SBRINT
Syllabus C. Reporting The Financial Performance Of A Range Of Entities C4. Leases

# ACCA SBR INT Syllabus C. Reporting The Financial Performance Of A Range Of Entities - C4a. Lessee Accounting - Notes2 / 11

### Syllabus C4a)

Discuss and apply the lessee accounting requirements for leases including the identification of a lease and the  measurement of the right of use asset and liability.

### Basic Rule

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:

Opening Interest (I/S) 12.04% (Payment) Closing
12,000 1,445 (5,000) 8,445
8,445 1,017 (5,000) 4,463
4,463 537 (5,000) 0

#### 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)