Lessee Accounting

NotesQuiz

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

How to Value the Right of Use asset?

Includes the following:

  • The Lease Liability (PV of payments)

  • All initial direct costs

After the initial Measurement - Asset

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

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:

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
NotesQuiz