11 6 Lessee Ltd Case as of 3

Topics: Lease, Finance lease, Leasing Pages: 14 (1187 words) Published: May 13, 2015
CASE 11-6: LESSEE LTD
Caleb Aytes
Brayden Hudson
Brian Laws
Katie Vittetoe

Topics To Be Discussed





Relevant Facts of the Case
IFRS
US GAAP
Real World

Relevant Facts of the Case
• Lessee Ltd.
– British Company that applies IFRS
– Leases equipment from Lessor Inc.
– 3 years
– No purchase or renewal options &
equipment reverts back to Lessor when
lease expires
– Remaining useful life = 4 years
– Guaranteed Residual Value of $20K

Accountants Analysis

Relevant Questions
1. Was the junior accountant’s analysis correct?
Why or why not?
2. Was the senior accountant’s analysis correct?
Why or why not?
3. How would the answer differ under U.S.
GAAP?

IFRS Analysis
• IAS 17 – Financing and Operating Leases
• Finance Lease - A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incidental to ownership.

• Operating Lease – lease that does not transfer
substantially all the risks and rewards incidental to
ownership.

IFRS Finance Lease Guidance


Substance rather than form




IAS 17 Examples Given:






Ownership transfer to lessee after lease contract
Bargain Purchase Option Available
Lease terms major part of assets life (whether title transferred or not) – Terms of Lessee’s Leased Asset – 75% or 3 of the 4 years of useful life P.V of the Min. Lease Payment’s are substantially that of the F.V. of the asset at lease inception – P.V. of MLP - $263,711.50

Leased asset is specialized for lessee’s business use without significant modification

Controllers Assessment:

Junior Accountant – Incorrectly stated as an Operating since title reverts back to owner •
Senior Accountant – Correctly stated as a financing lease

Financing Lease Recognition – Lessee


Interest Rate





implicit rate of lessor unless undeterminable then use lessee’s incremental borrowing rate 10% Implicit Rate of the Lease Terms

P.V. of Min. Lease Payments



Payments made over lease term excluding services, taxes to be reimbursed by the lessor. Lessee include any guaranteed amounts to included in contract

Yearly Payment

$
100,000.00

Residual Value

$

P.V. of Payments

$248,685.20

P.V. of the Residual Value

$15,026.30

P.V. of MLP at Lease Inception

$263,711.50

Controllers Assessment:
– Junior Accountant – Incorrect - did not calculate PV of MLP – Senior Accountant – Incorrect - did not used implicit borrowing rate

1-Jan-13

-

1-Jan-14
$
$

100,000.00 $
$

1-Jan-15
100,000.00
20,000.00

Financing Lease – Initial Recognition
• Recognize asset and liability at the lease
inception.
– Lesser of F.V of Asset or P.V. of MLP



F.V. of Asset - $250K
P.V. of MLP - $263.7K

Jan. 1, 2013 - To Record Leased Asset Obligation
Leased Asset
Lease Obligation

$ 263,711.50
$ 263,711.50

IFRS - Amortization Table
Correct Amort. Table
Year

Beg. Bal. of Lease
Obligation

Payment

Reduction in Lease
Obligation

Finance Charge

End Bal. of Lease
Obligation

1$

263,711.50 $100,000.00 $

73,628.85 $

26,371.15 $

190,082.64

2$

190,082.64 $100,000.00 $

80,991.74 $

19,008.26 $

109,090.91

3$

109,090.91 $100,000.00 $

89,090.91 $

10,909.09 $

20,000.00

Senior Accountant

IFRS – Lessee Lease Payment
Correct Year 1 Entry
Dec. 31, 2013

Senior Accountant

Lease Exp. - Other

$

2,000.00

Finance Charges

$

73,628.85

Interest Expense

$

26,371.15

Cash

$

102,000.00

IFRS – Payments Year 2-3
Dec. 31, 2014
Lease Exp. - Other

$

2,000.00

Lease Obligation

$

80,991.74

Finance Charges

$

19,008.26

Cash

$

102,000.00

$

102,000.00

Dec. 31, 2015
Lease Exp. - Other

$

2,000.00

Lease Obligation

$

89,090.91

Finance Charges

$

10,909.09

Cash

IFRS – Termination of Leased Asset
IAS 17 – “the asset shall be fully...


Cited: •


Board, F. A. (2013, May 2013). Proposed Accounting Standards Update-Leases (Topic 842). Retrieved March 23, 2015, from
FASB: http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176162613656&acceptedDisclaimer=true
Foundation, F. A. (2015). FASB Codification. Retrieved March 23, 2015, from Checkpoint:
https://checkpoint-riag-com.ezproxy.uta.edu/app/main/tocFrame?usid=e7893k1f253d&baseTid=T0GAAPCOD%3A840-10&
feature=ttoc&lastCpReqId=5208672&state=U0FE2-k_9_&usedParms=clickedTid
Kaikati, Jack. "Synthetic Leases: Red Flags in Retailing." International Journal of Retail and Distribution 32.10 (2004): 47581. Print.
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