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Discuss how Jay should treat this lease under IAS 17.
Solution
IAS 17 requires the substance of the transaction to be reviewed and the extent to which the risks and rewards of ownership of the leased asset are
transferred to be determined. If the risks and rewards of ownership are substantially transferred to the lessee, then the lease is a finance lease. The Standard
requires the land and buildings elements to be considered separately. Normally a lease of land will be regarded as an operating lease unless the title passes
to the lessee. In this case the title does not pass and the present value of the lease payments is only 74% of the fair value of the land, which does not
constitute substantially all of the fair value of the leased asset, one of the criteria for the determination of a finance lease.
In the case of the buildings, the title passes after 15 years, and the lease runs for the whole of its economic life, which indicates a finance lease. The present
value of the minimum lease payments is 94% of the fair value of the lease at its inception, an amount that indicates that the lessee is effectively purchasing
the building. Thus it would appear to be a finance lease. Property, plant, and equipment would increase by $17 million with a corresponding increase in
noncurrent liabilities. The noncurrent liability ($17 million) will be reduced by the payment on June 30, 20X0 ($2 million), and increased by the interest
charge ($17 million × 0.07, or $1.2 million).
The land will not appear on the statement of financial position and the operating lease rentals will be charged to the statement of comprehensive income.
Disclosures for Operating Leases
In addition to the disclosures required by the financial instruments standards, these disclosures are required:
• Total future minimum lease payments under noncancelable operating leases for each of the following:
• Not later than one year
• Later than one year and not later than five years
• Later than five years
• Total future minimum lease payments expected to be received under noncancelable subleases
• Lease and sublease payments and contingent rents recognized as an expense
• A general description of the significant leasing arrangements
Facts
CASE STUDY 3
An entity enters into a finance lease to lease a truck from another entity. The truck’s fair value is $140,000. The lease rentals are payable monthly, and the
lease term is five years. The present value of the minimum lease payments at the inception of the lease is $132,000 and the unguaranteed residual value of
the truck is estimated at $20,000.
Required
At which amount will the lease liability be recorded in the financial accounts at the inception of the lease?
Solution
The lease asset and liability will be recorded at $132,000, which is the present value of the minimum lease payments. A lease liability should be recorded at
the lower of the fair value of the leased asset and the present value of the minimum lease payment. The difference between the minimum lease payments
and the fair value of $8,000 will represent the present value of the unguaranteed residual value ($20,000).
Facts
CASE STUDY 4
An entity leases an asset from another entity. The fair value of the asset is $100,000, and the lease rentals are $18,000, payable half yearly. The first
payment is made on the delivery of the asset. The unguaranteed residual value of the asset after the three-year lease period is $4,000. The implicit interest