Summary FAC2601 Learning Unit 7- Leases.docx

Learning Unit 7- Leases
7.1 Schematic representation of IFRS 16
OBJECTIVE
To ensure that lessees provide relevant information in a manner that faithfully
represents those transactions


DEFINITION OF A LEASE
= A lease is a contract, or part of a contract that conveys the right to use an
asset (the underlying asset) for a period of time (lease term) in exchange for
consideration.



IDENTIFYING A LEASE
 Assess at inception of a contract whether the contract is, or contains, a lease.
 A contract is, or contains a lease if the contract conveys the right to control
the use of an identified asset for a period of time in exchange for
consideration, meaning that the customer has both of the following:
o The right to obtain substantially all of the economic benefits from use
of the identified asset; and
o The right to direct the use of the identified asset.



ACCOUNTING BY LESSEE
 Single lessee accounting model;
 Recognise a right-of-use asset and a lease liability for all leases at the
commencement of the lease or
- elect not to apply this requirement for short –term leases and
leases for which the underlying asset is of low value;
 Initially measure a right-of-use asset and the lease liability on a present
value basis;
 INCLUDE
- initial direct costs,
- lease payments made at or before the commencement date,
o LESS:
- any lease incentives received,
- and estimates of costs to be incurred by the lessee in
dismantling and removing the underlying asset or restoring the
site on which it is located,
- in the carrying amount of the right-of-use asset;
 The lease payments shall be discounted over the lease term using the
interest rate implicit in the lease, if that rate can be readily determined.
 If this rate cannot be readily determined, the lessee shall determine and
use its own incremental borrowing rate;
 Subsequently measure a right-of-use asset similarly to other non-financial
assets; and

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,  Subsequently measure the lease liability similarly to other financial
liabilities.
7.2 Identifying a lease:
IFRS 16, Leases will be applied if a contract contains a lease.
INCEPTION OF A LEASE
= earlier date of the lease agreement & the date of commitment by parties to
the principal provisions of the lease



At inception of a contract, an entity will need to determine whether a contract is
or contains a lease.
Contract is or will contain a lease when the contract conveys the:
 The right to control the use of an identified asset,
 for a period of time,
 in exchange for consideration.



A contract conveys the right to control the use of an identified asset for a period
of time when the customer (lessee) has both of the following:
1. The right to obtain substantially all economic benefits from the identified
asset; and
2. The right to direct the use of the identified asset.


If a customer only has the right to control the use of an asset for a portion of the
term of the contract, = only that portion of the contract will contain a lease.


A PERIOD OF TIME
A period of time refers
= to the time or amount of use of an identified asset (for example the number of
production units that the equipment will be used to produce).



REASSESSMENT
An entity is only required to reassess whether a contract is or contains a lease
when the terms or conditions of the lease have changed.


Lessee = an entity that obtains the right to use an underlying asset for a period
of time in exchange for consideration




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, Lessor = entity that provides the right to use an underlying asset for a period of
time in exchange for consideration
17.2.1 Steps to follow to determine whether a contract contains a lease:




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