Question

Daniel Hardware Co. is considering alternative financing arrangements for equipment used in its warehouses. Besides purchasing the equipment outright, Daniel is also considering a lease. Accounting for the outright purchase is fairly straightforward, but because Daniel has not used equipment leases in the past, the accounting staff is less informed about the specific accounting rules for leases. The staff is aware of some general lease rules related to "right-of-use," but they are unsure how the accounting rules apply to their situation. Daniel has asked you to conduct some research on these items related to lease capitalization criteria.

Instructions:

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)

(a) What is included in the measurement of (1) the lease liability and (2) the right-of-use asset?

(b) Besides the non-cancelable term of the lease, what are other considerations in determining the "lease term"?

(c) When should a lessee account for a lease modification? What procedures are followed?

Answer 1

Ans a. Accounting for lease is done as per IAS 17. The lease in this case is a finance lease. Here the lessee ie Daniel Warehouse Co should measure the lease liability as the total payments outstanding including repayment instalments and finance charges accrued to date. The asset should be recognized at lower of the fair market value or the present value of minimum lease payments determined at the inception of the lease.

Ans b. The lease term is the non cancellable period for which the lessee has aggreed to take on lease the asset together with any further periods for which the lessee has the option to continue the lease of the asset with or without further payment which option at the inception of the lease it is reasonably certain that the lessee will exercise.

Ans c. The lessee should account for a lease modification when the modification has been aggreed between the lessor and the lessee and modified lease aggreement incorporating the changes has been drawn up.