CIMA F2 Syllabus B. Financial reporting standards - Lessee Accounting - Notes ^{2 / 9}

Lessees recognise a right to use asset and associated liability on its SFP for most leases

How to Value the Liability

Present value of the lease payments

where the lease payments are:

1. Fixed Payments

2. Variable Payments  (if they depend on an index / rate)

3. Residual Value Guarantees

4. Probable purchase Options

5. Termination Penalties

How to Value the Right of Use asset?

Includes the following:

1. The Lease Liability (PV of payments)

2. Any lease payments made before the lease started

3. Any Restoration costs (Dr Asset Cr Provision)

4. All initial direct costs

After the initial Measurement - Asset

• Cost - depreciation (normally straight line) less any impairments

• Any subsequent re-measurements of the liability

After the initial Measurement - Liability

• Effective interest rate method (amortised cost)

• Any re-measurements (e.g. residual value guarantee changes)

Example

3 year lease term

Annual lease payments in arrears 5,000

Rate implicit in lease: 12.04%

PV of lease payments: 12,000

Answer

The lease liability is initially the PV of future lease payments - given here to be 12,000

Double entry: Dr Asset 12,000 Cr Lease Liability 12,000

The Asset is then depreciated by 4,000pa (12,000 / 3)

The lease liability uses amortised cost:

Example - Variable lease payments (included in Lease Liability)

(Remember only include those linked to a rate or index)

So the lease contract says you have to pay more lease payments of 5% of the sales in the shop you're leasing - should you include this potential variable lease payment in your lease liability?

Answer
No - because it is not based on a rate or index

(They are just put to the Income statement when they occur)