Company Valuation Under IFRS : Interpreting and Forecasting ...

Chapter Four – Key issues in accounting and their treatment under IFRS
Exhibit 4.20: Finance lease illustration
Inputs
Fair value of asset 1,040,000
Annual rental 250,000
Interest rate 9%
Term (years) 5
PV of MLP 972,413
PV as % of fair value 94%
Finance lease
Period Opening Interest Rental Capital Closing
balance repaid balance
1 972,413 87,517 -250,000 -162,483 809,930
2 809,930 72,894 -250,000 -177,106 632,824
3 632,824 56,954 -250,000 -193,046 439,778
4 439,778 39,580 -250,000 -210,420 229,358
5 229,358 20,642 -250,000 -229,358 0
Notes
1. The initial entry is to capitalise the lease and the asset at the present value of
the minimum lease payments, i.e. €972, 413.
2. The interest column goes to the income statement as the finance charge.
3. The principal will be depreciated, usually on a straight line basis in
accordance with the usual treatment of depreciation of fixed assets, despite
the fact that capital repayments are skewed towards the end of the lease.
4. The rental will go through the cash flow statement, normally divided
between principal repayments (financing cash flow) and the interest paid
(can be financing or operating or indeed investing under IFRS).
5. The closing balance is debt and will be time profiled between that which is
due within one year and that which is due after that period.
If we change the details we can see that the rentals merely go through the income
statement.
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