Question

An asset which could be purchased outright for £383,720 is instead leased by Lessee Ltd for three years at the end of which the asset will have no residual value. The lease provides for half-yearly payments in advance of £72,000, the first payment being made on 1 January 2018. The asset is to be depreciated using the straight line method.

Required:

(a) Show how the asset will be accounted for in the financial statements for the year ended 2018 under IAS 17 if: (i) Lessee Ltd is responsible for all maintenance and insurance costs; (ii) Lessee Ltd is not responsible for the maintenance and insurance costs.

(b) IFRS 16 Leases has changed how leases will be recognised in financial statements. Outline the key changes to lease accounting contained in IFRS 16 and discuss why these changes were considered to be needed. Your answer to this part of the question should not be more than 150 words.

Answer 1

(a) (i) In the given case, the lease residual value is Nil and hence, it should be accounted as Finance Lease by the lessee in its financials. Refer below for working-

Asset value to be recorded- 384,751.41 which is to be depreciated.

Lease working
Half Yearly	Lease	PV factor @10%	PV of lease	Interest	Repayment	Closing
0	72,000.00	1.00	72,000.00	-	(72,000.00)	312,751
1	72,000.00	0.95	68,649.31	15,265.40	(72,000.00)	256,017
2	72,000.00	0.91	65,454.55	12,496.18	(72,000.00)	196,513
3	72,000.00	0.87	62,408.46	9,591.80	(72,000.00)	134,105
4	72,000.00	0.83	59,504.13	6,545.65	(72,000.00)	68,650
5	72,000.00	0.79	56,734.96	3,350.83	(72,000.00)	1
6	-
			384,751.41	37,353.38	(288,000.00)

a (ii) Answer does not change as maintainence and repair cost does not change lease classification.

b. IFRS 16 captures the substance of the transaction i.e. control of the asset leading to better presentation of the leases in the financial statement. Further, IFRS 16 covers several other concepts which were not covered by IAS17 leading to varied accounting practices. e.g. IFRS 16 deals with sub-lease whereas no such topic was discussed by IAS 17. From lessor perspective, there is no major change in the standard.

Investors, stakeholder's had always questioned the presentation of leases and varied practices and there was always suspicion whether lease contract has been capture properly or not. Hence, IFRS 16 was brought in.