CIMA F1 Syllabus B. Financial Statements - Lessee Accounting - Notes ^{2 / 4}

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

Lease Term

It is the non-cancellable period for which a lessee has the right to use an underlying asset.

This includes periods covered by options for extensions if it is reasonably certain that the options will be exercised.

It also includes periods covered by an option to terminate the lease if the lessee is reasonably certain not to exercise that option.

For e.g.
Lease agreement - 5 years
Option to extend for another 2 years and the lessee is likely to exercise the option.

In this case, the lease term will be 5 years + 2 years = 7 years

For e.g.
Lease agreement - 5 years
Useful life of the asset - 3 years
Option to terminate the lease in 3 years

In this case, the lease term will be 3 years because it is likely that the lease will be terminated in 3 years as it matches the useful life of the asset.

How to Value the Liability

• Present value of the lease payments

How to Value the Right of Use asset?

Includes the following:

• The Lease Liability (PV of payments)

• All initial direct costs

• If a lease incentive is received, it is deducted from the initial measurement of the right-of-use asset

After the initial Measurement - Asset

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

• Restoration costs

After the initial Measurement - Liability

• Effective interest rate method (amortised cost)

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: