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Chapter 10 Leases

Chapter 10 Leases. Lecture Topics. Financial reporting and leases Sale and leaseback transactions Application of other accounting standards Disclosure about leases. Lecture References. Text - Chapter 10 AASBs - 1008 - 1021 - 1010 - 1041 - 1033 - 1036. Key Concepts.

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Chapter 10 Leases

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  1. Chapter 10Leases

  2. Lecture Topics • Financial reporting and leases • Sale and leaseback transactions • Application of other accounting standards • Disclosure about leases

  3. Lecture References • Text - Chapter 10 • AASBs - 1008 - 1021 - 1010 - 1041 - 1033 - 1036

  4. Key Concepts • Finance Lease • Operating Lease • Lessee vs Lessor • Cancellability • Lease Residual

  5. Financial Reporting and Leases • Leasing and financing strategies • Debt • Equity • Leases • Nature and substance of leases

  6. Financial Reporting and Leases • Finance lease • Record lease asset and liability • Depreciate lease asset • Apportion lease payments between liability and expense • Executory costs and contingent rental recognised as expense in period they arise

  7. Financial Reporting and Leases • Operating lease • No asset or liability recognised • Minimum lease payments expensed over lease term • Executory costs and contingent rental recognised as expense in period they arise

  8. Financial Reporting and Leases • Classification of leases • Technical guidelines • Implicit rate of interest • Lease term • Type of plant and equipment • Realisable value losses/gains • Secondary lease term • End of lease term

  9. Financial Reporting and Leases • Classification of leases • Non-cancellable lease • Minimum lease payments • Bargain purchase option • Fair value • Residual value • Guaranteed/Unguaranteed residual • Implicit interest rate

  10. Financial Reporting and Leases • Measuring lease assets and liability • Operating lease • Payment recognised as an expense • Recognition to reflect asset usage pattern • AASB 1008 and UIG 3

  11. Financial Reporting and Leases • Measuring lease assets and liability • Finance lease • Depreciating lease assets • Apportioning lease payments

  12. Financial Reporting and Leases • Present value calculations • PV of cash-flow at the end of n periods:

  13. Financial Reporting and Leases • PV for a series of equal payments received at the end of periods 1 to n - annuity in arrears

  14. Financial Reporting and Leases • PV for a series of equal payments received at the start of periods 1 to n - annuity in advance

  15. Financial Reporting and Leases • Finding r, the implicit interest rate in the lease

  16. Accounting for Leases • Acquisition of lease asset • Dr Lease asset xx • Cr Lease liability xx • Initial lease payment (payment in advance) • Dr Lease liability x • Cr Cash x

  17. Accounting for Leases • Subsequent lease payments • Dr Interest expense x • Dr Lease liability x • Cr Cash xx • Depreciation of asset • Dr Depreciation expense x • Cr Accumulated depreciation x

  18. Sale and Leaseback Transactions • Finance lease results • Material profit/loss on sale deferred and amortised over lease term • Implications of non-recognition of the sale • Unequal asset life • Recoverable amount test

  19. Sale and Leaseback Transactions • Operating lease results • Does sale price equal fair value? • Does carrying amount exceed fair value? • Is sale price below fair value? • Is sale price above fair value? • Evaluation of sale and leaseback requirements

  20. Accounting for Sale and Lease Back - Finance lease • Reclassification of asset • Dr Lease asset xx • Cr Asset xx • reclassification of asset • Dr Accumulated depn. - asset x • Cr Accumulated depn. - lease asset x • reclassification of asset depreciation

  21. Accounting for Sale and Lease Back - Finance lease • Lease asset measurement • Dr Accumulated depn. lease asset x • Cr Depreciation expense x • correction of accounting estimate on reclassification of physical asset

  22. Accounting for Sale and Lease Back - Finance lease • Recognition of liability and deferred difference • Dr Cash xx • Cr Lease liability x • Cr Deferred difference on s and lb x

  23. Accounting for Sale and Lease Back - Finance lease • Valuation adjustments for lease liability • Dr Expense: lease liability adj x • Cr Lease liability x

  24. Accounting for Sale and Lease Back - Finance lease • At balance date each year • Dr Depn. expense - lease asset x • Cr Accumulated depn. - lease asset x • Dr deferred difference - s and lb x • Cr Revenue: deferred diff on s and lb x

  25. Accounting for Sale and Lease Back - Finance lease • At balance date each year • Dr Interest expense x • Dr Lease liability x • Cr Cash xx

  26. Accounting for Sale and Lease Back - Operating lease • Calculate difference between carrying amount and fair value • Calculate profit/loss on sale

  27. Accounting for Sale and Lease Back - Operating lease • Sale and lease back transaction • Dr Accumulated depreciation xx • Dr Expense - sale under s and lb xx • Cr Asset xx • Dr Cash xx • Cr Revenue - sale under s and lb x • Cr Deferred profit x

  28. Accounting for Sale and Lease Back - Operating lease • At balance date each year • Dr Lease expense x • Cr Cash x • Dr Deferred profit x • Cr Revenue - deferred profit s and lb x

  29. Accounting for Sale and Lease Back - Operating lease • Where write-down to fair value • Dr Expense: Loss on revaluation x • Dr Accumulated depreciation - asset x • Cr Asset xx Difference between sales price and fair value results in deferred profit/loss

  30. Accounting for Sale and Lease Back - Operating lease • Write-down to fair value • Dr Expense: sale under s and lb xx • Cr Asset xx • Dr Cash xx • Cr Revenue - sale under s and lb x • Cr Deferred profit x

  31. Application of Other Accounting Standards • Depreciation of lease assets - AASB 1021 • Recoverable amount - AASB 1010 • Asset revaluation - AASB 1041 • General disclosure - AASB 1040 • Fair value and other disclosures - AASB 1033 • Borrowing costs - AASB 1036 and 1018

  32. Disclosure about Leases • Finance leases • carrying amount • contingent rentals • lease commitments • future minimum sub-lease rentals expected under non-cancellable leases • general description of leasing arrangements

  33. Disclosure about Leases • Operating leases • total rental expenses recognised • future minimum lease payments expected - non-cancellable sub-leases • where non-cancellable: • minimum lease payments • lease commitments • general description of leasing arrangements

  34. Where to get more information • Other courses • List books, articles, electronic sources

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