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Ifrs 16
Ifrs 16
Ifrs 16
Leases
21-1
Accounting for Leases
21-2
The
The Leasing
Leasing Environment
Environment
21-3
The
The Leasing
Leasing Environment
Environment
3. Flexibility.
21-4
The Leasing Environment
Advantages of Leasing—Lessor
1. Often provides profitable interest margins.
21-5
Lease Accounting
Only exceptions:
leases covering a term of less than one year or
lease of property with a value less than $5,000.
21-7 LO 2
Lease Accounting
The lessee
recognizes interest expense on the lease liability using the
effective-interest method and
records depreciation expense on the right-of-use asset.
21-8 LO 2
Measurement of the Lease Liability and
Lease Asset
Lease Term
The fixed, non-cancelable term of the lease.
Bargain-renewal option can extend this period.
At the commencement of the lease, the difference
between the renewal rental and the expected fair rental
must be great enough to make exercise of the option to
renew reasonably certain.
21-9 LO 2
Measurement of the Lease Liability and
Lease Asset
Lease Payments
Fixed payments.
Variable payments that are based on an index or a rate.
Guaranteed residual value.
Payments related to purchase or termination options
that the lessee is reasonably certain to exercise.
21-10 LO 2
Measurement of the Lease Liability and
Lease Asset
Discount Rate
Lessee should compute the present value of the lease
payments using the implicit interest rate.
► This rate, at commencement of the lease, which causes
the aggregate present value of the lease payments and
unguaranteed residual value to be equal to the fair value
of the leased asset.
21-12 LO 2
Terms and provisions of the lease agreement:
•The term of the lease is five years. The lease agreement is non-
cancelable, requiring equal rental payments of €20,711.11 at the
beginning of each year (annuity-due basis).
•The backhoe has a fair value at the commencement of the lease of
€100,000, an estimated economic life of five years, and a guaranteed
residual value of €5,000. (Ivanhoe expects that it is probable that the
expected value of the residual value at the end of the lease will be
greater than the guaranteed amount of €5,000.)
•The lease contains no renewal options. The backhoe reverts to CNH
Capital at the termination of the lease.
•Ivanhoe’s incremental borrowing rate is 5 percent per year.
•Ivanhoe depreciates its equipment on a straight-line basis.
•CNH sets the annual rental rate to earn a rate of return of 4 percent
per year; Ivanhoe is aware of this rate.
21-13 LO 2
Lessee Accounting: Example 1
Payment € 20,711.11
Present value factor (i=4%,n=5) x 4.62990
PV of lease payments €95,890.35 *
21-15 LO 2
ILLUSTRATION 21.7
Lease Amortization Schedule—Lessee
21-16 LO 2
ILLUSTRATION 21.7
21-17 * rounding LO 2
Lessee Accounting: Example 1
21-18 LO 2
Lessee Accounting: Example 1
21-19
ILLUSTRATION 21.7
21-20 * rounding LO 2
ILLUSTRATION 21.7
Equipment 5,000
Cash 5,000
21-21 * rounding LO 2
Lessee Accounting: Example 2
21-22 LO 2
Lessee Accounting: Example 2
Payment € 20,711.11
Present value factor (i=4%,n=5) x 4.62990
PV of lease payments € 95,890.35 *
Probable residual value € 2,000,00
PV factor (i=4,n=5) x .82193
PV of probable residual value 1,643.86
Lessee’s lease liability/right-of-use asset € 97,534.21
Ivanhoe makes the following entries to record the lease and the
first payment on January 1, 2019, as:
21-24 LO 2
ILLUSTRATION 21.11
Lease Amortization Schedule—Lessee
21-25 LO 2
ILLUSTRATION 21.12
Journal Entries—Guaranteed Residual Value
21-26 LO 2
Example 2: Residual Value Loss
21-28 LO 2
Lessee Accounting: Example 3
21-30 LO 2
Lessee Accounting: Example 3
The present value of the lease payments for M&S in this situation
is £49,924.56 (£17,620.08 × 2.83339 (PVF = AD 3,6%)).
January 1, 2019
Right-of-Use Asset 49,924.56
Lease Liability 49,924.56
21-32 LO 2
21-33 ILLUSTRATION 21.15 Journal Entries by Lessee LO 2
Low-Value and Short-Term Leases
21-34 LO 2
Lessor Accounting
Economics of Leasing
Lessor determines the amount of the rental payment, not
the lessee.
Determines payment using rate of return (implicit rate).
Considers credit standing of lessee.
Length of the lease.
Status of the residual value (guaranteed versus
unguaranteed).
21-35 LO 3
Lessor Accounting
Economics of Leasing
In Examples 1 and 2, CNH determined the implicit rate to be 4
percent, the fair value of the equipment to be €100,000, and the
residual value to be $5,000. CNH then computes the lease
payment as shown.
21-37 LO 3
For a finance lease,
•must be non-
cancelable and
•meet at least one of
the five tests.
ILLUSTRATION 21.218
Lease Classification Tests
21-38 LO 3
Classification of Leases by the Lessor
21-39 LO 3
Classification of Leases by the Lessor
21-40 LO 3
Classification of Leases by the Lessor
21-41 LO 3
Classification of Leases by the Lessor
Lease Payments
Generally include:
1.Fixed payments.
2.Variable payments.
21-42 LO 3
Classification of Leases by the Lessor
Discount Rate
Implicit rate should be used to determine the present
value of the payments.
Defined as the discount rate that, at commencement
of the lease, causes the present value of the lease
payments and unguaranteed residual value to be
equal to the fair value of the leased asset.
21-43 LO 3
Alternative Use Test
If at the end of the lease term the lessor does not have an
alternative use for the asset, the lessee classifies the lease
as a finance lease.
The assumption is that the lessee uses all the benefits from
the leased asset and therefore the lessee has essentially
purchased the asset.
21-44 LO 3
Classification of Leases by the Lessor
21-46 LO 3
Finance (Sales-Type) Lease Example
ILLUSTRATION 21.20
Lease Payment Calculation
21-47 LO 3
Finance (Sales-Type) Lease Example
21-48 LO 3
Finance (Sales-Type) Lease Example
ILLUSTRATION 21.23
Lease Amortization Schedule
21-50 LO 3
ILLUSTRATION 21.23
ILLUSTRATION 21.24
Balance Sheet
Presentation
ILLUSTRATION 21.25
Income Statement
presentation
21-53 LO 3
ILLUSTRATION 21.23
21-55 * rounding LO 3
ILLUSTRATION 21.23
Inventory 5,000
Lease Receivable 5,000
21-56 * rounding LO 3
Lessor—Guaranteed Residual Value
21-58 LO 3
Lessor—Unguaranteed Residual Value
21-59 LO 3
Lessor—Unguaranteed Residual Value
ILLUSTRATION 21.27
Computation of Lease Amounts by CNH—Sales-Type Lease
21-60 LO 3
ILLUSTRATION 21.28
21-61 Entries for Guaranteed and Unguaranteed Residual Values — Sales-Type Lease LO 3
Lessor Accounting for Operating
Leases
The following data relates to a lease agreement between Hathaway Disposal
Ltd. and M&S for the use of one of Hathaway’s standard cardboard
compactors. Information relevant to the lease is as follows.
•The term of the lease is three years. The lease agreement is non-
cancelable, requiring three annual rental payments of £17,620.08, with the
first payment on January 1, 2019 (annuity-due basis).
•The compactor has a cost and fair value at commencement of the lease of
£60,000, an estimated economic life of five years, and a residual value at the
end of the lease of £12,000 (unguaranteed).
•The lease contains no renewal options. The compactor reverts to Hathaway
at the termination of the lease.
•The implicit rate of the lessor is known by M&S. Traylor’s incremental
borrowing rate is 6 percent. Hathaway sets the annual rental rate to earn a
rate of return of 6 percent per year (implicit rate) on its investment.
21-62 LO 3
Lessor Accounting for Operating Leases
ILLUSTRATION 21.30
Lease Classification Tests
21-63 LO 3
Lessor Accounting for Operating Leases
21-64 LO 3
Lessor Accounting for Operating Leases
Cash 17,620.08
Unearned Lease Revenue 17,620.08
21-65 LO 3
Lessor Accounting for Operating Leases
21-66 LO 3