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IFRS 16
LEASES
LECTURE MATERIAL
Prepared by BIANCA NEL CA (SA)
COPYRIGHT NOTICE

Copyright © CA Campus

These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of 1978, no part
of this material may be reprinted or reproduced, in any form whatsoever, either in whole or in part or by any
electronic or other means including the making of photocopies thereof, without the express prior written
consent of the proprietor, CA Campus.

No individual may share any CA Campus content or material with any other person.

The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and to report
their details to:
• UNISA
• The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons
from registering as chartered accountants (SA), as such actions constitute a gross transgression of
ethical principles, which is a violation of the code of professional conduct of SAICA
• South African Police Service
• Any other relevant professional body / organisation, including any employer

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CONTENTS
SAICA'S PRINCIPLES OF EXAMINATION

The concepts and topics of IFRS 16 are at a core level, except for the following:
Concepts and topics (IFRS 16) Level of examination
Lessee and lessor:
• Lease modifications [IFRS 16.39-46; IFRS 16.79-80] Awareness
• Sale and leaseback (including any related tax implications)
[IFRS 16.98-103]
Lessor:
• Manufacturer or dealer lessor [IFRS 16.71-74] Awareness
(including any related tax implications)

An issue is at an AWARENESS LEVEL if:

• Not core but still important at entry-level

• CA have to know about the issue, to identify that it is an issue that potentially has
significant accounting implication and requires additional or specialist IFRS knowledge.
• Be able to identify and describe what the accounting issue is and read up on it further.
• Students would be expected to perform basic processing of the transactions (figures
obtained from an expert)

IFRS 16:
In May 2020 the Board issued Covid-19-Related Rent Concessions, which
amended IFRS 16. The amendment permits (authorizes) lessees, as a practical
expedient, not to assess whether rent concessions that occur as a direct
consequence of the covid-19 pandemic and meet specified conditions are lease
modifications.
Instead, the lessee accounts for those rent concessions as if they were not
lease modifications.

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EXCEPT: RECOGNITION
EXEMPTION ELECT: IF
STEP 3: WHO'S
REVISION RECORDS?
(1) Short term Leases
( < 12 months )
STEP 2:
(2) Underlying asset =
STEP 1: IDENTIFYING A
low value (new
DEFINITION LEASE? STEP 4: RECOGNITION asset)
? IFRS 16. B31 & MEASUREMENT =>“Operating lease acc”
flowchart pmt = expense P/L
(straight-line basis)
Contract, or part of a TAX
contract that conveys the STEP 5: PRESENTATION
Accounting = lease
right to use an asset for a & DISCLOSURE FINANCE LEASE OPERATING LEASE
payments expense (P/L)
period of time (lease [TEMPLATES] 1. Derecognise asset 1. Recognise depr on (straight-line)
term) in exchange for 2. Recognise gain/loss on asset (IAS 16)
consideration derecognition of asset 2. Recognise lease Tax = actual amounts
3. Recognise receivable income on straight line paid as deduction in the
equal to NET basis year of assessment in
INVESTMENT 3. Recognise lease which paid, subject to
INTEREST RATE CHANGES 4. Recognise finance incentive on a straight limitations - sect 23H
STEPS TO FOLLOW IN QUESTIONS: ( Tax Act)
income (effective line basis
1. Calc IRIL in lease (original/OLD)
2. Calc Net investment -lease using interest rate method) TAX
IRIL AND Lease pmts => include
3. Amort table (BEFORE CHANGE) 5. Recognise lease taxable income (earlier of
Refer to: Handout: B31 & contract on
4. Amort (AFTER CHANGE) payments against receipt or accrual).
page 10 of this document. 5. Calc adjustment due to the change
GROSS INVESTMENT Straight-lining pmts => TD
JOURNALS
when payments are => DT
Increase in interest rate =
Increase the Unearned Finance
received. Leased asset => DT (tax
Income: allowance differs from
Dr. Gross investment in finance lease NET INVESTMENT = gross lessor’s depr policy)
Cr. Unearned finance income investment discounted @
interest rate implicit Note: sect 23A (Tax Act)
Decrease in interest rate = allowances available of
Decrease in Unearned Finance Land & Buildings elements? machinery, plant, aircraft, ships.
Income: Allowance granted may not
exceed taxable income derived
Dr. Unearned finance income
from rental income during that
Cr. Gross investment in finance lease year.

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INITIAL MEASUREMENT
LESSEE SUBSEQUENT MEASUREMENT
Right-of-use asset Lease liability Right-of-use asset Lease liability
@ Cost @ PV of lease pmts not paid at that Measure @ COST MODEL unless another Measured by:
date [@ Interest rate implicit (if measurement model applies. 1. Adding interest expense on lease to
WHAT IS COST? available, if NOT @ incremental COST CA of lease liability;
1. Amount of initial borrowing rate)] ROUA measured @ cost: 2. Deducting pmts made on lease from the
1. Less acc depr; CA of lease liability; AND
measurement of lease
1. Fixed pmts (includes in-substance 2. Less acc impairment (IAS 36); AND 3. Remeasuring the CA to reflect any
liability
fixed pmts) less lease incentives 3. Adjusted for remeasurements of the lease reassessments or modifications.
2. Lease payment made liability PV + INT – PMT +/– revised = CA lease liability.
receivable;
(deposit) on/or before OTHER MEASUREMENT MODELS
2. Variable lease pmts that depend The following will be included in P/L UNLESS
commencement date, LESS ROUA measured @ FV IF: included in CA of another asset:
on index or specific rate, initially
lease incentives received; to be measured using the • ROUA meets IAS 40 definition AND • Interest on lease liability; AND
3. Any initial direct costs index/rate at commencement • Lessee accounts for investment property • Variable lease pmts not included in
incurred by lessee date; @ FV Model measurement of liability in period in which
3. Exercise price of a purchase option ROUA measured @ REVALMODEL IF: the event or condition that triggers those
4. Estimate of costs to be
if it is reasonably certain that the • The ROUA related to a class of PE to pmts occur
incurred by lessee in
lessee will exercise that option; which the lessee has applied the Dr Finance Cost (P/L)
dismantling /removing the Revaluation Model
4. Penalty pmts for terminating the Dr Lease Liability (SFP)
underlying asset = when NB! If ownership transfer at end of lease term = Cr Bank (SFP)
lease; and
entity incurs an obligation. Depreciate over useful life Payment of lease instalment......
5. Amounts payable in terms of
Transfer of ownership uncertain = Depreciate over Dr Variable lease payment expenses (P/L)
residual value guarantees.
shorter or useful life or lease term [IFRS 16.32] Cr Bank (SFP)
Payment of variable lease pmts .....
VAT [LESSEE & LESSOR]
Refer to: VAT example end of notes
VAT is payable by lessor on cash selling price IF lessor is a registered VAT vendor.
Lessee may claim INPUT VAT credit if asset used to produce taxable supplies (you cannot claim on a motor car).
When a lessee finances VAT: When a lessee does not finance VAT:
VAT add to cost (VAT is financed) and lease instalments are calculated on VAT incl. amount. Lessee decide to pay VAT in cash to lessor at beginning of
Lease liability = disclosed at amount incl. of VAT. lease in which case the future instalments will exclude VAT.
Lease liability will then exclude VAT as lessor does not
NB!! Instalment deductible for income tax must exclude this VAT portion to avoid same amount being claimed as finance the VAT.
VAT & as tax deduction for income tax purposes (sect 23C Tax Act).
VAT to be excluded from each instalment is calculated in proportion to lease payments, as follows:
VAT amount x remaining instalment / total instalments

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TAX IMPLICATIONS
Refer to: IFRS 16 & Tax video

LESSEE LESSOR
ACCOUNTING: Lessor taxed on finance lease pmts received/ accrued to him (no distinction
between interest and capital components)

TAX: Demonstrates the SFP method calculation for deferred tax:

INSTALLMENT SALE AGREEMENTS (in substance a finance lease)

FROM PURCHASER’S PERSPECTIVE FROM SELLER’S PERSPECTIVE
Accounting similar to leases (NOT electing Accounting similar to FINANCE LEASE (depr not recorded on leased asset & finance income is
simplified measurement requirements) recorded), and as profit on sale is usually realised = accounting procedures for finance leases used
=> difference in tax position. by manufacturer/dealer are followed by seller. Profit (sales - cost of sales) recognised in year of
sale.
Asset-applied to make taxable supplies, An ISA = purchase contract for tax purposes.
purchaser can claim tax allowance on cash Lessee = viewed as owner of asset for tax and lessor no longer receives a tax allowance.
price of asset, Lessor will be taxed on finance income.
finance costs = deductible as they are
incurred (as opposed to the full lease Sect 24 (Tax Act) stipulates that profit (sales less COS) is deemed to accrue to seller:
payment).
Carrying amount Tax base Temporary difference?
TD = If tax and depreciation rates differ. Net investment in ISA Net investment in ICS No
Consequently, the only timing difference Rnil (s 24 allowance) Yes
that might arise is where the depreciation
policy differs from tax allowance

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LESSEE LESSOR
STEPS TO FOLLOW: FINANCE LEASE OPERATING LEASE
1. Calculate the interest rate implicit in the lease STEPS TO FOLLOW: STEPS TO FOLLOW:
2. Calculate the 1. Calculate the interest rate implicit in the 1. Calculate total lease payments
NB! Only guidance: If 2. Equalise lease payments per year
- Right-of-use asset & lease (IRIL)
IRIL provided = Don't
- Lease Liability Note: PV = add initial direct cost of LESSOR 3. Calculate income received in advance
calculate!
or accrue per year
NOTE: VAT? 2. Calculate the Net Investment (using IRIL)
3. Calculate the PV of lease payments Note: FV = Residual values
JOURNALS
4. Perform the amortisation table 3. Calculate unearned finance income Dr. Bank (SFP)
5. Calculate the Accounting Profit 4. Prepare the amortisation table Cr. Operating lease income (P/L)
(assist with current tax calc) 5. Current tax calculation Cr. Lease income received advance (SFP) or
6. Calculate the Deferred tax 6. Deferred tax calculation Dr. Lease income outstanding (SFP)
7. Calculate the Current tax JOURNALS Lease income received for the year
JNLS = KNOW DEPRECIATION RATE Dr. Gross investment in finance lease (SFP) Dr. Depreciation
JOURNALS Cr. Bank (initial costs) (SFP) Cr. Accumulated depreciation
Dr. Right-of-use asset (SFP) Cr. Unearned finance income (SFP) Depreciation for the year
Cr. Lease Liability (SFP) Cr. Equipment (SFP) Dr/Cr Income tax expense (P/L)
Cr. Bank (SFP) (initial costs) Recognise lease receivable and initial direct costs and Dr/Cr Other payables (SARS) (SFP)
Initial recognition: recognise asset/liability and cost of asset derecognise equipment/asset Current tax provision for the year
paid cash YEAR-END: Dr/Cr Income tax expense (Deferred tax) (P/L)
YEAR-END: Dr. Bank (SFP) Dr/Cr Deferred tax (SFP)
Dr. Finance cost (P/L) - Amortisation Schedule Cr. Gross investment in finance lease (SFP) Deferred tax movement for the year
Dr. Lease liability (SFP) Recognise first instalment received
Cr. Bank (SFP)
Dr. Unearned finance income (SFP)
The total lease payments for the year
Cr. Finance Income (P/L)
Dr. Depreciation
Recognise finance income as profit
Cr. Accumulated depreciation
Depreciation for the year

NB! Tax journals

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BASIC LECTURE EXAMPLE LESSEE [INITIAL & SUBS]:

IFRS 16.32
PV = R400 000
interest = 12.1104%
Period = 4 years
PMT = R132 000

INITIAL SUBSEQUENT

Dr. ROUA [SFP] 400 000 Dr. Dep [P/L] 100 000
Cr. LL [SFP] 400 000 Cr. Acc Dep [SFP] 100 000

Add to scenario: Dr. LL [SFP] 132 000

Initial direct cost of R10 000 Cr. Bank [SFP] 132 000
Dr. ROUA [SFP] 410 000
Cr. LL [SFP] 400 000 Dr. Finance exp [P/L] 48 442
Cr. Bank [SFP] 10 000 Cr. LL [SFP] 48 442

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BASIC EXAMPLE: LESSEE FINANCE VAT

Machine cost price = R115 000 (VAT incl.)
Interest = 20%
Period = 4 years
FV = 0
PMT = R44 423 (incl. VAT) [Arrears]
STEP 1: Calculate ROUA = _____________
STEP 2: Calculate LL = _____________
STEP 3: Amortisation table:
PMT INTEREST CAPITAL BALANCE VAT
1 Jan 20.15 115 000
31 Dec 20.15 44 423 23 000 21 423 93 577 =15 000 X
[44 423 X 3/177 692]
=> 11 250
31 Dec 20.16 44 423 18 715 25 708 67 869 =15 000 X
[44 423 X 2/177 692]
=> 7 500
31 Dec 20.17 44 423 13 574 30 849 37 019 =15 000 X
[44 423 X 1/177 692]
=> 3 750
31 Dec 20.18 44 423 7 404 37 019 0 =15 000 X
[0/177 692]
=> 0
177 692 62 694 115 000
STEP 4: Journals
Dr. ROUA [SFP] 100 000 Dr. Dep [P/L] 25 000
Dr. VAT INPUT [SFP] 15 000 Cr. Acc Dep [SFP] 25 000
Cr. LL [SFP] 115 000
Dr. LL [SFP] 21 423
Cr. Bank [SFP] 44 423
Dr. Finance exp [P/L] 23 000

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Who is the owner of the ASSET?
STEP 5: Deferred tax calc:

31 Dec 20.15 CA TB TD DT
ROUA 75 000
VAT: Not deductible for TAX in
LL (93 577) (_________)
future = because "we" receive the
benefit by claiming INPUT vat on
the transaction

BASIC TAX EXAMPLE

Dr. Dep [P/L] 102 500

Cr. Acc Dep [SFP] 102 500
Dr. ROUA [SFP] 410 000 410 000/4 = 102 500
Cr. LL [SFP] 400 000 Dr. LL [SFP] 132 000
Cr. Bank [SFP] 10 000 Cr. Bank [SFP] 132 000

Dr. Finance exp [P/L] 48 442

Cr. LL [SFP] 48 442

1] CURRENT TAX CALC:

PBT XXX

2] DEFERRED TAX CALC:

CA TB TD DT

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IFRS 16 Handout
WATCH: IFRS 16 - Revision Lecture - Part 1 of 3

CONTRACT

1. Identified asset
2. Right control
3. Period
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WATCH: IFRS 16 & Tax video (25 Min)

IFRS 16 & INCOME TAX PRINCIPLES

LESSOR LESSEE
Operating lease Finance lease Exemption recognition ROUA
[@ Net investment] [Operating lease acc] Lease liability
Dr. Gross investment in finance lease (SFP) PV = R400 000; interest = 12.1104%
Dr. Bank [SFP] XXX Cr. Bank (initial costs) (SFP) Dr. Rental expense [P/L] XXX Period = 4 years; PMT = R132 000
Cr. Rental Income [P/L] XXX Cr. Unearned finance income (SFP) Cr. Bank [SFP] XXX Initial direct cost of R10 000
Dr/Cr SFP line item XXX Cr. Equipment (SFP) Dr/Cr SFP line item XXX Dr. ROUA [SFP] 410 000
Recognise lease receivable , initial direct costs Cr. LL [SFP] 400 000
and derecognise equipment/asset Cr. Bank [SFP] 10 000
Initial recognition of lease
YEAR-END: YEAR-END:
Dr. Bank (SFP) Dr. Dep [P/L] 102 500
Cr. Gross investment in finance lease (SFP) Cr. Acc Dep [SFP] 102 500
Recognise first instalment received Depreciation on ROUA; Lease term 4 years.
Dr. Unearned finance income (SFP) 410 000/4 = 102
Cr. Finance Income (P/L) Dr. LL [SFP] 83 558
Recognise finance income in P/L Cr. Bank [SFP] 132 000
Dr. Finance exp [P/L] 48 442
Subsequent recognition of lease
Accounting: Accounting: Accounting: Accounting:
• Rental income in P/L • Finance income in P/L • Rental expense (P/L) • Deduct depreciation (P/L)
• Net investment = CA (straight-line) • Deduct finance costs of lessee (P/L)
Tax: • Present value of lease liability at year-
• Lease pmts => include taxable Tax: Tax: end.
income (earlier of receipt or • Lessor is taxed on finance lease payments • actual amounts paid as • CA of right-of-use asset at year-end.
accrual). received or accrued to him deduction in year of Tax:
• Straight-lining pmts => TD => DT • Asset: Normal tax allowances may be claimed assessment in which paid, In P/L:
• Leased asset => DT (tax as deductions by lessor = result in TD (for acc subject to limitations - sect 23H • No tax allowance deduction allowed
allowance differs from lessor’s purposes the gross profit and finance income • Deduct full instalment of lease
[VAT: Where the lease
depr. policy) will be recognised) (finance costs + capital portion)
agreement contains VAT,
SFP:
the tax base will be the
SARS taxes lease income received [interest & • CA of lease liability year end – amounts
VAT amount contained in
capital components] deductible in future therefore = R0
future lease instalments)]
and gives tax allowances. • No asset recognised therefore = R0

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LESSOR LESSEE
Operating lease Finance lease Exemption recognition 1. ROUA
[@ Net investment] [Operating lease acc] 2. Lease liability
INCOME TAX INCOME TAX INCOME TAX INCOME TAX

CURRENT TAX CURRENT TAX CURRENT TAX CURRENT TAX

PBT XXX PBT XXX PBT XXX PBT XXX

DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX

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 IFRS 16
LEASES
LECTURE EXAMPLES
Prepared by BIANCA NEL CA (SA)
COPYRIGHT NOTICE

Copyright © CA Campus

These notes enjoy copyright under the Berne Convention. In terms of the Copyright Act, no 98 of 1978, no part
of this material may be reprinted or reproduced, in any form whatsoever, either in whole or in part or by any
electronic or other means including the making of photocopies thereof, without the express prior written
consent of the proprietor, CA Campus.

No individual may share any CA Campus content or material with any other person.

The proprietor will not hesitate to prosecute any such offenders to the fullest extent of the law and to report
their details to:
• UNISA
• The South African Institute of Chartered Accountants (SAICA) for purposes of barring such persons
from registering as chartered accountants (SA), as such actions constitute a gross transgression of
ethical principles, which is a violation of the code of professional conduct of SAICA
• South African Police Service
• Any other relevant professional body / organisation, including any employer
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IFRS 16 EXAMPLES

The examples in this document will test calculations, journals and disclosure.
NOTE: Theory questions are always important, but to be able to understand
principles, we need to work through the calculations and the implications.
I encourage you to work through an additional question or 2 of your
institution.

LESSEE
• Example 1
• Example 2 [NOT RECORDED]
• Example 3

LESSOR
• Example 4 = FINANCE LEASE
• Example 5 = OPERATING LEASE [NOT RECORDED]

ADDITIONAL EXAMPLES

1. IFRS 16 - Illustrative Examples

Examples:
• 2
• 4
Work through these
• 12
examples.
• 13
• 15

2. Descriptive Accounting - Chapter 23 [21st Addition]

3. Self-assessment questions of your institution

NOTE: Rounding differences in examples

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LESSEE

EXAMPLE 1
[SOURCE: UNISA FAC3703/2017 Example adapted]

A manufacturing company, Spiderman Ltd, entered into a contract on 1 January 20.16

whereby two machines with a total cash selling price of R457 826 (R526 500 including VAT
at 15%) would be leased from a finance company. The contract contains a lease in terms of
IFRS 16 Leases. The lessor did not incur any initial direct costs. The machines will be used to
produce taxable supplies.

The period of the lease is three years and the lease payments include VAT are payable
quarterly in arrears. Spiderman Ltd will obtain ownership of the machines at the end of the
lease term at no additional cost. Spiderman Ltd paid R20 000 (R23 000 including VAT) legal
fees for negotiating the lease. For tax purposes, the legal fees incurred by Spiderman Ltd are
of a capital nature. The interest rate implicit in the lease is 24 % per annum.

The profit before tax of Spiderman Ltd for the year ended 31 December 20.16 before the
above lease transactions, amounted to R300 000. The two machines have Rnil residual value
and will be depreciated over their expected useful lives of four years using the straight-line
method.

The deferred tax balance at 1 January 20.16 was Rnil and the only temporary differences are
those in connection with the leased assets. The income tax rate is 28%.

The company's reporting period ends on 31 December each year.

REQUIRED
(a) Prepare the journal entries of Spiderman Ltd for the abovementioned lease for the
financial year ended 31 December 20.16.

(b) Prepare the notes to the financial statements of Spiderman Ltd at 31 December 20.16
(excluding the accounting policy notes and IFRS 7 disclosure) in respect of the above
lease. Comparative figures and Accounting Policies are not required.
NOTE: Tax reconciliation not required

• Your answers must comply with the International Financial Reporting Standards (IFRS).
• Round all amounts to the nearest Rand.

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SOLUTION

(a) Journal entries for the year ended 31 December 20.16

Dr Cr
R R
1 January 20.16
Right-of-use asset: Machinery (SFP) [C2] 20 000
VAT control account (SFP) 3 000
Bank (SFP) 23 000
Capitalise legal fees to the cost of the machinery
Right-of-use asset: Machinery (SFP) [C2] 457 826
VAT control account (SFP) (526 500 x 15/115) 68 674
Lease liability (SFP) 526 500
Recognise right-of-use asset and lease liability
ROUA 477 826
Bank (SFP) (68 674+ 3 000) 71 674
VAT control account (SFP) 71 674
VAT input received from SARS
31 December 20.16
Lease liability (SFP) [C4] 136 529
Finance costs (SFP) [C4] 114 668
Bank (SFP) (4 x 62 799) 251 197
Recognition of four instalments paid during 20.16
Depreciation (P/L) (477 826/4 years) 119 457
Accumulated depreciation (SFP) 119 457
Recognise depreciation on right-of-use assets
Income tax expense (current tax) (P/L) [C7] 14 680
Other payables: SARS (SFP) 14 680
Recognise provision for income tax payable
Income tax expense (deferred tax) (P/L) 3 970
Deferred tax (SFP) [C6] 3 970
Recognise movement in deferred tax balance

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(b) Disclosure

SPIDERMAN LTD
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.16

1. Profit before tax

20.16
Profit before tax is stated after taking into account the following items: R

Expenses
Depreciation: Right-of-use assets [C5] 119 457
2. Finance costs

Finance cost on lease liabilities [C4] 114 668

3. Income tax expense

Major components of tax expense

SA normal tax
Current tax
– Current year [C7] 14 680
Deferred tax
– Movement in temporary differences [C3] (14 181 x 28%) 3 970
18 650

2. Deferred tax
20.16
Analysis of temporary differences R
Property, plant and equipment – Right-of-use assets
Accelerated deductions for tax purposes [C6] (100 344)
Lease liability [C6] 96 373
Net deferred tax asset (3 970)

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3. Leases
20.16 20.16
3.1 Right-of-use assets Machinery Total
R R
Carrying amount at beginning of year – –
Additions [C2] 477 826 477 826
Depreciation for the year [C5] (119 457) (119 457)
Adjustments for lease remeasurements – –
Adjustments for lease modifications – –
Carrying amount at end of year 358 369 358 369

3.2 Maturity analysis of future lease payments outstanding at the reporting date

20.16
R
Future lease payments (undiscounted)
- For the year ended 31 December 20.17 (62 799 x 4) [C4] 251 196
- For the year ended 31 December 20.18 (62 799 x 4) [C4] 251 196
- For the year ended 31 December 20.19 –
- For the year ended 31 December 20.20 –
- Remaining years after 31 December 20.20 –
Total future lease payments 502 392
Total future finance costs [C4] (112 424)
Lease liability [C4] 389 971
Short-term portion presented under current liabilities [C4] 172 365
Long-term portion presented under non-current liabilities [C4] 217 606

62 799 x 4
3.3 Total cash outflows relating to leases
Presented under financing activities
Cash payments for principal portion of lease liabilities (251 196 – 114 668) 136 529
Presented under operating activities
Cash payments for legal fees 23 000
Cash payments for interest portion of lease liabilities [C4] 114 668
Total cash outflow relating to leases 274 197

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CALCULATIONS

STEP 1 C1. Interest rate implicit in the lease

The interest rate implicit in the lease is given as 24% per annum.

STEP 2 C2. Right-of-use asset

Right-of-use asset (Machinery) R
Initial amount of the lease liability 526 500
Initial direct costs of lessee – legal fees 23 000
Lease payments made at or before commencement date -
Less VAT input claimed on right-of-use assets (68 674 + 3 000) (71 674)
477 826
Lease liability
Present value of lease payments at lease commencement date 526 500

STEP 3 C3. Present value of lease payments

Set HP and Sharp EL-738 calculators on
Present value provided as R526 500 4P/YR as there is four instalments
=>have to calculate the PMT. payable per year
N = 12 (4 payments per year x 3 years)
FV = 0 (residual value guarantee)
I = 24% [24/4=6% per payment if you use a Sharp]
PV = 526 500
PMT? = 62 799

STEP 4 C4. Amortisation table

Contract entered into at beginning of year, first payment (arrears)

PAYMENT DATES INSTALMENT CAPITAL INTEREST CLOSING BALANCE

01.01.2016 526,500
31.03.20.16 62,799 31,209 31,590 495,291
Finance cost in
30.06.20.16 62,799 33,082 29,717 462,209
P/L
30.09.20.16 62,799 35,067 27,733 427,142
31.12.20.16 62,799 37,171 25,629 389,971 114,668
31.03.20.17 62,799 39,401 23,398 350,570 172,365
30.06.20.17 62,799 41,765 21,034 308,805
30.09.20.17 62,799 44,271 18,528 264,534 Future lease
31.12.20.17 62,799 46,927 15,872 217,606 payments 20.17
31.03.20.18 62,799 49,743 13,056 167,863 251,197
30.06.20.18 62,799 52,728 10,072 115,136 217,606
30.09.20.18 62,799 55,891 6,908 59,245 Future lease
31.12.20.18 62,799 59,245 3,555 0 payments 20.17
753,592 526,500 227,092 251,197

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STEP 5 C5. Accounting profit

R
Accounting profit (given) 300 000
Depreciation ((457 826 + 20 000)/4 years) (119 457)
Finance costs (114 668)
Adjusted accounting profit 65 875

STEP 6 C6. Deferred tax calculation

Carrying Temporary Deferred tax
Tax base
amount difference at 28%
R R R asset/(liability)
31 December 20.15 (given) - -

31 December 20.16
Right-of-use assets - cost a358 370 b- 358 370 (100 344)
Lease liability (389 971) d(45 782) (344 189) 96 373
Net deferred tax asset 14 181 3 970

Movement in temporary differences - taxable 14 181 (3 970)

a R477 826 x 3⁄4 years = R358 370

b The cost of the machines is not tax deductible as the machines are still owned by the
lessor for tax purposes.
d The tax base is the carrying amount of the liability (R389 971) less instalments (excluding
VAT) deductible in future periods which is equal to the VAT included in remaining
instalments.
VAT included in remaining instalments:
R68 674 x (8 x 62 799)/(12 x 62 799) = R45 782. As all the instalments are equal, the VAT
can also be calculated as follows: R68 674 x 2/3 years = R45 782.

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STEP 7 C7. Current tax

R
Accounting profit [C5] 65 875
Take out accounting rules:
Depreciation 119 457
Interest expense 114 668
Include tax rules:
Payment [excluding VAT]
Total payment = R251 197
VAT only on capital portion R17 808
R251 197 - R17 808 (233 389)
66 611
Movement in temporary differences (taxable) [C6] (14 181)
Taxable income 52 430

Current tax @ 28% 14 680

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EXAMPLE 2
[SOURCE: UNISA FAC3703/2017 Example adapted]

Cars Ltd, a company registered as a vendor for VAT purposes, leased five passenger vehicles
from Finance Ltd on 1 January 20.15. The input VAT on passenger vehicles cannot be claimed
back. The leasing of the five passenger vehicles is a lease in terms of IFRS 16 Leases.

The conditions of the lease agreement were as follows:

• The cash price of each passenger vehicle is R49 565, excluding VAT at 15%. The VAT is
financed.
• Lease instalments of XXX (total instalment for five passenger vehicles) are made half
yearly in arrears, over a period of three years.
• The interest rate implicit in the lease is 19,12358% per annum.
• Cars Ltd will acquire ownership of the vehicles at the end of the lease term at no
additional cost.

The company provides for depreciation according to the straight-line method over the
useful life of the assets. The useful life of each passenger vehicle is considered to be five
years and has a residual value of Rnil.

The income tax rate is 28%. The company had a deferred tax liability at 1 July 20.16
amounting to R2 152. There are no items affecting deferred tax other than the above lease
agreement.

REQUIRED
(a) Present the lease transaction in the statement of financial position for the year ended
30 June 20.17.
(b) Disclose the lease transaction in the notes to the financial statements of Cars Ltd for the
year ended 30 June 20.17.

• Your answers must comply with the International Financial Reporting Standards (IFRS).
• Comparative figures are not required.
• Round all amounts to the nearest Rand

EXAM TECHNIQUE
As no notes are specifically excluded, all notes that are affected by the lease transaction
need to be disclosed, including accounting policy notes and the disclosure in terms of IFRS 7,
Financial Instruments: Disclosures.

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SOLUTION

(a) CARS Ltd

EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.17

Notes 20.17
R
ASSETS
Non-current assets
Right-of-use assets 5.1 142 500
EQUITY AND LIABILITIES
Non-current liabilities
Lease liability 5.2 –
Deferred tax liability 4 23 391
Current liabilities
Lease liability 6 58 962

(b) CARS LTD NOTES FOR THE YEAR ENDED 30 JUNE 20.17 Note that depreciation
on right-of-use assets
1. Profit before tax should be included as
part of the total
depreciation charge for
Profit before tax is stated after taking into account the following items:
the year in respect of
20.17 the relevant class of
Expenses R fixed assets.
Depreciation: Right-of-use assets [C5] 57 000

2. Finance costs
Finance cost on lease liabilities [C4] 26 264

4. Income tax expense

Major components of tax expense

SA normal tax
Current tax expense
– Current year Xxx
Deferred tax expense
– Movement in temporary differences [C6] 21 239

Tax reconciliation
Accounting profit Xxx
Tax at 28% Xxx

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4. Deferred tax

Analysis of temporary differences

Property, plant and equipment – Right-of-use assets
Accelerated deductions for tax purposes [C6] (39 900)
Lease liability [C6] 16 509
Net deferred tax liability [C6] (23 391)

5. Leases

Motor Total
5.1 Right-of-use assets
vehicles
R R
20.17
Carrying amount at beginning of year (285 000 [C2] – 85 500 [C5]) 199 500 199 500
Depreciation for the year [C5] (57 000) (57 000)
Carrying amount at end of year 142 500 142 500

5.2 Maturity analysis of future lease payments outstanding at the reporting date

20.17
R
Future lease payments (undiscounted)
- For the year ended June 20.17 [C4] -
- For the year ended June 20.18 [C4] 64 600
Total future lease payments 64 600
Total future finance costs (5 638)
Lease liability 58 962
Short-term portion presented under current liabilities [C4] 58 962
Long-term portion presented under non-current liabilities [C4] -

5.3 Total cash outflows relating to leases Instalments that took place in the financial year

Presented under financing activities

Cash payments for principal portion of lease liabilities 102 936
Presented under operating activities
Cash payments for interest portion of lease liabilities 26 264
Total cash outflow relating to leases 129 200

Will not always be equal to P/L as the

total cash outflows is on the CASH
BASIS. The interest in P/L includes
interest ACCRUED.

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6. Categories of financial liabilities

Non-current financial liabilities

Financial liabilities measured at amortised cost
Finance lease liability -
Current financial liabilities
Financial liabilities measured at amortised cost
Finance lease liability 58 962

Concentration of interest rate risk on financial liabilities measured at amortised cost

The company has no exposure to interest rate changes with regard to the finance lease
liability at the reporting date as the interest rate is fixed for the lease term.

Concentration of liquidity risk on financial liabilities

The exposure of the company’s financial liabilities to liquidity risk and the contractual
repayment dates. Refer to note 7 for the maturity analysis for lease liabilities.

The company manages its liquidity risk by ensuring that the maturities of its assets and
liabilities match according to cash flow needs and that the company has adequate access to
credit. Expected cash flow requirements with rolling cash flow budgets.

CALCULATIONS

STEP 1 C1. Interest rate implicit in the lease

The interest rate implicit in the lease is given as 19,12538% per annum. I: 19.12538% should
be divided by 2, because it is an annual rate and instalments are made half yearly in arrears.
( PMT calculation = 64 601.72 approximately the same as the solution).

STEP 2 C2. Right-of-use asset

Right-of-use asset (Motor vehicles) R
Initial amount of the lease liability [C3] 285 000
285 000
Lease liability
Present value of lease payments at lease commencement date [C3] 285 000

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STEP 3 C3. Present value of lease payments

Present value provided Set HP and Sharp EL-738 calculators on 2P/YR
=>have to calculate the PMT. as there are two instalments payable per year
N = 6 (2 payments per year x 3 years)
FV = 0 (residual value guarantee)
I = 19,12538%
PV = 285 000
PMT? = 64 600

STEP 4 C4. Amortisation table

Pmt made in PAYMENT DATES INSTALMENT CAPITAL INTEREST CLOSING BALANCE

arrears 01.01.20.15 285,000.00
Year end 30.06.20.15 64,600.00 37,348.90 27,251.10 247,651.10
31.12.20.15 64,600.00 40,920.12 23,679.88 206,730.98
Year end 30.06.20.16 64,600.00 44,832.82 19,767.18 161,898.16
31.12.20.16 64,600.00 49,119.64 15,480.36 112,778.52
Year end 30.06.20.17 64,600.00 53,816.36 10,783.65 58,962.16
31.12.20.17 64,600.00 58,962.16 5,637.84 (0.00)
387,600.01 285,000.00 102,600.01

ST 58,962.16
Finance cost in P/L 20.17 26,264.01

AMORTISATION TABLE
Please note that the amortisation table has a rounding balance of R1. This is a result of the interest rate
implicit in the lease being rounded off to five decimals. You will not be penalised for a small rounding
difference as above. In the exam you will be requested to round the interest rate to a specific number of
decimals to avoid a rounding difference.

STEP 5 Accounting Profit = Not sufficient information provided

C5. Depreciation
R
Cost price of motor vehicles 285 000
Depreciation per year (285 000/5) 57 000
Accumulated depreciation:
Year end: 1 January 20.15 to 30 June 20.15: 6 months (57 000 x 6/12) 28 500
1 January 20.15 to 30 June 20.16: 18 months (57 000 x 18/12) 85 500
1 January 20.15 to 30 June 20.17: 30 months (57 000 x 30/12) 142 500

Note that no VAT input is claimable on passenger vehicles and is included in the cost price.
In the case of an asset on which VAT input is claimable, for example machinery, the VAT will
not be part of the cost price of the asset.

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STEP 6 C6. Deferred tax calculation

Deferred
Carrying Temporary tax at
Tax base
amount difference 28%
asset/
R R R (liability)
30 June 20.16 (given) (2 152/28%) 7 685 (2 152)

30 June 20.17
Right-of-use assets: Vehicles (note 6) 142 500 a- 142 500 (39 900)
Lease liability (note 7) (58 962) b- (58 962) 16 509
Net deferred tax liability 83 538 (23 391)

Movement in temporary differences (83 538 – 7 685) (taxable) 75 853 (21 239)

a The tax base is amounts deductible in future. For tax purposes, the ownership of the
vehicles resides with the lessor, therefore no tax deductions.
b The tax base is the carrying amount (58 962) minus amounts deductible in future
(58 962). The full amount (VAT inclusive) is deductible for income tax purposes as the
VAT input was not claimed.

Carrying amount of asset > tax base of asset  deferred tax liability
Carrying amount of liability > tax base of liability  deferred tax asset

DEFERRED TAX AND VAT Please take note of the difference between the deferred tax
calculations for examples 1 and 2. In example 2, VAT input had not been claimed up front
because VAT input is not claimable on passenger vehicles according to the VAT Act. If VAT
was claimed up front as a VAT input and the instalment was adjusted to exclude VAT, then
the VAT portion of the future instalments would be recognised as the tax base.

STEP 7 Current Tax = Not sufficient information provided

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EXAMPLE 3
[SOURCE: UNISA FAC3703/2017 Example adapted]

Tiles 4 You Ltd is a company that manufactures floor tiles.

During the year ended 30 June 20.18 Tiles 4 You Ltd entered into three separate contracts
to lease the following assets. Each of these contracts contains a lease as per IFRS 16, Leases.

The information relating to the contracts is as follows:

Ceramic mixer
Monthly instalment payable in advance R15 820
Cash price of asset R450 000
Period of lease 1 October 20.17 to 30 September 20.18

Tile oven
Commencement date of lease 1 August 20.17
Period of lease 3 years
Bi-annual instalments payable in arrears R71 228
Interest rate implicit in the lease 17,9% per annum

Lease payments for the tile oven are payable on 31 January and 31 July of each year.
Ownership of the tile oven will be transferred at the end of the lease term to Tiles 4 You
Ltd at no additional cost.

Factory building
The lease commenced on 1 July 20.17 for a period of seven years. The lease provides for a
basic rental of R10 000 per month, in advance, plus 1% of the budgeted manufacturing cost
of tiles manufactured in excess of 1 000 000 tiles. The budgeted excess tiles production for
the year ended 30 June 20.18 amounts to 5 400 000 tiles. The manufacturing cost per tile
amounts to R1.

The interest rate implicit in the lease could not be determined reliably for the lease of the
factory building.

Additional information:

Tiles 4 You Ltd’s incremental borrowing rates were as follows on the following dates:
1 July 20.17 15% per annum
1 August 20.17 16% per annum
30 June 20.18 14% per annum

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The company provides for depreciation according to the straight-line method over the
useful life of the assets. All three assets have residual values of Rnil and the useful life of
each of the leased items is as follows:

Ceramic mixer 5 years

Tile oven 6 years
Factory building 20 years

NB! Tiles 4 You Ltd makes use of the recognition exemption of IFRS 16, Leases for all short-term
and low-value assets.

The deferred tax balance at the beginning of the reporting period amounted to Rnil and the
only temporary differences are those apparent from the above information. The income tax
rate is 28%. The profit before tax, after taking above transactions into account amounted to
R1 050 000.

REQUIRED
Disclose the above lease agreements in the notes to the financial statements of Tiles 4 You
Ltd for the reporting period ended 30 June 20.18.

• Your answers must comply with the International Financial Reporting Standards (IFRS).
The accounting policy note and the disclosure in terms of IFRS 7, Financial instruments:
Disclosures = NOT REQUIRED.
• Ignore any VAT implications.
• Round all amounts to the nearest Rand
• Comparative figures are not required.

How to approach this question?

STEP 1: Include the disclosure Template

STEP 2: Briefly plan the Calculations

= 3 Leases, therefore perform the Calculations on each lease Separately (except for
current and deferred tax)

Follow the STEPS provided in the Lecture Notes per Lease

© CA CAMPUS
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SOLUTION

TILES 4 YOU LTD

NOTES FOR THE YEAR ENDED 30 JUNE 20.18

2. Profit before tax

Profit before tax is stated after taking the following items into account: 20.18
R
Expenses
Depreciation: Right-of-use assets (48 889 + 74 957) 123 846

3. Finance costs

Finance cost on lease liabilities [C7] 123 467

4. Income tax expense

20.18
Major components of tax expense R
SA normal tax
Current taxation
– Current year [C8] 309 704
Deferred taxation
– Movement in temporary differences [C9] (15 704)
294 000
Tax reconciliation
Accounting profit [C8] 1 050 000
Tax at 28% (R1 050 000 x 28%) 294 000

5. Leases

5.1 Right-of-use assets Tile oven Building Total

20.18 R R R
Carrying amount at beginning of year - - -
Additions [C2 & C5] 320 000 524 700 844 700
Depreciation for the year (320 000/6 x 11/12) (48 889)
(524 700/7) (74 957) (123 846)
Carrying amount at end of year 271 111 449 743 720 854

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5.2 Maturity analysis of future lease payments outstanding at the reporting date
20.18
R
Future lease payments (undiscounted)
- For the year ended 30 June 20.19 (71 228 [C4] x 2) + (10 000 x 12) 262 456
- For the year ended 30 June 20.20 (71 228 [C4] x 2) + (10 000 x 12) 262 456
- For the year ended 30 June 20.21 (71 228 [C4] x 1) + (10 000 x 12) 191 228
- For the year ended 30 June 20.22 (10 000 x 12) 120 000
- Remaining years after 30 June 20.22 (10 000 x 12 x 2) 240 000
Total future lease payments 1 076 140
Total future finance costs (241 264 [C7] + 58 038 [C4]) (299 302)
Lease liability (298 102 [C4] + 478 837 [C7]) 776 838
Short-term portion presented under current liabilities
(104 183 [C4] + 53 237 [C7]) 157 420
Long-term portion presented under non-current liabilities
(193 919 [C4] + 425 600 [C7]) 619 519

5.3 Income and expenses related to leases

Expenses
Variable lease payments on factory building (5 400 000 x R1 x 1%) 54 000
Short-term lease expense – recognition exemption [C1] 142 380

Tile 4 You Ltd elected the recognition exemption on short-term leases for the ceramic mixer.

5.4 Total cash outflows relating to leases

20.18
R
Presented under financing activities
Cash payments for principal portion of lease liabilities 67 761
((10 000 x 12) + 71 228 – 123 467)
Presented under operating activities
Cash payments for interest portion of lease liabilities 123 467
Cash payments for short-term leases 142 280
Cash payments for variable lease payments 54 000
Total cash outflow relating to leases 387 508

6. Deferred tax
Analysis of temporary differences
Right-of-use assets (75 911 + 125 928) (201 839)
Lease liabilities (83 469 + 134 074) 217 543
Deferred tax asset 15 704

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CALCULATIONS

Perform the calculations for each Lease Separately by following the steps provided in the
Lecture Notes.

LEASE 1: CERAMIC MIXER

C1. Short-term lease payments (Ceramic mixer) R

Short-term lease for the year ended 30 June 20.8 (15 820 x 9 months) 142 380
Short-term lease for the year ended 30 June 20.9 (15 820 x 3 months) 47 460

SHORT-TERM LEASE
The lease period for the ceramic mixer is 12 months and is therefore a short-term lease. The
company uses the recognition exemption of IFRS 16, Leases and as a result, no right-of-use
asset or lease liability is recognised.

LEASE 2: TILE OVEN

STEP 1: IRIL? = Provided = 17.9% (Don't waste time to calculate if this is provided)

STEP 2: C2. Right-of-use asset (Tile oven)

Right-of-use asset (Tile oven)
Initial amount of the lease liability [C3] 320 000
Initial direct costs -
Lease payments before or after lease not included in the present value -
320 000
Lease liability (Tile oven)
Present value of lease payments at lease commencement date [C3] 320 000

STEP 3:C3. Present value of lease payments

N = 6 (2 payments per year x 3 years) Set HP and Sharp EL-738 calculators on 2P/YR
as there are two instalments payable per year
PMT = 71 228
FV = 0 (only residual value guarantee)
I = 17,9% Remember to identify if the VAT is
PV = ? 320 000 Financed by Lessee or not?

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STEP 4: C4. Amortisation table (Tile oven)

Interest at Closing balance
Capital Instalments
17,9% outstanding
R R R R
1 August 20.17 320 000
31 January 20.18 28 640 42 588 71 228 277 412
30 June 20.18 (year-end) a20 690 - - * 298 102
b 298 102 -
31 July 20.18 4 138 46 400 71 228 231 012
193 919 =
31 January 20.19 20 676 50 552 71 228 180 460
104 183
30 June 20.19 (year-end) 13 459 - - ** 193 919
31 July 20.19 2 692 55 077 71 228 125 383
31 January 20.20 11 222 60 006 71 228 65 377
31 July 20.20 5 851 65 377 71 228 -
107 368 320 000 427 368

a 277 412 x 17.9% x 5/12 = 20 690. R20 690 is the portion of interest that accrued by
30 June 20.18 and is included in the instalment that will be paid after year end on
31 July 20.18. The total interest for the year ended 30 June 20.18 is 28 640 + 20 690.

b 277 412 x 17.9% x 1/12 = 4 138. R4 138 is the remaining portion of the interest that is
included in the instalment of R71 228 that will be paid after year end on 31 July 20.18.
The instalment paid on 31 July 20.18 includes interest of R24 828 (20 690 + 4 138) and
capital of R46 400. The finance costs of R4 138 will be recognised as finance costs in the
financial year ending 30 June 20.19.

Total future finance costs at 30 June 20.18:

• 4 138 + 20 676 + 13 459 + 2 692 + 11 222 + 5 851 = 58 038 OR
• 4 138 + 3 Amort 6 (interest) R53 900 = 58 038

SHORT-TERM AND LONG-TERM PORTIONS OF THE LEASE LIABILITY

The short-term and long-term portions of the lease liability are calculated by using the
amortisation table above and can be calculated using a long method or a short method as
illustrated below.

The short-term portion is the first 12 months after the financial year-end. For the tile oven,
it is from 1 July 20.18 until 30 June 20.19. The long-term portion is the period from the day
after the short-term portion ends until the end of the lease term. For the tile oven, the long-
term portion is from 1 July 20.19 until 31 July 20.20.

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LONG METHOD
Short-term Long-term
Total
portion portion
Instalments a142 456 c213 684 356 140
Future finance costs b(38 273) d(19 765) (58 038)
Capital 104 183 193 919 298 102

a 71 228 x 2 = 142 456

b 4 138 + 20 676 + 13 459 = 38 273
c 71 228 x 3 = 213 684
d 2 692 + 11 222 + 5 851 = 19 765

SHORT METHOD
Short-term Long-term
portion portion
* 298 102 – ** 193 919 104 183 (refer to amortisation table)
Balance as at 30 June 20.19 193 919 (refer to amortisation table)

EXAM TECHNIQUE

Both the long method and the short method are acceptable in the exam. It is advisable to
use the short method in order to save time.

You can also extract the capital balances from your financial calculator as follows:
1 Amort (balance) R277 412 + accrued interest of R20 690 = R298 102
3 Amort (balance) R180 460 + accrued interest of R13 459 = R193 919

Refer to your calculator manual for detailed instructions on how to use the amortisation
functions.

LEASE 3: FACTORY BUILDING

STEP 1: IRIL? = Could not be determined reliably for the lease, therefore use the Incremental
borrowing rates = 15%

STEP 2: C5. Right-of-use asset (Factory building)

Right-of-use asset (Factory building) R
Initial amount of the lease liability [C6] 524 700
524 700
Lease liability (Factory building)
Present value of lease payments at lease commencement date [C6] 524 700

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STEP 3:C6. Present value of lease payments (Factory building)

Set HP and Sharp EL-738 calculators on 12P/YR as there are
twelve instalments payable per year. Set calculator on BEGIN
mode. THEN PERIOD (N) = 84

N = 83 (12 payments per year x 7 years = 84 – 1 PAYMENT IN ADVANCE)

PMT = 10 000
FV = 0 (only residual value guarantee)
I = 15%/12 = 1.25 = pmts in months
PV = ? 514 700 + 10 000 (ADVANCE PMT)

STEP 4: C7 Amortisation table (factory building)

Interest at Closing balance
Capital Instalments
15% outstanding
R R R R
524 700
1 July 20.17 - 10 000 10 000 514 700
1 August 20.17 6 434 3 566 10 000 511 134
1 September 20.17 6 389 3 611 10 000 507 523
1 October 20.17 6 344 3 656 10 000 503 867
1 November 20.17 6 298 3 702 10 000 500 165
1 December 20.17 6 252 3 748 10 000 496 417
1 January 20.18 6 205 3 795 10 000 492 623
1 February 20.18 6 158 3 842 10 000 488 780
1 March 20.18 6 110 3 890 10 000 484 890
1 April 20.18 6 061 3 939 10 000 480 951
1 May 20.18 6 012 3 988 10 000 476 963
1 June 20.18 5 962 4 038 10 000 472 925
30 June 20.18 5 912 - - 478 837
(year-end)
74 137 51 775 120 000

AMORTISATION TABLE
The amortisation table for this lease is 84 lines long. The amortisation table was only
prepared until year end (the first 13 lines). The entire amortisation table can be extracted
from a financial calculator and the amounts needed are extracted from the financial
calculator as follows:
Finance costs from 1 July 20.17 to 30 June 20.18:
1 Amort 13 (interest) = R74 137

Total future interest from 1 July 20.18 – 1 June 20.24:

14 Amort 84 (interest) = 241 164

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Short-term and long-term portions of the lease liability:

Long method
Short-term Long-term
Total
portion portion
Instalments a120 000 c600 000 720 000
Future finance costs b(66 764) d(174 400) (241 164)
Capital 53 236 425 600 478 836

a 10 000 x 12 = 120 000 (instalments 13 – 24)

b 14 Amort 25 (interest) 66 764
c 10 000 x 60 = 600 000 (instalments 25 – 84)
d 26 Amort 84 (interest) = 174 400

SHORT AND LONG-TERM PORTIONS USING FINANCIAL CALCULATOR

The balances are extracted from your financial calculator as follows:

Balances at 30 June 20.18 (12 Amort (balance)) R472 925

Accrued interest (13 Amort (interest)) R5 912
Closing balance at 30 June 20.18 including accrued interest R478 837

Balance at 30 June 20.19 (24 Amort (balance)) R420 346

Accrued interest (25 Amort (interest)) R5 254
Closing balance at 30 June 20.19 including accrual interest R425 600
(long-term portion)

Short-term portion (478 837 – 425 600) R53 237

NB!!
Ensure you know how to use your calculator. This can save you time in the TEST.

STEP 5 & 7: [LEASE 2 & 3]

C8. Current tax
R
Profit before tax (given) 1 050 000
Accounting profit 1 050 000
Movement in temporary differences [C9] (see comment below) *56 085
Taxable profit 1 106 085
Current tax @ 28% (1 106 085 x 28%) 309 704

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R
Proof of movement in temporary differences: (see comment below) *56 084
Add back depreciation: right-of-use asset: Tile oven 48 889
Add back finance charges: Tile oven 49 330
Minus full lease instalments paid: Tile oven (71 228)
Add back depreciation: right-of-use asset: Factory Building 74 957
Add back finance charges: Factory Building 74 137
Minus full lease instalments paid: Factory Building (120 000)

* MOVEMENT IN TEMPORARY DIFFERENCES

There is a rounding difference of R1 on the proof of temporary differences. This small rounding difference
must be ignored.

STEP 6: [LEASE 2 & 3]

C9. Deferred tax

Deferred tax
Carrying Tax Temporary
at 28%
amount base difference
asset/(liability)
R R R R
30 June 20.17 (given) – –

30 June 20.18
Right-of-use assets: Tile oven 271 111 – 271 111 (75 911)
Lease liability: Tile oven (298 102) – (298 102) 83 469
Right-of-use asset: Building 449 743 – 44 743 (125 928)
Lease liability: Building (478 837) – (478 837) 134 074

Deferred tax asset (56 085) 15 704

Movement in temporary differences (-56 085 – 0) (deductible)

CARRYING AMOUNT OF LEASE LIABILITIES USED FOR DEFERRED TAX

The carrying amount of the lease liability used for deferred tax is the balance outstanding at
year end. Therefore, this will include interest that is payable but not yet paid at year-end
(i.e. the accrued interest is paid after year-end when the installment is paid).

Therefore, the carrying amount of the lease liability (tile oven) at year-end is R277 412
(opening balance at 30 June 20.8) + R20 690 (interest payable at 30 June 20.8) = R298 102

The carrying amount of the lease liability (building) at year-end is R472 925 (opening
balance at 30 June 20.8) + R5912 (interest payable at 30 June 20.8) = R478 837

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LESSOR

EXAMPLE 4 [FINANCE LEASE]

[SOURCE: UNISA FAC3703/2017 Example adapted]

On 1 January 20.16 Sun Ltd leased a machine to Moon Ltd. Sun Ltd used the machine in its
manufacturing process. The lease agreement contains a lease in terms of IFRS 16, Leases.
Moon Ltd has a high credit rating.

The terms of the lease agreement were as follows:

Open market value of the machine at commencement of lease R340 000

Instalments payable annually in arrears R120 010
Period of lease 5 years
Date of first payment 31 December 20.16

Sun Ltd incurred R15 000 in legal fees to secure the lease agreement. The legal fees are
deductible for tax purposes.

The estimated useful life of the machine is five years with a residual value of Rnil. Moon Ltd
will take ownership of the machine at the end of the lease term at no additional cost. The
machine was originally purchased on 1 November 20.15 for R350 000.

The income tax rate is 28%. A tax deduction is granted for the machine over five years on
the straight-line basis apportioned for part of a year. The deferred tax balance at 1 January
20.17 was R9 787.

Assume that the profit before tax of Sun Ltd for the reporting periods ended 31 December
20.17, before taking the lease agreement into account, was R550 000 respectively.

REQUIRED
Present and disclose the lease transaction in the annual financial statements of Sun Ltd for
the reporting period ended 31 December 20.17.

• Your answer must comply with the International Financial Reporting Standards
(IFRS).
• Ignore VAT.
• Cash flow statement and statement of changes in equity are not required.
• Comparative figures are not required.
• Accounting Policy are not required.

© CA CAMPUS
 27 FOR USE BY CA CAMPUS STUDENTS ONLY

SOLUTION

SUN LTD EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT

31 DECEMBER 20.17
Notes 20.17
R
ASSETS
Non-current assets
Net investment in finance leases 4 182 246
Current assets R250 837
Net investment in finance leases 4 68 592

EQUITY AND LIABILITIES

Non-current liabilities
Deferred tax 6 14 701
Current liabilities
Other payables: SARS 2 166 750

SUN LTD EXTRACT FROM THE STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 20.17

Notes 20.17
R
Profit before tax 613 087
Income tax expense 4 (166 750)
Profit for the year 446 337

Not required.
SUN LTD Only to
NOTES FOR THE YEAR ENDED 31 DECEMBER 20.17 indicate how to
disclose
1. Profit before tax
20.17 20.16
Profit before tax includes the following: R R

Income
Profit on sale of asset (340 000 – 338 333) - 1 667
Finance income [C1] 63 087 xxx
Depreciation - -

Note: Finance income can be disclosed as part of the profit before tax note OR a separate note.

© CA CAMPUS
 28 FOR USE BY CA CAMPUS STUDENTS ONLY

2. Income tax expense

Major components of tax expense 20.17

SA normal tax R
Current tax [C2]
– Current year 166 750
Deferred tax [C3]
– Movement in temporary differences 4 914
171 664
Tax reconciliation
Accounting profit [C2] 613 087
Tax at 28% 171 664

3. Property, plant and equipment

This is the 20.16 PPE note. Not required.
Machine However due to the fact that we had to
Carrying amount beginning of the year disclose all related notes. If 20.16 was
Cost required you had to identify to disclose
Accumulated depreciation ( the PPE note
Disposal

Carrying amount end of the year

Cost
Accumulated depreciation

The asset is leased in terms

(finance lease) from 1 January
20.16 which gives rise to a
disposal on 1 January 20.16 for
accounting purposes.

For tax purposes the asset lease

has not been disposed.
4. Net investment in finance leases

4.1 Reconciliation of net investment in finance leases:

20.17
R
Opening balance 307 760
New leases entered into -
Repayments of capital (56 923)
Effect of lease modification -
250 837

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4.2 Maturity analysis of future finance lease installments receivable at reporting date:
Later
than
20.18 20.19 20.20 20.21 20.22 20.22
20.17 R R R R R
Undiscounted lease payments 120 010 120 010 120 010 - - -
Unearned finance income (51 418) (37 358) (20 415) - - -
[C1]
Net investment in the lease 68 592 82 652 99 594 - - -

182 246
5. Categories of financial assets
IFRS 7 disclosure
Non-current financial assets 20.17
This is the
Financial assets at amortised cost R
Outstanding
Net investment in finance leases (refer to note 4.1) 182 246
capital amount
as per the
Current financial assets
Amortisation
Financial assets at amortised cost
schedule
Net investment in finance leases (refer to note 4.2) 68 592

Credit risk in financial assets

The company manages its liquidity risk by ensuring that the maturities of its assets and
liabilities are matched according to cash flow needs and that the company has adequate
access to credit. Expected cash flow requirements are monitored with rolling cash flow
budgets.
20.17
R
(a) Maximum exposure to credit risk
Financial assets at amortised cost
Net investment in finance leases (current + non-current) 250 837

(b) Credit quality of financial assets that are neither past due not impaired
Financial assets at amortised cost
Net investment in finance leases – High credit rating 250 837

6. Deferred tax

Analysis of temporary differences

Net investment in finance leases (14 701)
Net deferred tax liability (14 701)

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 30 FOR USE BY CA CAMPUS STUDENTS ONLY

CALCULATIONS

STEP 1: Calculate the interest rate implicit in the lease.

Present value of: Fair value of leased asset

IRIL: MLP + = +
Unguaranteed residual value initial direct costs of lessor

Set HP and Sharp EL-738 calculators on 1P/YR. LESSORS:

N = 5 (1 payment per year x 5 years) When calculating
PV = (340 000 + 15 000) (fair value + initial direct costs of lessor) the PV : take into
PMT = 120 010 account the UGRV
FV = 0 + 0 (guaranteed and unguaranteed residual values) & GRV = FV
IRIL = ? 20.499% per annum

STEP 2: Calculate unearned finance income.

R
Gross investment in the lease (5 x 120 010) 600 050
Unearned finance income (600 050 – 355 000) (245 050)
Net investment in finance leases (present value) 355 000
Refer to TOTAL line in amortisation table

STEP 3: Prepare amortisation table at R355 000.

Contract entered into at beginning of year, first payment AT END of year (appears)

PAYMENT DATES INSTALMENT CAPITAL INTEREST CLOSING BALANCE

01.01.20.16 355,000.00 Opening balance for
31.12.20.16 120,010 47,240 72,770 307,760 20.17 [N4]
31.12.20.17 120,010 56,923 63,087 250,837
31.12.20.18 120,010 68,592 51,418 182,246 Non-current assets
31.12.20.19 120,010 250 837 82,652 37,358 99,594
31.12.20.20 120,010 99,594 20,415 Current asset
600,050 355,000 245,049

182,246
NOTE: R1 rounding difference = Immaterial

NOTE: You need to know the implication (difference in amortisation table) when lease
payments are paid in arrears vs in advance. [Refer to Descriptive Accounting 21th Edition,
page 657, Example 23.13 for an example of payments made in advance.]

© CA CAMPUS
 31 FOR USE BY CA CAMPUS STUDENTS ONLY

STEP 4: C2. Current tax

20.17 DEFERRED TAX ON THE MACHINE
R For accounting purposes, machine
sold on 1 January 20.16,
Profit before interest (before lease) (given) 550 000 as a result, the CA for the machine
on 31 December 20.16 is Rnil.
Finance income [amort table] 63 087
Profit in sale of asset [ISA] -
For tax purposes, the machine was
Accounting profit 613 087 NOT sold on 1 January 20.16.
Movement in temporary differences [C3] (17 551)
Taxable profit 595 536 Therefore, the machine continues
to have a tax base.
Current tax at 28% 166 750

STEP 5: C3. Deferred tax Deferred

tax at
28%
Carrying Temporary asset/
amount Tax base difference (liability)
R R R R
31 December 20.16 (given) 34 953 (9 787)

For accounting = not owner (finance lease)

31 December 20.17
Machine [C4] - 198 333 (198 333) 55 533
Net investment in finance leases 250 837 – 250 837 (70 234)
Net deferred tax liability 52 504 (14 701)

Movement in temporary differences (34 953 – 52 504) 17 551 (4 914)

C4. Tax base of machine

R
Cost (excluding legal fees) (see comment below) 350 000
Tax deduction (350 000/5 x 2/12) (11 667)
Tax base at 31 December 20.15 338 333
Tax deduction (350 000/5) (70 000)
Tax base at 31 December 20.16 268 333
Tax deduction (350 000/5) (70 000)
Tax base at 31 December 20.17 198 333

LEGAL FEES INCURRED BY SUN LTD

For tax purposes, SARS allows a section 11(c) deduction for the legal fees. As a result, the
legal fees do not form part of the cost of the asset for tax purposes and is excluded from the
tax base of the machine.

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32 FOR USE BY CA CAMPUS STUDENTS ONLY

JOURNAL ENTRIES

INITIAL journal:
Dr Gross investment in finance lease (SFP) 600 050
Cr Bank (SFP) If deposit was paid
Cr Unearned finance income (SFP) 245 050
Cr Equipment (SFP) 355 000
Recognise lease receivable and initial direct costs and derecognise equipment (grader)

Year end journal:

Dr Bank (SFP) 120 010
Cr Gross investment in finance lease (SFP) 120 010
Recognise first instalment received
Dr Unearned finance income (SFP) 63 087
Cr Finance income (P/L) 63 087
Recognise finance income as profit

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 33 FOR USE BY CA CAMPUS STUDENTS ONLY

EXAMPLE 5 [OPERATING LEASE]

[SOURCE: UNISA FAC3703/2017 Example adapted]

North Ltd acquired equipment on 1 July 20.16 for R1 000 000. South Ltd started leasing
equipment from North Ltd on 1 July 20.16 in terms of an operating lease agreement. The
period of the lease is three years, after which South Ltd has the option to extend the lease
for a further 12 months.

The lease payments are payable as follows:

R
1 July 20.16 53 000
30 June 20.17 295 000
30 June 20.18 295 000
30 June 20.19 282 000
925 000

The equipment has an estimated useful life of six years and a residual value of Rnil.

North Ltd incurred R30 000 in legal fees to secure the lease agreement.

South Ltd and North Ltd depreciate equipment according to the straight-line method over
the useful life of the asset. Both companies have a 30 June year-end.

SARS grants a tax allowance on equipment over five years according to the straight-line
basis. The income tax rate is 28% for the year and the opening balance of deferred tax was
Rnil on 1 July 20.16. Profit before tax was R100 000 before taking the above transactions
into account.

REQUIRED
(a) Prepare the journal entries of North Ltd for the reporting period ended 30 June 20.17.
Journal narrations are required.

(b) Present the above transaction in the statement of financial position at 30 June 20.17 and
disclose the above lease transaction in the notes to the annual financial statements of
North Ltd for the year ended 30 June 20.17.

• Comparative figures are not required.

• Your answers must comply with the International Financial Reporting Standards
(IFRS).
• Ignore VAT.
• Disclosure in terms of IFRS 7, Financial Instruments: Disclosure is not required.

© CA CAMPUS
 34 FOR USE BY CA CAMPUS STUDENTS ONLY

SOLUTION

(a) Journal entries

Dr Cr
Year ended 30 June 20.17 R R
Equipment: Cost price (SFP) (1 000 000 + 30 000) 1 030 000
Bank (SFP) 1 030 000
Equipment purchased 1 July 20.16 and capitalise commission
Bank (SFP) (53 000 + 295 000) 348 000
Operating lease income: Equipment (P/L) [C1] 308 333
Lease income received in advance (SFP) [C2] 39 667
Lease income received for the year
Depreciation (P/L) (1 000 000/6) + (30 000/3) 176 667
Accumulated depreciation: Equipment (SFP) 176 667
Depreciation for the year
Income tax expense (current tax) (P/L) [C3] 61 040
Other payables: SARS (SFP) 61 040
Current tax provision for the year
Income tax expense (deferred tax) (P/L) 3 826
Deferred tax (SFP) [C4] 3 826
Deferred tax movement for the year

(b) Disclosure

NORTH LTD
EXTRACT FROM THE STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20.17
Notes 20.17
R
ASSETS
Non-current assets
Property, plant and equipment 4 853 333

EQUITY AND LIABILITIES

Total liabilities
Non-current liabilities
Deferred tax 7 3 826
Operating lease income received in advance [C2] 26 333
Current liabilities
Operating lease income received in advance [C2] 13 333
Other payables 61 040

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 35 FOR USE BY CA CAMPUS STUDENTS ONLY

NORTH LTD
NOTES FOR THE YEAR ENDED 30 JUNE 20.17

1. Profit before tax

Profit before tax is shown after taking into account the following items:
20.17
R
Expenses
Depreciation (refer to note 4) 176 667
Straight-line operating lease income
– Equipment [C1] 308 333

2. Property, plant and equipment

Equipment
Carrying amount at 1 July 20.16 -
Cost -
Accumulated depreciation -
Additions 1 000 000
Legal fees capitalised 30 000
Depreciation [(1 000 000/6) + (30 000/3)] (176 667)
Carrying amount at 30 June 20.17 853 333
Cost 1 030 000
Accumulated depreciation (176 667)

The equipment is leased out in terms of an operating lease (refer note 6).

LEGAL FEES CAPITALISED TO EQUIPMENT

The legal fees incurred to enter into the operating lease are capitalised to the equipment.
The legal fees are then depreciated over the lease term.

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 36 FOR USE BY CA CAMPUS STUDENTS ONLY

3. Income tax expense

20.17
R
Major components of tax expense
SA normal tax
Current tax
– Current year [C3] 61 040
Deferred tax
– Movement in temporary differences [C4] (13 666 x 28%) 3 826
64 866
Tax reconciliation
Accounting profit [C3] 231 667
Tax at 28% (215 000 x 28%) 64 867

4. Operating lease agreement

The undiscounted lease payments expected to be received under operating lease

agreements at the reporting date is as follows:

30 June 20.18 295 000

30 June 20.19 282 000
577 000

5. Deferred tax

Analysis of temporary differences

Operating lease income received in advance [C4] 11 107

Property, plant and equipment
- Accelerated deductions for tax purposes [C4] (14 933)
Net deferred tax liability (3 826)

© CA CAMPUS
 37 FOR USE BY CA CAMPUS STUDENTS ONLY

CALCULATIONS

C1. Straight-lining of operating lease payments

R
Total lease payments (given) 925 000
Equalised lease payment per annum (925 000/3) 308 333

C2. Operating lease income received in advance

Instalments Equalised Lease Income
received in lease received in
cash payments advance
30 June 20.17 348,000 308,333 39,667
30 June 20.18 295,000 308,333 (13,333)
30 June 20.19 282,000 308,333 (26,333)
925,000 925,000 0

* The lease income received in advance is recognised as a credit balance in the Statement
of Financial Position

C3. Current tax

R
Profit before tax 100 000
Equalised operating lease income 308 333
Depreciation 176 667
Accounting profit 231 667
Movement in temporary differences (taxable) (see C4 below) (13 666)
Taxable income 218 001
Current tax at 28% (218 001 x 28%) 61 040

APPLICATION OF SECTION 23A OF THE INCOME TAX ACT

The tax allowance on the equipment must not exceed the lease income received for the
equipment. The tax allowance on the equipment of R180 000 is less than the lease income
of R308 000, therefore no limit is applicable.

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 38 FOR USE BY CA CAMPUS STUDENTS ONLY

C4. Deferred tax

Deferred tax
@ 28%
Carrying Temporary asset/
amount Tax base difference (liability)
R R R R
30 June 20.16 – –

30 June 20.17
Equipment 853 333 a800 000 53 333 b(14 933)
Lease income received in advance (39 667) c– (39 667) d11 107
Deferred tax liability at 30 June 20.17 13 666 (3 826)

Movement in temporary differences (taxable) (13 666 – 0) 13 666 (3 826)

a 1 000 000 – (1 000 000/5) = 800 000 Commission is not capitalised for tax purposes
b Carrying amount of asset > tax base of asset  deferred tax liability
c Carrying amount (39 667) minus amounts not taxable in future (39 667 already taxed) = 0
d Carrying amount of liability > tax base of liability ∴ deferred tax asset

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FAQ: When to use residual values, which amount etc.

SOURCE: Unisa handout 2018: Residual values
WATCH: IFRS 16 - Lecture Example FAQ (15 Min)

A lease contract can contain a

• residual value guarantee,
• an unguaranteed residual value or
• both.

Appendix A to IFRS 16 defines a residual value guarantee as:

A guarantee made to a lessor, by a party unrelated to the lessor, that the value (or part of
the value) of an underlying asset at the end of a lease will be at least a specified amount.

If the unrelated party referred to above, is the lessee; the amount expected to be paid by
the lessee under the residual value guarantee, will form part of the lease payments of the
lessee.

The value included in the lease liability with regard to any residual value guarantee will be
the amount that the lessee expects to pay to the lessor due to the asset being disposed of
at a value lower than what the lessee guaranteed the lessor will obtain at the end of the
lease term.

Example 1
(Ignore any Value Added Tax (VAT) consequences)

Lessee Ltd enters into a lease contract, as defined in IFRS16.9, with Lessor Ltd to lease a
machine. Should Lessee Ltd guarantee the Lessor Ltd that the machine will be sold for
R18 000 at the end of the lease term and the fair value of the asset is estimated at R20 000
at the end of the lease term.:

Assume the following additional information:

Lease term 3 years
Lease payment (annually in arrears) R117 000
Fair value at commencement of the lease R300 000
(Estimated fair value at the end of the lease term R20 000)

Required:
Calculate the following:
• Interest rate implicit of the lease
• Lease liability to be recognised in the record of the Lessee on initial recognition

© CA CAMPUS
40 FOR USE BY CA CAMPUS STUDENTS ONLY

Solution

Calculate the interest rate implicit of the lease:

SHARP EL-738
1. 2ndF MODE (Clear all)
2. 117 000 PMT
3. 20 000 FV
4. (300 000) PV
5. 3 N
6. COMP I/Y 11.10%

Lessor Ltd:
The estimated fair value of the asset that will be obtained when the asset is disposed of
amounting to R20 000, will be taken into account to determine the interest rate implicit in
the lease and the investment of the lessor in the lease.

Amortisation Table at 11.10% for lessor:

Amortisation table: LESSOR

Pmt made in arrears
PAYMENT DATES INSTALMENT CAPITAL INTEREST CLOSING BALANCE
300,000
Year 1 117,000 83,700 33,300 216,300
Year 2 117,000 92,991 24,009 123,309
Year 3 117,000 103,313 13,687 20,000
20,000 20,000
371,000 300,003 70,997

300,004.18 < 300,000

Calculate the present value of lease liability for lessee:

SHARP EL-738
1. 2ndF MODE (Clear all)
2. 117 000 PMT
3. 0 FV [Note]
4. 11.10 I/Y
5. 3 N
6. COMP PV 285 418

Lessee Ltd:
The residual value guarantee of R18 000 will not form part of the lease payments included
in the measurement of the lease liability of Lessee Ltd, since it is estimated that the asset
will be sold for more than the value that the lessee has guaranteed the lessor will obtain
when the asset is disposed of (IFRS16.27(c)).

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41 FOR USE BY CA CAMPUS STUDENTS ONLY

Amortisation table for LESSEE

Pmt made in arrears
PAYMENT DATES INSTALMENT CAPITAL INTEREST CLOSING BALANCE
285,418
Year 1 117,000 85,319 31,681 200,099
Year 2 117,000 94,789 22,211 105,311
Year 3 117,000 105,311 11,689 -
-
351,000 285,418 65,582

285,418.08 < 300,000

COMMENT
On commencement date of the lease, the lessee recognises the right-of-use asset at a
value lower than its fair value, which support the fact that the lessee will not obtain the
full benefits of the underlying asset (the lessor will receive the disposal receipts of the
underlying asset).

Example 2
(Ignore any Value Added Tax (VAT) consequences)

Lessee Ltd enters into a lease contract (as defined in IFRS16.9) with Lessor Ltd to lease a
machine with the guarantee that Lessor Ltd will be able to sell the asset for R8 000 at the
end of the lease term. The guarantee was given in order to ensure that the machine is not
used beyond reasonably expected usage for the terms of the lease. At commencement of
the lease, Lessee Ltd estimates that the asset may only be sold for R6 500.

In determining the interest rate implicit in the lease:

• Lessor Ltd will account for a residual value guarantee of R8 000.
• Lessee Ltd will however only account for a residual value guarantee of R1 500
(R8 000 – R6 500), which is the amount Lessee Ltd expects to pay in order for the
residual value guarantee to be fulfilled.

Appendix A to IFRS 16 defines an unguaranteed residual value as:

That portion of the residual value of the underlying asset, the realisation of which by a
lessor is not assured or is guaranteed solely by a party related to the lessor.

By nature, an unguaranteed residual value is an estimate, since it refers to the fair value of
the asset that the lessor will obtain when the asset is disposed of at the end of the lease
term. Therefore, the underlying asset of a lease contract that contains an unguaranteed
residual value will always be returned to the lessor.

© CA CAMPUS
 I DON’T KNOW WHAT TO DO WHEN THERE IS A REASSESSMENT OF A LEASE LIABILITY

• First read through the principles below.

• Follow the steps provided with the given information.

REASSESSMENT OF LEASE LIABILITY (IFRS 16.39-46):

There are instances where the terms of the lease can change during the lease term, in which
case the lease liability must be reassessed. [AWARENESS]

A lessee shall REMEASURE the lease liability in

the following circumstances:

1. Change in the lease term, 1. Change in amounts expected to be paid

OR under a residual value guarantee,
2. Change in assessment of an option to OR
purchase the underlying asset. 2. Change in future lease payments due to a
change in index or rate used to determine
those payments.

Discount the revised lease payments Discount the revised lease payments using
using a revised discount rate. rate.
the UNCHANGED DISCOUNT RATE.

STEPS: STEPS:

STEP 1: Calculate the REVISED DISCOUNT STEP 1: Use the ORIGINAL DISCOUNT RATE
RATE, WITH NEW INFO STEP 2: Obtain the NEW INFO,
STEP 2: Calculate the NEW Lease Liability FV might change due to RV change
with the REVISED DISCOUNT RATE OR
calculated in STEP 1 Lease PMTs might have changed.
STEP 3: Calculate the difference: STEP 3: Calculate the difference:
OLD LL versus NEW LL OLD LL versus NEW LL
An unchanged discount rate is used.
UNLESS
The change in the lease payments is as a
result of floating interest rates. In this case,
a revised discount rate, that reflects changes
in the interest rate, must be used.
IF increase in LL:
Dr. ROUA [Amount calculated in STEP 3] XXX
Cr. Lease Liability [Amount calculated in STEP 3] XXX
IF decrease in LL:
Dr. Lease Liability [Amount calculated in STEP 3] XXX
Cr. ROUA [Amount calculated in STEP 3] XXX