Tunku Abdul Rahman University College

Faculty of Accountancy, Finance and Business

Academic Year 2021
BBFA4014 Financial Reporting

Tutorial 4
Leases (IFRS 16 / MFRS 16)

Question 1

A lessee enters into a five-year lease of a building which has a remaining useful life of 10 years.
Lease payments are $50,000 per annum, payable at the beginning of each year.

The lessee incurs initial direct costs of $20,000 and receives lease incentives of $5,000. There is no
transfer of the asset at the end of the lease and no purchase option.

The interest rate implicit in the lease is not immediately determinable but the lessee's incremental
borrowing rate is 5%.

Required:

a) Discuss how the lessee should recognize the lease in accordance to IFRS16 Leases.
b) How should the lessee recognise the lease if the lease payments are paid in arrears?

Question 2

Selleasy Co sells a building to Buylesser for $800,000 cash. The carrying amount of the building
prior to the sale was $600,000. Selleasy arranges to lease the building back for five years at
$120,000 per annum, payable in arrears. The remaining useful life is 15 years.

The transaction satisfies the performance obligations in IFRS 15, so will be accounted for as a sale
and leaseback .

At the date of sale the fair value of the building was $750,000, so the excess $50,000 paid by the
buyer is recognised as additional financing provided by Buylesser.

The interest rate implicit in the lease is 4.5% and the present value of the annual payments is:
$
120,000/1.045 114,833
120,000/1.0452 109,888
3
120,000/1.045 105,155
120,000/1.0454 100,627
120,000/1.0455 96,294
526,797

Of this, $476,797 relates to the lease and $50,000 relates to the additional financing.

Required:

Discuss how Selleasy should recognize the sales and leaseback on transaction date in
accordance to IFRS16 Leases.
Question 3

Magna Co entered into a sale and leaseback on 1 April 20X7. It sold a lathe with a carrying amount of
$300,000 for $400,000 (equivalent to fair value) and leased it back over a five-year period, equivalent to
its remaining useful life. The transaction constitutes a sale in accordance with IFRS 15.

The lease provided for five annual payments in arrears of $90,000. The rate of interest implicit in the
lease is 5%.

Required

What are the amounts to be recognised in the financial statements at 31 March 20X8 in respect of this
transaction?

Question 4: Implications of the changes

Vache leases a machine to Toro. The lease is for four years at an annual cost of $2,000 payable annually
in arrears. The normal cash price (and fair value) of the asset is $5,900 (the present value of the minimum
lease payments is $5,710). The implicit rate of interest is 15%.

Required:

How should Vache account for their net investment in the lease?

Question 5
Oroc hires out industrial plant on long-term operating leases. On 1 January 20X1, it entered into a
seven-year lease on a mobile crane. The terms of the lease are $175,000 payable on 1January 20X1,
followed by six rentals of $70,000 payable on 1 January 20X2 - 20X7.The crane will be returned to
Oroc on 31 December 20X7.The crane originally cost $880,000 and has a 25-year useful life with no
residual value.

Required:
Discuss the accounting treatment of the above in the books of Oroc for the year ended 31 December
20X1.