TOPIC 4 - IAS 17 LEASES -...
Transcript of TOPIC 4 - IAS 17 LEASES -...
CPA P2 Advanced Corporate Reporting
1
© Cenit Online 2015
TOPIC 4 - IAS 17 – LEASES
CPA P2 Advanced Corporate Reporting
2
© Cenit Online 2015
5 Indicators of A Finance Lease
1. A finance lease is presumed if the lease term is for all or substantially all of the assets
useful life.
N.B. The Lease term is the non cancellable period for which the lessee has contracted to lease
the asset together with any further terms for which the lessee has the option to continue to
lease the asset
2. A finance lease is presumed if the lease transfers ownership of the asset to the lessee
by the end of the lease term (thus hire purchase transactions qualify)
3. The lessee has the option to purchase the asset at the end of the lease term and the
purchase price is sufficiently below market value, that it makes it highly probable that
the lessee will purchase the asset outright
4. The leased asset could be used by another party, other than the lessee, but only with
significant modifications being made - indicates the leased asset is specifically for the
current lessee
5. The present value of the minimum lease payments is equal to all or substantially all of
the fair value of the leased asset at the inception of the lease – (So in other words, in
todays money, the lease payments are equal or nearly equal to the purchase cost of
the leased asset)
CPA P2 Advanced Corporate Reporting
3
© Cenit Online 2015
CPA P2 Advanced Corporate Reporting
4
© Cenit Online 2015
CPA P2 Advanced Corporate Reporting
5
© Cenit Online 2015
DEPOSITS PAID
Where the lessee has paid a deposit to the lessor before the lease commences, the deposit is
used to reduce the amount of the lease liablity i.e. reduce the amount of lease finance
advanced – deposits are deemed to be all capital
The Double Entry for a deposit is
Cr Bank
Dr Finance Lease Obligation
In questions, where the initial payment is different in amount to the annual rentals, this is
generally taken to be an indicator of a deposit paid – See “Branch” question !!
FINANCE LEASE IN ADVANCE
Main Points
Rental is paid on first day
The first rental is deemed to be all capital
An accrual will be made for finance costs
CPA P2 Advanced Corporate Reporting
6
© Cenit Online 2015
In Year 2, the amount of capital repaid will be the lease rental less accrued interest
from Year 1 paid in Year 2 i.e. paid as part of Year 2 rental
FINANCE LEASE IN ARREARS
Rental is paid on Last day
Rentals are deemed to be composed of Interest and Capital
No Interest Accrual
FINANCE LEASE PAID IN ARREARS EXAMPLE
CPA P2 Advanced Corporate Reporting
7
© Cenit Online 2015
CPA P2 Advanced Corporate Reporting
8
© Cenit Online 2015
FINANCE LEASE PAID IN ARREARS EXAMPLE
CPA P2 Advanced Corporate Reporting
9
© Cenit Online 2015
CPA P2 Advanced Corporate Reporting
10
© Cenit Online 2015
CPA P2 Advanced Corporate Reporting
11
© Cenit Online 2015
Leases of Land & Buildings
Under IAS 17, the land and buildings element would be dealt with seperately. The lease of
the land is an operating lease, as land has an indefinite useful economic life. The lease on the
buildings is assessed on its own merits. The lease payments are split in proportion to the fair
values of the respective assets
CPA P2 Advanced Corporate Reporting
12
© Cenit Online 2015
SUM OF THE DIGITS METHOD OF ALLOCATING INTEREST
ON A FINANCE LEASE An means of allocating the Finance Charge over the term of a finance lease
Approximates to the actuarial method
More interest expensed in the early part of the lease and less towards the end
Procedure
The digit 1 is assigned to the final instalment, 2 to the penultimate instalment and so
on (This applies for a Finance Lease in Arrears. For a Finance Lease paid in Advance,
the Digit 0 is applied to the Final Instalment )
Add the digits
Calculate the interest charge included in each instalment by taking the total finance
cost and multiplying by the following fraction
Digit Applicable to the Instalment
Sum of the Digits
CPA P2 Advanced Corporate Reporting
13
© Cenit Online 2015
Example of Sum of the Digits Method
Account for the above lease using the sum of the Digits as a means of allocating the finance
charge
CPA P2 Advanced Corporate Reporting
14
© Cenit Online 2015
Solution
Finance Cost
Allocation
Total Finance
Expense
(5000) * 4 –
€15,850 =
€4150
Instalment Digit Finance Expense
Allocation
1 4 4/10 * 4150 = 1660 2 3 3/10 * 4150 = 1245 3 2 2/10 * 4150 = 830 4 1 1/10 * 4150 = 415 10 4150
Finance Lease (In
Arrears)Table
Date Opening Capital
Obligation
Interest Rental Closing Capital
Obligation
Yr 1 15,850 1660 -5000 12,510
Yr 2 12,510 1245 -5000 8,755
Yr 3 8755 830 -5000 4,585
Yr 4 4585 415 -5000 -
Statement of Profit or Loss Extract for the Year End Yr 1 Finance Cost 1,660
Depreciation (15,850/4) 3,963
CPA P2 Advanced Corporate Reporting
15
© Cenit Online 2015
Statement of Financial Position Extracts As at 31/12/Yr 1 Assets
Non Current
Assets Held Under
Finance Lease
(15,850 – 3,963) 11,887
Non Current Liabilities
Finance Lease
Obligation
8755
Current Liabilities
Finance Lease
Obligation
(15850+1660-5000 -
8755)
3755
Bank 5000
Retained Egs -5623
CPA P2 Advanced Corporate Reporting
16
© Cenit Online 2015
LESSOR ACCOUNTING
Finance Lease
Mirror image of lessee accounting
Amount Due from Lessee
Recognised to give a
constant periodic rate of
return .Approximation may
be made (i.e. Sum of Digits)
Credit against
Investment in Finance
Lease
Operating Lease - Record as a long term asset and
depreciate over useful life, record income on a straight
line basis over the lease term.
Net Investment in Finance
Lease
Finance Income
Lease Rentals Received
CPA P2 Advanced Corporate Reporting
17
© Cenit Online 2015
IAS 17 – Finance Lease Paid In Advance – Class Question & Answer
A lease rental of €20 million was paid on 1 April 2009. It is the first of 5 annual payments in
advance for the rental of an item of equipment that has a cash purchase price of €80 million.
The auditors have advised that this is a finance lease and have calculated the implicit rate in
the lease as 12% per annum. Leased assets should be depreciated on a straight line basis over
the life of the lease.
(a) Show the effect on the Statement of Profit or Loss and Statement of Financial Position
for 31 March 2010
(b) Calculate the interest charge for the remaining years of the lease
Solution
1. The cash price of the leased plant of €80 million should be capitalised and included as
plant and equipment. As the lease has a 5 year life, straight line depreciation for the
year to 31 March 2010 will be 20% of €80 million = €16 million
Leasing Table - Lease Paid in Advance (i.e. on First Day of Period)
Year Opening
Capital
Obligation
Rental Remaining
Capital
Obligation
Interest
Accrual
(12%)
31.3.10 1 80,000 (20,000) 60,000 7200
31.3.11 2 60,000 (20,000) 47,200 5664
31.3.12 3 47,200 (20,000) 32,864 3,944
31.3.13 4 32,864 (20,000) 16,808 3192
31.3.14 5 16,808 (20,000) - -
Notes:
1. First Rental is deemed to be all capital
2. Interest for each year is calculated on the “Remaining Capital Obligation”
CPA P2 Advanced Corporate Reporting
18
© Cenit Online 2015
3. The Interest Accrual in the current year is paid from the Rental of the following year
with the balance of the rental representing capital repayment
Statement of Profit or Loss Extract for Y/e 31.3.10
Finance Charge 7,200
Depreciation 16,000
Statement of Financial Position Extract as at 31.3.10
Assets
Non Current Assets
Plant (80-16) 64,000
Equity & Liabilities
Non Current Liabilities
Finance Lease Obligation 47,200
Current Liabilities
Finance Lease Obligation (12800+7200) 20,000
CPA P2 Advanced Corporate Reporting
19
© Cenit Online 2015
Sale and leaseback transactions
In a sale and leaseback transaction, an asset is sold by a vendor and then the same asset is
leased back to the same vendor.
The lease payment and the sale price are usually interdependent because they are negotiated
as a package. The accounting treatment of a sale and leaseback transaction depends upon the
type of lease involved.
If the leaseback is a finance lease, the transaction is a means whereby the lessor provides
finance to the lessee, with the asset as security (i.e.in substance, it is a financing transaction
not a sale transaction.) For this reason it is not appropriate to regard an excess of sales
proceeds over the carrying amount as income (i.e. Gain on Disposal). Such excess is deferred
and amortised over the lease term.
So because the entity still has the risks and rewards of ownership of the asset via a finance
lease, the gain on disposal is not immediately realised. It gets realised as the finance lease
term progresses. Such excess is deferred and amortised over the lease term in the financial
statements of the lessee/seller.
Journals for a Sale and Leaseback Transaction where a finance Lease is created
1.
Dr Bank
Cr Assets
Cr Deferred Gain on Disposal
Being sales proceeds on disposal
2.
Dr Asset Held under Finance Lease
Cr Finance Lease Obligation
Being creation of Finance Lease Liability
3.
Dr Deferred Gain on Disposal (SOFP)
Cr Gain on Disposal (SOPL)
Being amortisation of Deferred Gain over Lease Term
CPA P2 Advanced Corporate Reporting
20
© Cenit Online 2015
4. Account for Finance Lease as Normal – Interest, Capital Repaid, Split of Outstanding
Obligation between Current Liabilities and Non Current Liabilities and Depreciate the
Leased Asset
If the leaseback is an operating lease, and the lease payments and the sale price
are at fair value, there has in effect been a normal sale transaction and any profit or
loss is recognised immediately.
Dr Bank
Cr PPE
Cr/Dr Gain/Loss on Disposal (SOPL)
The remaining operating lease payments will be recognised on a straight line basis in the
SOPL.
Where the sale price is below fair value, any profit or loss should be recognised
immediately except that if the apparent loss is compensated by future lease payments at
below market price it should to that extent, be deferred and amortised over the period for
which the asset is expected to be used
If the sale price is above fair value, the excess over fair value should be deferred and
amortised over the period which the asset is expected to be used
CPA P2 Advanced Corporate Reporting
21
© Cenit Online 2015
Criticisms of IAS 17 Leases
CPA P2 Advanced Corporate Reporting
22
© Cenit Online 2015
CPA P2 Advanced Corporate Reporting
23
© Cenit Online 2015
CPA P2 Advanced Corporate Reporting
24
© Cenit Online 2015
Past Exam Questions
–CPA P1
Past Exam Questions
– CPA P2
Q3 (3) Apr 14 Q (A) April 2015
Q5 Apr 13 Q1 August 2014
Q4 Aug 11 Q (A) April 2014
Q3 Apr 11
Q (B) Aug 13
Q (a) Aug 12
Q1 Aug 11 – Issue 8
Q3 Apr 11
Q1 Apr 11 note (vi)