208 174
(c) (d)
Lease liability 19 644 421 - (19 644 421) (5 500 438)
Prepaid lease expense of low-value
(e) (f)
assets 6 000 - 6 000 1 680
(g) (h)
Restoration provision 541 054 - (541 054) (151 495)
lOMoARcPSD|53277556

(442 079) (256 090)

(a) Carrying amount of right-of-use asset on 31/12/20X17 (from class example 1).
(b) The carrying amount of the right-of-use asset consist of two components. The reasons why the tax base is zero will be different
for each component:

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a. Deposit and initial direct cost - No future tax deduction as full amount of R35 000 for initial direct costs and R300 000
for the deposit to secure the lease already deducted in current tax calculation for year ended 31/12/20X16
b. Rest of carrying amount - No future tax deduction for asset as lessee is not owner of asset for tax purposes
(c) Lease liability (capital amount outstanding) on 31/12/20X17.

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 (d) TB = CA – amount of this CA deductible for tax in future = R19 644 421 – R19 644 421 = Rnil [explanation: The future tax
deduction will be the total amount of the lease payments paid in cash in the future. SARS makes no distinction between the
capital and finance cost portions of these payments. The carrying amount of the lease liability on 31/12/20X17 represents the
capital portion of these total future cash payments that will be deductible for tax in the future when paid in cash. Thus, the whole
amount of the lease liability amount (capital amount) will be tax deductible in the future when the payments are paid in cash in
the future.]
(e) Refer extract from journal entries provided in information given in the example for R6 000 (R3 000 31/12/20X16 + R3 000 31/12/20X17)
(f) Tax deduction in future is Rnil as R3 000 deductible in current tax calculation of 31/12/20X17 as amount is less than R100 000
(refer S23H of Income Tax Act). Net deduction in current tax calculation is R3 000 (R30 000 – R33 000) and the other R3 000
was deducted in the current tax calculation for the year ended 31/12/20X16. Thus total amount already deducted is R6 000.
(g) Balance on restoration provision on 31/12/20X16 is R480 937 refer deferred tax calc 31/12/20X16 + R60 117 refer current tax calc = R541 054
(h) TB = CA – amount of this CA deductible for tax in future = R541 054 – R541 054 = Rnil. The restoration cost will only be
deductible for tax purposes when paid in cash in the future.
lOMoARcPSD|53277556

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 lOMoARcPSD|53277556

c) Disclosure of Zinfandel Limited (lessee)

Zinfandel Limited
Notes for the year ended 31 December 20X17

4. Deferred tax

Analysis of temporary differences:

20X17 20X16
R R
Lease agreements for tax purposes (292 264) (52 166)
(20X16: R5 608 803 – R5 660 969)
(20X17: R5 208 174 – R5 500 438)
Prepaid expenses relating to lease agreements 1 680 840
Provision for restoration costs (151 495) (134 663)
(442 079) (185 989)

10. Income tax expense

Main components of income tax expense:

20X17 20X16
R R
Current – current (refer part a above) 8 703 323 5 910 048
Deferred – arising on originating and reversing
temporary differences (refer part b above) (256 090) (185 989)
Total income tax expense 8 447 233 5 724 059

Reconciliation between the income tax expense and accounting profit

20X17 20X16
R R

Accounting profit before income taxes 30 145 690 20 593 070

Tax at the applicable rate of 28% 8 440 793 5 766 059
Tax effect of expenses not deductible for tax
purposes:
- Fines (R23 000 x 28%) 6 440 -
Tax effect of income not taxable:
- Dividends (R150 000 x 28%) - (42 000)
Income tax expense 8 447 233 5 724 059

The standard tax rate of 28% is the rate announced by the South African tax authority.

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 lOMoARcPSD|53277556

HOMEWORK QUESTIONS

QUESTION 1 (19½ marks)

[lease in books of lessee; notes; tax implications]

CONFUSED LIMITED manufactures machinery and you have been approached to

assist with the accounting treatment of the following transaction for the year ended
30 June 20X8:

Plant JT200

On 1 January 20X5 (commencement date), Confused Limited leased a piece of its

plant that it uses in its manufacturing process, from Rentals Limited in terms of a lease
contract for a period of five years. The fair value of the plant at the commencement of
the lease was R71 143. The annual lease payment of R15 000 is payable in arrears
with the first payment payable on 31 December 20X5. An additional payment of
R13 000 is also payable with the final lease payment of R15 000.

In order to negotiate lower lease payments over the lease contract, Confused Limited
agreed to a residual value guarantee of R7 000. On the commencement date of the
lease contract, Confused Limited does not expect to pay any amount to Rentals Limited
at the end of the lease contract in terms of this residual value guarantee. On the
commencement date of the lease contract, Rentals Limited estimates that it will realise
a total amount of R10 000 for this plant at the end of the lease term.

Confused Limited paid R3 000 to their externally appointed attorneys on

1 January 20X5 for the preparation of the lease contract. Rentals Limited did not incur
any initial direct costs related to this rental agreement.

The lease agreement prohibits the company from the declaration and payment of
ordinary dividends throughout the lease term.

Additional information:

1. There have been no changes in the residual values and useful lives of any of the
plant. There has also not been any indicator of impairment of the plant.

2. Assume that all amounts payable and receivable have been paid and received
timeously.

3. Right-of-use assets related to plant are accounted for in accordance with the cost
model. Depreciation on plant is written off on the straight-line basis over the
estimated useful life of eight years.

4. The South African Revenue Service allows a wear and tear allowance straight line
over six years on plant. Initial direct costs on lease agreements are deductible for
tax purposes in the year in which they are incurred. The tax rate has remained
unchanged at 28%.

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 lOMoARcPSD|53277556

5. There is certainty of future taxable income.

6. The maturity analysis of the lease liabilities is prepared using time bands of 12
months each.

7. You may assume that the lessee will have access to the unguaranteed residual
value and the initial direct cost of the lessor.

REQUIRED:

a) Disclose the above transaction in the notes to the financial statements of

Confused Limited for the year ended 30 June 20X8 in accordance with IFRS 16,
Leases.

Note: • The accounting policy note is not required.

• Right-of-use assets are presented on the statement of financial
position in a separate line item by Confused Limited.
• All matters that must be disclosed in terms of IFRS 16 related to
the lease contract must be included in a single note.
• A “Profit before income taxes” note is not required.
• Ignore all tax implications.
• Comparative amounts are not required.
• Round all calculated amounts to the nearest Rand.
(16½ marks)

b) Prepare ONLY a detailed deferred taxation calculation for Confused Limited for
the year ended 30 June 20X8 in accordance with IAS 12, Income Taxes.
(3 marks)
Note: • Round calculated amounts to the nearest Rand.

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QUESTION 2 (11 marks)

[recognition exemption applied to lease in books of lessee; notes]

SCRAT LIMITED manufactures machinery and entered into several lease agreements
during the financial year ended 30 September 20X9.

On 1 January 20X9 (commencement date), Scrat Limited entered into a non-

cancellable lease contract to lease equipment for a period of three years. The lease
payments of R51 000 each are payable by Scrat Limited annually in arrears. The
equipment is considered to be a low-value asset, and so Scrat Limited decided to apply
the recognition exemption to this lease contract.

Included in each lease payment payable, is an amount of R1 000 in respect of

maintenance costs for this equipment. Scrat Limited decided to distinguish between
the lease and non-lease components in this lease contract based on the relative stand-
alone selling prices of R50 000 per year for the lease of the equipment and R1 000 per
year for the maintenance.

The following additional information has been extracted from the lease agreement:
• Scrat Limited cannot pay or declare dividends during the lease term.
• An additional amount is payable on 31 December each year to the lessor
calculated at 1% of the cost of electricity used by the equipment to protect the
lessor from the misuse (overuse) of the equipment by the lessee.

The estimated cost of electricity used for the first year is R19 500 with an expected
increase of 2% per year. The actual cost of electricity used by the equipment for the
nine months ended 30 September 20X9 is R14 500.

The costs (that are deductible for income tax purposes) that are related directly to the
negotiation and arrangement of this operating lease agreement were as follows:
• incurred and paid for by Scrat Limited R1 000
• incurred and paid for by the lessor R1 500

The tax rate is 28%. Assume that the South African Revenue Service (SARS) only
allows the deduction of contractual payments when they are due and payable.

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REQUIRED:

a) Disclose the above lease agreement in the notes to the financial statements of
Scrat Limited for the year ended 30 September 20X9 in accordance with
IFRS 16, Leases.

Note:  The accounting policy note is not required.

 Scrat Limited uses a single note for disclosure of matters
related to lease agreements. The “Profit before income taxes”
note is not required.
 Comparative amounts are not required.
 Ignore all tax implications.
 Round calculated amounts to the nearest Rand.
(7 marks)

b) Assume that the profit before income taxes of Scrat Limited was R1 160 605 for
the year ended 30 September 20X9 and the above lease had been taken into
account. Calculate the current tax payable of Scrat Limited for the year ended
30 September 20X9.

Note: • Round calculated amounts to the nearest Rand.

• Assume that there are no non-taxable items, non-deductible
items or temporary differences other than those that arise
from the information provided above.
(4 marks)

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 lOMoARcPSD|53277556

QUESTION 3 (14 marks)

[lease in books of lessee; current and deferred tax calculations; journals]

GHARAGHAB LIMITED leased plant in terms of a lease contract on 1 August 20X9

(commencement date). Gharaghab Limited’s reporting date is 30 April.

The accountant has prepared the following amortisation schedule (which you must
accept is correct):

Payment date Payment Interest Capital Capital

amount outstanding
R R R R
1 August 20X9 661 200
31 July 20X10 259 962 82 650 177 312 483 888
31 July 20X11 259 962 60 485 199 477 284 411
31 July 20X12 259 962 35 551 224 411 60 000
31 July 20X12 60 000 - 60 000 -
839 886 178 686 661 200

Gharaghab Limited depreciates plant on the straight-line basis over an estimated

useful life of five years. Ownership of the plant will pass to Gharaghab Limited when
the lease contract terminates. The plant was available for use as intended by
management immediately.

The tax rate is 28%. The accounting profit for the year ended 30 April 20X10, after the
lease contract has been taken into account, is R928 345. Assume that there are no
temporary differences other than those that are evident from the information provided.
There are no non-deductible expenses or non-taxable income items.

The credit balance on deferred tax on 30 April 20X9 amounted to R675 235 and the
credit balance on deferred tax on 30 April 20X10 before the lease contract had been
taken into account also amounted to R675 235.

REQUIRED:

Prepare the general journal entries (cash transactions excluded) for Gharaghab
Limited for the year ended 30 April 20X10 in accordance with International Financial
Reporting Standards (IFRS).

Note:  Round calculated amounts to the nearest Rand.

 Journal narrations are not required.

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QUESTION 4 (23½ marks)

Case study 1 (6 marks)

[change in the lease term]

TRENERY LIMITED entered into a lease contract to lease a machine on 1 July 20X16
(commencement date). The lease term is four years and there is an option to extend
this lease term for another two years.

The annual lease payments for the first four years that are payable in arrears are
R200 000, with the first payment payable on 30 June 20X17. The lease payments in
the option period are R150 000 per annum, also payable annually in arrears.

Since the interest rate implicit in the lease is not readily determinable, Trenery Limited’s
incremental borrowing rate is 12,5% per annum on 1 July 20X16.
On 1 July 20X16, there was no reasonable certainty that Trenery Limited would make
use of the option period.

There are no residual values and neither of the parties incurred any initial direct costs
related to this lease.

However, on 1 July 20X18, management decided that they would exercise the option
period at the end of the lease term. On 1 July 20X18, the incremental borrowing rate
of Trenery Limited was 12,75% per annum.

REQUIRED:

Calculate the adjustment that would be made to the lease liability and the underlying
right-of-use asset on 1 July 20X18 in the books of Trenery Limited in accordance with
IFRS 16, Leases.

Note: • Round calculated amounts to the nearest Rand.

Case study 2 (3½ marks)

[change in the exercise of option to purchase]

TRENERY LIMITED entered into a lease contract to lease a machine on 1 July 20X16
(commencement date). The lease term is four years and there is an option to purchase
this machine at the end of the four year term for R180 000 (which is the estimated fair
value of the machine on this date).

The annual lease payments payable in arrears are R200 000, with the first payment
payable on 30 June 20X17.

Since the interest rate implicit in the lease is not readily determinable, Trenery Limited’s
incremental borrowing rate is 12,5% per annum on 1 July 20X16.

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On 1 July 20X16, there was no reasonable certainty that Trenery Limited would make
use of the purchase option.

There are no residual values and neither of the parties incurred any initial direct costs
related to this lease.

However, on 1 July 20X18, management have decided to exercise the option to

purchase the machine at the end of the lease term. On this date, the incremental
borrowing rate of Trenery Limited was 12,75% per annum.

REQUIRED:

Calculate the adjustment that would be made to the lease liability and the underlying
right-of-use asset on 1 July 20X18 in the books of Trenery Limited in accordance with
IFRS 16, Leases.

Note: • Round calculated amounts to the nearest Rand.

Case study 3 (4 marks)

[change in the interest rate - floating rate]

TRENERY LIMITED entered into a lease contract to lease a machine on 1 July 20X16
(commencement date). The lease term is four years and there is no purchase option
or extension option.

The annual lease payments payable in arrears are R200 000, with the first payment
payable on 30 June 20X17.

The interest rate implicit in the lease is determinable by Trenery Limited and amounts
to 12,5% per annum, which is the same as the prime lending rate on this date.
However, this rate is linked to the prime lending rate and may vary over the lease term
if the prime lending rate changes during this period.

There are no residual values and neither of the parties incurred any initial direct costs
related to this lease.

On 1 July 20X18, the prime lending rate increased to 12,75% per annum.

REQUIRED:

Calculate the new lease payment amount and the adjustment that would be made to
the lease liability and the underlying right-of-use asset on 1 July 20X18 in the books of
Trenery Limited in accordance with IFRS 16, Leases.

Note: • Round calculated amounts to the nearest Rand.

• If no adjustments are made, give reasons for this.

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Case study 4 (5½ marks)

[change in amount payable i.t.o. residual value guarantee]

TRENERY LIMITED entered into a lease contract to lease a machine on 1 July 20X16
(commencement date). The lease term is four years. There is no option to extend this
lease and there is no option to purchase this asset at the end of the lease term.

The annual lease payment payable in arrears is R200 000, with the first payment
payable on 30 June 20X17. If the fair value of the machinery at the end of the lease
term is less than R190 000, then Trenery Limited will be required to pay to the lessor
an amount calculated as the difference between the actual fair value and the amount
of R190 000.

On 1 July 20X16, the fair value of the machine at the end of the lease term was
estimated by Trenery Limited to be R185 000, whilst on 1 July 20X19, this amount was
estimated to be only R120 000 as the machine had been used far more than was the
original intention. No changes to the fair value of R185 000 were deemed necessary in
the prior periods.

Since the interest rate implicit in the lease is not readily determinable, Trenery Limited’s
incremental borrowing rate is 12,5% per annum on 1 July 20X16. On 1 July 20X19, the
incremental borrowing rate was 15,4% per annum.

There is no unguaranteed residual value and neither of the parties incurred any initial
direct costs related to this lease.

REQUIRED:

Calculate the adjustment that would be made to the lease liability and the underlying
right-of-use asset on 1 July 20X19 in the books of Trenery Limited in accordance with
IFRS 16, Leases.

Note: • Round calculated amounts to the nearest Rand.

Case study 5 (4½ marks)

[change in lease payments caused by change in an index used to determine

lease payments]

TRENERY LIMITED entered into a lease contract to lease a machine on 1 July 20X16
(commencement date). The lease term is four years. There is no option to extend this
lease and there is no option to purchase this asset at the end of the lease term.

In terms of the lease contract, the lease payments are payable annually in arrears. The
initial lease payment amount payable on 30 June 20X17 is R200 000. These annual
lease payments will increase every two years on the basis of the increase in the
Consumer Price Index (CPI) for the preceding 24 month period (i.e. the first reassessed
lease payment will be payable on 30 June 20X19). The CPI on 1 July 20X16 was 110
and this increased to 120 on 30 June 20X18.

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There were no initial direct costs incurred by either of the parties to the contract and
there are also no lease incentives, prepayments or residual values.

Since the interest rate implicit in the lease is not readily determinable, Trenery Limited’s
incremental borrowing rate is 12,5% per annum on 1 July 20X16. On 1 July 20X18, the
incremental borrowing rate was 15,4% per annum.

REQUIRED:

Calculate the adjustment that would be made to the lease liability and the underlying
right-of-use asset on 1 July 20X18 in the books of Trenery Limited in accordance with
IFRS 16, Leases.

Note: • Round calculated amounts to the nearest Rand.

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QUESTION 5 (23 marks)

THULI LIMITED is listed on the JSE Limited and has a reporting date of 31 December.

1. Accounting policies

The following is an extract from the accounting policy notes of Thuli Limited for
the year ended 31 December 20X16:
Plant is accounted for using the cost model. It is depreciated using the
straight-line method over its estimated useful life of 15 years. There is no
significant residual value.
Laptop computers are accounted for using the cost model and are
depreciated using the straight-line method over their estimated useful lives of
three years. There are no significant residual values.
Delivery vehicles are accounted for using the cost model. They are
depreciated using the straight-line method over their estimated useful lives,
which vary between four and six years. Some of these delivery vehicles have
significant residual values that are taken into account in the calculation of
depreciation, while others have insignificant residual values.

2. Lease contracts entered into by Thuli Limited

The company has entered into a number of lease transactions as a lessee. The
details of the lease contracts (which are lease contracts in terms of IFRS 16,
Leases) are as follows:

2.1 Lease related to plant

On 1 January 20X15 (commencement date), Thuli Limited entered into a non-

cancellable lease contract to lease plant from Bafana Limited. The lease contract
is for an initial term of five years with an option to extend the lease term for a
further one year. There is no option to acquire ownership of the plant on expiry of
the lease contract. The lease contract specifies that the lease payment is based
on an amount of R50 per unit of product that is manufactured using this plant with
a minimum lease payment of R1 300 521,58 per annum for the initial lease term
of five years, whilst the minimum lease payment is R950 250,15 per annum for
the optional extension period. All of these minimum lease payments are payable
annually in arrears with the first payment payable on 31 December 20X15. If the
total lease payment exceeds the minimum lease payment, the excess is payable
in cash on 31 March of the following year.

On 1 January 20X15, Bafana Limited paid R150 000 to Thuli Limited as an

incentive to encourage Thuli Limited to enter into this lease contract. Thuli Limited
incurred initial costs of R65 000. This comprised of legal fees paid to its external
legal advisor of R40 000 as well as R25 000 representing the cost to company of
two employees. These employees were involved in the investigation of market-
related terms for similar types of leases and negotiated the terms of this lease
contract with the lessor.

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On 1 January 20X15, there was no reasonable certainty that Thuli Limited would
exercise the extension option available in the lease contract. However, during the
year ended 31 December 20X16, the local currency weakened significantly
relative to other currencies and since a new plant would have to be imported, the
management of Thuli Limited decided that it would be in the interest of the
company to exercise the extension option. On 31 December 20X16, Bafana
Limited was advised that this decision had been made.

The interest rate implicit in the lease contract was not readily determinable by
Thuli Limited on 1 January 20X15. The incremental borrowing rate on this date
was determined to be 10% per annum. On 31 December 20X16, this rate had
increased to 14,5% per annum.

On 1 January 20X15, Thuli Limited estimated that it would manufacture 31 600

units of product per year for the term of the lease. The following actual units were
manufactured:
Units
1 January 20X15 – 31 December 20X15 31 800
1 January 20X16 – 31 December 20X16 34 900

Thuli Limited does own other plant (refer accounting policies provided above). On
1 January 20X15, Thuli Limited estimated that the economic life of the leased
plant is 15 years. During the year ended 31 December 20X16, Thuli Limited used
this leased plant for one month to construct a new piece of specialised
manufacturing equipment to be used in the mixing of the ingredients of a new
product.

2.2 Lease related to laptop computers

During the year ended 31 December 20X14, some owned laptop computers were
donated to a library in a rural school. These laptop computers were replaced
when, on 1 January 20X15 (commencement date), Thuli Limited entered into a
non-cancellable lease contract with Nomasonto Limited, for the lease of ten new
laptop computers, for a period of three years. The annual lease payments are
payable by Thuli Limited in arrears, with the first payment payable on 31
December 20X15.

On 1 January 20X15, Thuli Limited correctly classified these laptop computers as

low-value assets based on the criteria given in IFRS 16, Leases, and elected to
apply the recognition exemption to this lease contract from this date.

The annual lease payments are as follows:

Year R
Year 1 125 000
Year 2 137 500
Year 3 151 250

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All of these annual lease payments include a fixed amount of R5 000 in respect
of maintenance and support costs that are recoverable by Nomasonto Limited.
On 1 January 20X15, Thuli Limited decided to distinguish between the lease and
non-lease components in this lease contract. All of these amounts are the same
as the relative stand-alone selling prices.

Thuli Limited does own other laptop computers (refer to the accounting policies
provided above). On 1 January 20X15, Thuli Limited estimated that each of the
ten laptop computers has an economic life of three years.

2.3 Lease related to delivery vehicle

Thuli Limited required a new delivery vehicle to replace one that had been written
off in an accident in September 20X16. Thuli Limited applied to a bank for
financing for the purchase of a new delivery vehicle but only received confirmation
that this funding had been approved on 29 December 20X16.

Since they urgently required the use of a delivery vehicle, Thuli Limited entered
into a lease contract on 1 October 20X16 (commencement date), with Madonsela
Limited to lease a delivery vehicle. The lease term is 10 years. Both Thuli Limited
and Madonsela Limited have the right to terminate this lease contract on the
anniversary date of the lease commencement date (i.e. on 1 October of each year
commencing on 1 October 20X17). No penalties for termination are payable by
either of the parties to this lease contract. The lease payments of R25 000 are
payable monthly in arrears. Thuli Limited did not incur or pay any initial direct
costs in respect of this lease contract.

In the past, Thuli Limited has frequently exercised termination options in lease
contracts. It is very likely that this practice will also be applied with this contract
since they have now obtained the required funding.

The interest rate implicit in the lease contract was not readily determinable by
Thuli Limited on 1 October 20X16. The incremental borrowing rate on this date
was determined to be 11,5% per annum.

Thuli Limited does own other delivery vehicles (refer to accounting policies
provided above). On 1 October 20X16, Thuli Limited estimated that the economic
life of the leased delivery vehicle is 10 years with no residual value.

2.4 Various other lease agreements

During the year ended 31 December 20X16, Thuli Limited entered into 3 other
lease contracts that it correctly classified as short-term leases. The actual cash
payments in respect of these lease contracts during the year ended 31 December
20X16 amounted to R325 000. The calculated amounts (straight-line) of the cash
payments of these leases is R295 000 for the year ended 31 December 20X16.
No initial direct costs were incurred or paid by Thuli Limited.

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2.5 Other information

• You must assume that the portfolio of short-term leases to which Thuli Limited
is committed at 31 December 20X16 is similar to the portfolio for which an
expense related to short-term leases was recognised during the reporting
period ended on 31 December 20X16.

• Thuli Limited has elected to apply the recognition exemption to all its short-
term leases.

• Thuli Limited chooses to disclose all matters related to leases in which it is the
lessee in a single note.

• Thuli Limited has timely paid all lease payments for all of the lease contracts,
as discussed above.

• Thuli Limited uses the following time bands in its disclosure related to lease
contracts (where applicable):
- Not later than 1 year
- Later than 1 year but not later than 5 years
- Later than 5 years

REQUIRED:

Regarding leases entered into by Thuli Limited, disclose ONLY the following sections
of the “Lease contracts in which the company is a lessee” note for the year ended
31 December 20X16, in accordance with IFRS 16:

• Right-of-use asset; (10 marks)

• Income and expenses related to leases; (10 marks)
• Lease liability. (3 marks)

Note:
• Comparative amounts are not required.
• Round all calculated amounts to the nearest Rand.
• Accounting policy notes are not required.

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