IFRS 16-LEASE
Sale and leaseback transactions
Sale and leaseback transactions involve one entity (seller/lessee) transferring
to another entity (the buyer/lessor) and then immediately leasing it back.
The buyer/lessor is normally a bank or finance company. The purpose of the
transaction is to allow the seller/lessee to raise cash whilst retaining use of the
asset
Practical Questions
Question 1 ( Lessee Accounting)
On 1 January 20X1, Maxi Plc enters into a lease for machinery:
- Lease term: 3 years
- Annual lease payments: ₦5,000,000, payable at year-end
- Interest rate: 10%
- Fair value of asset: ₦13,000,000
- No residual value, ownership remains with lessor.
Required:
1. Calculate the initial measurement of the lease liability and ROU asset.
2. Prepare the lease liability amortization schedule.
3. Show extracts of the financial statements for 20X1.
SOLUTION
1 YEAR 3
ANNUAL PAYMENT
2 #5M
3 INTEREST 10%
4 FV 13M
WORKINGS
YEAR PAYMENT DF(10%) PV
1 5,000,000 0.9091 4,545,500
2 5,000,000 0.8264 4,132,000
3 5,000,000 0.7513 3,756,500
2.4868 12,434,000
2 LEASE AMORTIZATION TABLE
CLOSING
YEAR OPENING INTEREST(10%) PAYMENT BAL
A B C D=A+B-C
1 12,434,000 1,243,400 5,000,000 8,677,400
2 8,677,400 868,086 5,000,000 4,545,486
3 4,545,486 454,514 5,000,000 0
3a STATEMENT OF PROFIT OR LOSS
DEPRECIATION 4,144,667
INTEREST 1,243,400
5,388,067
3b STATEMENT OF FINANCIAL POSITION
ROU 8,289,333
LIABILITY 8,677,400
Question 2 (Sale and Leaseback)
On 1 Jan 20X2, Delta Plc sells a building to Omega Bank for ₦50m (CV: ₦40m)
and leases it back for 10 years.
- Annual lease payments: ₦7m, payable end of the year
- Interest rate: 6%
- Right retained: 60% of the building’s rights.
Required:
1. Calculate the gain on sale recognized.
2. Determine the initial measurement of ROU asset and lease liability.
Question 3
Delta Energy Plc has agreed to lease heavy machinery from Riverstate Leasing
Company Limited. The lease period of the machinery is six (6) years. The
agreement provides that Riverstate Leasing Company Limited will incur all upkeep
expenses. The cost of the machinery is N1,200,000,000. The economic useful life
is 18 years. Delta Energy Plc is to pay annual lease rentals of N180,000,000 in
advance over 6 years, after which the machinery will revert to the lessor. The
implicit interest rate is 20% per annum.
The present value of N1 at 20% is as follows:
Year 0: 1.0000
Year 1: 0.8333
Year 2: 0.6944
Year 3: 0.5787
Year 4: 0.4823
Year 5: 0.4019
Year 6: 0.3349
Required:
i. Calculate the present value of the lease rentals of the machinery. (4 Marks)
ii. Identify with justification the kind of lease involved. (3 Marks)
iii. Advise on how to treat the lease rentals paid by Delta Energy Plc in the
financial statements. (1 Mark)
iv. Identify the TWO kinds of leases stipulated in IFRS 16 and compare them in
tabular form, stating at least FIVE differences. (7 Marks)
SOLUTION 3
YEAR CASHFLOW DF (20%) PV
0 -180,000 1 -180,000
1 -180,000 0.8333 -149,994
2 -180,000 0.6944 -124,992
3 -180,000 0.5787 -104,166
4 -180,000 0.4823 -86,814
5 -180,000 0.4019 -72,342
6 -180,000 0.3349 -60,282
-778,590
OR
YEAR CASHFLOW DF(20%) PV
0-6 -180,000 4.3255 -778,590
ASSIGNMENT:
Dolapo plc agrees to lease an asset. The terms of the lease are as follows.
1. The primary period is four years from 1 January 20x2 with a rental of #2,000 pa
payable on 31 December each year.
2. The present value of the lease payment is #5,710
3. The interest rate implicit in the lease is 15%.
Required:
What figures will be shown in the financial statements for the year ended
December 31, 20x2?
