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ACC203
Financial Accounting 2
Accounting for Leases
COMMONWEALTH OF AUSTRALIA
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Lecture Outline
• Discuss the characteristics of a lease and the classification of leases
1.
• Account for finance leases from the perspectives of the lessee and the
lessor
4.
• Account for operating leases from the perspective of both lessor and
the lessee
5.
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Reference
What Is a Lease?
• An agreement where a lessor gives a lessee the
right to use an asset for an agreed period of time
1. • In return, the lessee provides a series of payments
Classification Of Leases -
AASB117
Finance • Transfers substantially all
ownership risk and rewards, with
Lease or without eventual title transfer.
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Under a finance lease the lessee guarantees the residual value that the
lessor will realise
The guarantee may range from 1% to 100% of the residual value
The existence of a guaranteed residual value indicates that the lessor has
transferred risks associated with movements in the residual value to the
lessee
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A clause allowing the lessee to purchase the asset at the end of the lease
term for a pre-set amount
The option price is normally sufficiently lower than the expected fair value
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Example
A photocopier lease may specify additional payments if the number of
photocopies exceeds a certain amount
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Incentives To Misclassify
Leases
• Divergent accounting treatments provide an incentive to
misclassify leases as operating leases
• Classification as a finance lease may have the following
1. adverse impacts on a lessee’s financial statements:
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Subsequent measurement
For assets, determine
• depreciation (over the useful life of the asset to the
entity)
• any impairment
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Contingent rent - - - - -
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1.
penalty will apply – therefore the lease is deemed to be
non-cancellable
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30/06/15
22,000 -** 22,000 63,457
** Paid annually in advance therefore no interest expense on 30/06/15
30/06/16 22,000 4,442*** 17,558**** 45,899
*** Based on interest rate implicit in lease of 7% ($63,457 x 7%)
30/06/17 22,000 3,213 18,787 27,112
30/06/18
22,000 1,898 20,102 7,010
30/06/19
7,500***** 491 7,010 -
**** $22,000 - $4,442 = $17,558
***** Guaranteed residual paid on last day of lease 23
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Cr Cash 23,900
Payment of second annual lease payment
Dr Depreciation expense 19,489
Cr Accumulated depreciation 19,489
($85,457 - $7,500 g’teed
Annual depreciation charge rv) = $77,957 / 4 yrs =
$19,489.
Depreciated over lease term as Lessee Ltd intends
on returning the asset at the end of lease
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Dr Cash 23,900
Cr Lease receivable 22,000
Cr Reimbursement in advance 1,900
Receipt of first annual lease payment
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• Lessors
• Lease receipts are recognised as revenue on a straight
2. line basis over the term of the lease
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Future Developments
• IASB and FASB have released an ED on leases
• Converged standard will result in significant
1. changes to current accounting methods
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Lecture 10 Activity
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