Question

Point to Point Ltd provides a service, transporting passengers from Hosea Kutako International Airport to hotels in Windhoek City and the surrounding areas.
It enters a contract with Bust Ltd for the lease of five, 25-seater buses for a period of 3 years. The lease payments are constant over the lease term. The market for airport transfer is constantly changing and Point to Point Ltd may need to use similar 25-seater buses or large 40-seater buses, depending on whether other models of transport become available or not. As such the contract allows Point to Point Ltd to cancel the lease at the end of the 1st year or at the end of the 2nd year without any penalty.

Required:
Discuss with reference to IFRS 16 Leases: how Point to Point Ltd should account for this lease contract.

Answer 1

IFRS 16 provides for accounting for leases from the perspective of lessee as signle model based on the Control approach. If a lessee has control over the assets during the period of lease, the lessee shall account for lease ROU assets and Lease Liability.

From the point of view of lessor, a lease shall be classified as finance lease or operating lease. Finance lease has been defined as a lease which meets following criteria-

(a)  The lease transfers ownership of the asset to the lessee by the end of the lease term

(b) The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised

(c) The lease term is for the major part of the economic life of the asset even if title is not transferred

(d) At the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the asset

(e) The asset is of such a specialised nature that only the lessee can use it
without major modifications

Leases other than Finance lease shall be accounted as operating lease by the Lessor.

In the given case, Point to Point Ltd. has provided a bus for lease for 3 years period and does not meet any of the criteria's above. Hence, the Lessor shall account for the income as Lease Rental Income and Bus shall be depreciated over the period of the Life of the Assets.