FINANCIAL ACCOUNTING AND REPORTING-II

MOCK SOLUTION
TOPIC : IFRS-16 (LEASES)

Question # 1:

Query No. 1
IFRS 16 – Leases – requires a lessee to recognise a right-of-use asset in all circumstances other than for very short leases (of one year or
less) or for low value assets. A warehouse lease for five years is neither of these, so recognition of a non-current asset will be required
in our financial statements.

Query No. 2
The initial carrying amount of the right-of-use asset comprises the present value of the lease payments plus any direct costs we
incurred in arranging the lease.

In this case, therefore, the initial carrying amount at 1 October 20X4 will be $2 million ($1,895,000 + $105,000).

The right-of-use asset is included as a separate component of property, plant and equipment and depreciated over the lease term.

The depreciation of the asset for the year ended 31 March 20X5 will be $200,000 ($2 million x 1/5 x 6/12).

Therefore the carrying amount of the right-of-use asset at 31 March 20X5 will be $1,800,000 ($2 million – $200,000).

Query No. 3
When the right-of-use asset is recognised, a lease liability is also recognised. It is initially measured at the present value of the lease
payments – $1,895,000 in this case.

The liability will be increased by a finance cost. This finance cost is based on the carrying amount of the liability and the rate of interest
implicit in the lease.

The finance cost will be charged as an expense in the statement of profit or loss.

When the lease rentals are paid, they will be treated as a repayment of the lease liability. Since a lease rental is due for payment six
months after the year end, $500,000 of the lease liability will be treated as a current liability. The balance will be non-current.
 FINANCIAL ACCOUNTING AND REPORTING-II
MOCK SOLUTION
TOPIC : IFRS-16 (LEASES)

Question # 2:
Gamma

Entries already made

1-Oct-23 Expense - P/L 44,500,000
Cash - Rental (200,000$ x 220) 44,000,000
Cash - Initial Direct Costs 500,000

Rectification Entries

1-Oct-23 Right to Use Assets (W1) 190,233,581

Reversal of Expense - P/L (From above) 44,500,000
Lease Liability (W4) 145,733,581

31-Mar-24 Depreciation Expense - P/L [(190,233,581/5) x 6/12] 19,023,358

Right to Use Assets 19,023,358

31-Mar-24 Interest Expense - P/L (W4) 5,988,325

Lease Liability 5,988,325

31-Mar-24 FCY Loss - P/L (W4) 10,174,854

Lease Liability 10,174,854

Gamma Limited
Extracts of Statement of Financial Position
As at 31 March 2024

ASSETS Amount in Rs.

Non-Current Assets:
- Right to Use Assets [190,233,581 - 19,023,358] 171,210,223

LIABILITIES
Non-Current Liabilities
- Lease Liability (From Notes) 121,123,558

Current Liabilities
- Lease Liability (From Notes) 40,773,202

Extracts of Statement of Profit or Loss

For the year ended 31 March 2024

- Depreciation expense (From Entries) (19,023,358)

- Interest expense (From Entries) (5,988,325)
- FCY Loss on lease liability (From Entries) (10,174,854)

Notes to the financial Statements:

For the year ended 31 March 2024

16. Lease Liability

- Current Portion [(200,000$ x 235) - (26,497 x 235)] 40,773,202
- Non-Current Portion (balancing) 121,123,558
161,896,760 (W4)
16.1 Maturity Analysis:
- Not later than one year 40,773,202
- Later than one year but not later than 5 years 121,123,558
- Later than 5 years -
161,896,760
WORKINGS

(W1) Lease Liability: USD Rs. / USD Rs.

- Present value of 5 rental of $200,000 (in advance) @ 8% 862,425 220 189,733,581

(W2) Right of Use Asset:

- Lease Liability (W1) 862,425 220 189,733,581
- Initial Direct Costs - - 500,000
ROU-Asset 190,233,581

(W3) Lease Amortization Schedule

Amount in USD
Period end Opening Liability Rental Opening Liability Interest @ 8% Closing Liability
1-Oct-23 862,425 (200,000) 662,425 26,497 688,922
31-Mar-24 688,922 - 688,922 26,497 715,419
1-Oct-24 715,419 (200,000) 515,419 20,617 536,036
31-Mar-25 536,036 - 536,036 20,617 556,653
1-Oct-25 556,653 (200,000) 356,653 14,266 370,919
31-Mar-26 370,919 - 370,919 14,266 385,185
1-Oct-26 385,185 (200,000) 185,185 7,407 192,593
31-Mar-27 192,593 - 192,593 7,407 200,000
1-Oct-27 200,000 (200,000) 0 0 0

(W4) FCY Loss on lease liability

- Lease liability recorded on 1 Oct 2023 (662,425 x 220) (W3) 145,733,581 Rs.
- Interest Expense for 6 months (26,497 x 226) (W3) 5,988,325 Rs.
Carrying amount on 31 Mar 2024 151,721,906 Rs.

Carrying amount on 31 Mar 2024 - Remeasured (688,922 x 235) (W3) 161,896,760 Rs.

FCY Loss (10,174,854) Rs.