ACCT3321 Lecture Notes - Lecture 4: Gotland Regiment, Finance Lease, Book Value
CHAPTER 10
Leases
- Leasing means gaining access to the benefits of an asset without owning it
- In a lease agreement, payments are made for the right to use the asset for a
specified period of time.
- The new lease approach will result in a more faithful representation of a lessee’s
assets and liabilities and, together with enhanced disclosure, will provide greater
transparency of a lessee’s financial leverage and capital employed.
- Paragraph 1 of AASB 16 states the objective:
oIt sets out the principles for the recognition, measurement, presentation and
disclosure of leases. The objective is to ensure that lessees and lessors
provide relevant information in a manner that faithfully represents those
transactions. This information gives a basis for users of financial statements
to assess the effect that leases have on the financial position, financial
performance and cash flows of an entity
What is a lease?
- Appendix A of AASB 16:
oA contract, or part of a contract, that conveys the right to use an asset (the
underlying asset) for a period of time in exchange for consideration
oAn asset must be identified for there to be a lease
- Right to use:
oThe right to obtain substantially all the economic benefits from use of the
identified asset
oThe right to direct the use of the identified asset
- The customers’ ability to derive benefits from the asset refers to the potential
economic benefits throughout the lease term
oDirect [holding and using the asset]
oIndirect [subleasing the asset]
- The customer’s ability to direct the use of the underlying asset would normally be
evident in whether it can determine:
oHow and for what purpose the asset is employed
oHow the asset is operated
oThe operator of the asset
- A lease is effective when it is a separate component to the contract
- If the lessor has a substantive right to substitute the asset, the contract cannot be
recognised as a lease as the right to use the asset cannot be considered to have been
transferred it would exist if the lessor has the practical ability to substitute the
asset at any time without needing the lessee’s approval and can benefit from
substituting the asset
-Lessor the owner of the asset and retains ownership under the lease arrangement
-Lessee obtains the right to use the asset, not the ownership of the asset itself, in
return for making a payment or series of payments to the lessor
- Paragraph 3 exclusions:
o(a) leases to explore for or use minerals, oil, natural gas and similar non-
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regenerative resources;
o(b) leases of biological assets within the scope of AASB 141 [IAS 41]
Agriculture held by a lessee;
o(c) service concession arrangements within the scope of [AASB]
Interpretation 12 [IFRIC 12] Service Con- cession Arrangements;
o(d) licences of intellectual property granted by a lessor within the scope of
AASB 15 [IFRS 15] Revenue from Contracts with Customers; and
o(e) rights held by a lessee under licensing agreements within the scope of
AASB 138 [IAS 38] Intangible Assets for such items as motion picture lms,
video recordings, plays, manuscripts, patents and copyrights.
Accounting for leases by lessees
- leases with a term of more than 12 months or the asset is low in value
-Initial recognition
oA lessee is required to recognise a right-of-use asset representing its right to
use the underlying leased asset and a lease liability representing its obligation
to make lease payments
oThe commencement of the lease is the date from which the lessee is entitled
to exercise its right to use the underlying asset
oLease liability
Measured at the present value of the lease payments that are not
paid at the commencement date of the lease
They include:
Fixed payments, less any lease incentives
Variable lease payments, calculated based on an index or a
rate
The purchase option, if it is reasonably expected to be
exercised by the lessee
Penalties for terminating the lease, if the lease payments are
calculated on early termination
Residual value guarantees expected to be payable by the
lessee
If any payment is made at commencement date, they are still
considered lease payments, but are not included in the initial amount
recognised for the lease liability
If any payment includes executory costs (i.e. insurance,
maintenance…) reimbursed by the lessee after being paid by the
lessor on behalf of the lessee, those costs should be deducted before
calculating the lease payments. these costs are related to additional
services by the lessee and are not related to the asset
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Fixed payments = the payment does not change through the lease
term
Variable lease payments = may increase or decrease during the lease
term
Purchase option = should allow the lessee to purchase the asset at
the end of the lease for a pre-set amount, significantly less than the
expected residual amount (bargain purchase option)
Residual value guarantee = that part of the residual value of the
underlying asset guaranteed by the lessee, a party related to the
lessee or a third party. The lessor will estimate the residual value at
the end of the lease term. Where a lessee guarantees some or all the
residual value of the asset, the lessor has transferred risks associated
with movements in the residual value to the lessee.
Unguaranteed residual value = the part of the residual value that the
lessor is not assured that will be realised or that is guaranteed solely
by a party related to the lessor
Interest rate implicit in the lease = used to calculate the present
value of lease payments
The rate of interest that causes the present value of (a) the lease
payments and (b) the unguaranteed residual value to equal the sum
of (i) the fair value of the underlying asset and (ii) any initial direct
costs of the lessor.
Fair value = the amount for which an asset could be exchanged, or a
liabilities settled, between knowledgeable, willing parties in an arm’s
length transaction
Initial direct costs = incremental costs that are directly attributable to
negotiating an arranging a lease, except for costs incurred by
manufacturer/dealer lessors in connection with a finance lease
Lessee’s incremental borrowing rate = the rate of interest that a
lessee would have to pay to borrow over a similar term, and with a
similar security, the funds necessary to obtain an asset of a similar
value to the right-of-use asset in a similar economic environment
oRight of use asset
The right to use asset should be measured at cost and that will
include:
Amount recognised as the lease liability
Any lease payment made before commencement date less any
lease incentive received
Any initial direct costs incurred by the lessee
An estimate of the costs to dismantle and remove the
underlying asset, to restore the site on which it is located and
to restore the asset to the conditions required by the lease
contract
- Subsequent measurement
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