academy 2019/2020 advanced financial accounting lecture 6 · - academy lecture 6 professional,...

Advanced Financial Accounting - Academy Lecture 6

Professional, Practical, Proven

Academy 2019/2020

Advanced Financial AccountingLecture 6

Accounting for Leases

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Section 20 FRS 102

- Leases

A Lease is an agreement whereby the Lessor conveys to the Lessee,

in return for payment or a series of payments,

the right to use an asset for a period of time.

A Finance Lease:

Transfers substantially all of the risks and rewards of ownership to the

lessee.

An Operating Lease:

Does not transfer the risks and rewards of ownership to the lessee.

Adv FA examines the accounting treatment of leases in the Books

of Lessees only 3

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Classification of a Finance Lease

• Transfer substantially all the risks and rewards of ownership of the asset.

• Title may, or may not, be eventually transferred.

• Usually involves payment at the full cost of the asset together with a return on the finance provided by the lessor.

Typical Parameters that indicate Classification as a Finance Lease

• The Lease transfers ownership at the end of the lease term

• The lessee has the option to purchase the asset at a price sufficiently below fair value at exercise date and it is reasonably certain the option will be exercised.

• The lease term is for a major part of the assets economic life even if title is not transferred.

• The present value of minimum lease payments amounts to substantially all of the assets value at inception

• The leased asset is so specialised that it could only be used by the lessee without major modifications being made

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Classification of an Operating Lease

• Do not transfer the risks and rewards incidental to ownership of the asset.

• At the inception of the Lease the present value of minimum lease payments does not amount to substantially all of the fair value of the leased asset.

• Involves the lessee paying a rental for the hire of an asset for a period of time which is normally substantially less than its useful economic life.

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Operating Leases:

Payments by the Lessee are charged to the Lessee’s Statement of

Comprehensive Income i.e. recorded as an Expense.

The rentals should be charged to the statement of comprehensive income on a

straight line basis over the life of the lease term.

Dr Operating Lease x (SOCI)

Cr Bank x (SOFP)

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Finance Leases:

Payments by the Lessee should be capitalised (tangible non-current assets

“Leased Assets”)

Step 1: Capitalise the asset and show the obligation to make payments against

the capital cost of the asset as a liability.

Step 2: Calculate the interest charge at the end of the accounting period;

record the expense in the SOCI and the liability in the obligation a/c

Step 3: Record the Bank payment by crediting the Bank A/C and debiting the

Lease Obligation A/C

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FINANCE LEASEStep 1: Capitalise the Leased Asset

Leased Asset

01/01 15,000


01/01 15,000

Dep Exp A/C

SOFP

SOCI

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Leased Asset

01/01 15,000


01/01 15,00031/12 1,000

Lease Interest Exp A/C

31/12 1,000

SOFP

SOCI

Step 2: Calculate and record the interest charge

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Leased Asset

01/01 15,000


Bank 6,500 01/01/01 15,00031/12 1,500

Lease Interest Exp A/C

31/12 1,500

SOFP

SOCI

Step 2: Calculate and record the interest chargeStep 3: Record the Bank Payment to the Leasing Co.

Section 20 FRS 102 – Calculating the Interest Charge

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The Actuarial Method:

Based on the following assumption:

Amount of Capital invested by the Lessor x Rate of Return desired

=

Value of Interest Charged.

For Example: Adv FA Manual – Section 8.5

On 1st January 2011 ABC Limited lease a machine from XYZ Ltd.

The Cash price of the machine is €125,095, while the total lease price was

€150,000. ABC Ltd will make five annual payments of 30,000, starting on 1st

January 2011.

The lease charge of €24,905 represents interest of 10% per annum

Calculate the correct interest values to be applied to the Lease liability balance

over the Term of the Lease.

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The Actuarial Method:The Cash price of the machine is €125,095, while the total lease price was €150,000.

The lease charge of €24,905 represents interest of 10% per annum. Payment 1 at inception.

Date Capital Due Capital Paid Interest Paid Payment

01/01 125,095

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01/01 125,095 30,000 - 30,000

01/02 95,095 9,510 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 7,461 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066 5,207 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066 24,793 5,207 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066 24,793 5,207 30,000

01/05 27,273

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066 24,793 5,207 30,000

01/05 27,273 2,727 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066 24,793 5,207 30,000

01/05 27,273 27,273 2,727 30,000

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066 24,793 5,207 30,000

01/05 27,273 27,273 2,727 30,000

01/06 -

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01/01 125,095 30,000 - 30,000

01/02 95,095 20,490 9,510 30,000

01/03 74,605 22,539 7,461 30,000

01/04 52,066 24,793 5,207 30,000

01/05 27,273 27,273 2,727 30,000

01/06 -

Totals 125,095 24,905 150,000

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Class Question

- Leases

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Finance Lease A/C

01/01/09 11,420

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Finance Lease A/C

01/01/09 11,420

31/12/09 SOCI 1,713

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Finance Lease A/C

31/12/09 4,000 01/01/09 11,420

31/12/09 SOCI 1,713

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Finance Lease A/C

31/12/09 4,000 01/01/09 11,420

b/f 9,133 31/12/09 SOCI 1,713

13,133 13,133

b/d 9,133

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Finance Lease A/C

31/12/09 Bank 4,000 01/01/09 11,420

b/f 9,133 31/12/09 SOCI 1,713

13,133 13,133

31/12/10 4,000 b/d 9,133

b/f 6,503 31/12/10 SOCI 1,370

10,503 10,503

31/12/11 4,000 b/d 6,503

b/f 3,478 31/12/11 SOCI 975

7,478 7,478

31/12/11 4,000 b/d 3,478

b/f -__ 31/12/12 SOCI 522

4,000 4,000

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Finance Leases - Disclosures

• Carrying Amount of the Asset

• Reconciliation between the total min lease payments and their present Value

• Lease Obligations should be analysed between those in which the commitment expires (a) within a year of the SOFP date, (b) between 2-5 years, (c) after five years.

Operating Leases - Disclosures

• Total operating lease rentals paid during the year

• Lease Obligations should be analysed between those in which the commitment expires (a) within a year of the SOFP date, (b) between 2-5 years, (c) after five years.

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Recommended Work

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DisclaimerCare has been taken to ensure that all data and information in Academy lectures is factual and that numerical values are accurate. To the best of our knowledge, all information in the Academy lectures is accurate at the time of publication. Accounting Technicians Ireland and its lecturers assume no responsibility for errors or misinterpretation of the information contained in these lectures or in its use.

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