200536 Intermediate Financial Accounting

Homework Solutions for Tutorial

chapter 14
Comprehension questions
2.

If a lease agreement states that the lessee guarantees a residual value, at the end of the
lease term, of $20 000, what does this mean?
The guaranteed residual value is that part of the residual value of the leased asset guaranteed by
the lessee or a third party related to the lessee (AASB 117, paragraph 4). The lessor will estimate
the residual value of the leased asset at the end of the lease term based on market conditions at the
inception of the lease and the lessee will guarantee that, when the asset is returned to the lessor, it
will realise at least that amount. The guarantee may range from 1% to 100% of the residual value
and is a matter for negotiation between lessor and lessee. Where a lessee guarantees some or all of
the residual value of the asset, the lessor has transferred risks associated with movements in the
residual value to the lessee.
3. What is meant by the interest rate implicit in a lease?
This is defined in AASB 117, paragraph 4 as the discount rate that at the inception of the lease
causes the aggregate present value of:
(a)
the minimum lease payments; and
(b)
the unguaranteed residual value
to be equal to the sum of:
(i)
the fair value of the leased asset, and
(ii)
any initial direct costs of the lessor.
This interest rate is used to discount the minimum lease payments to their present value for
recognition purposes. This discount rate is implicit in the lease because it is the terms of the lease
(number, timing and quantum of repayments, guaranteed residual values or bargain purchase
options) that determine its value. Any change to the terms or to the fair value will change the
interest rate.
4.

Where a lessor incurs initial direct costs in establishing a lease agreement, how are
these costs to be accounted for by the lessor?
Initial direct costs are incremental costs that are directly attributable to negotiating and arranging a
lease, except for such costs incurred by manufacturer or dealer lessors (paragraph 4). Examples
include commission, legal fees and internal costs, but exclude general overheads such as those
incurred by a sale and marketing team (paragraph 38).
The accounting treatment for initial direct costs differs depending on whether the lease is
classified as operating or finance, and if finance, whether the lessor is a manufacturer/dealer.
Finance lease
non-manufacturer/dealer lessor initial direct costs are included in the finance lease receivable
and are recovered via payments received over the lease term.
manufacturer/dealer lessor initial direct costs are recognised as an expense at the
commencement of the lease when the profit or loss on sale of the leased asset is
recognised.

IFA 200536

Solutions - chap 14

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Operating lease
Any initial direct costs incurred by lessors in negotiating operating leases are added to the
carrying amount of the leased asset and recognised as an expense over the lease term on
the same basis as the lease income (paragraph 52).
6.
How are finance leases to be accounted for by lessees?
See AASB 117 paras. 20-28.
A lessee recognises an initial asset and liability at an amount equal to the fair value of the leased
property, or, if lower, the PV of the minimum lease payments.
After initial recognition:
- the leased asset is depreciated over its useful life generally the lease term in a pattern
reflecting the consumption or loss of the rewards embodied in the asset.
the lease liability is reduced as the lessee makes lease payments. Interest expense is determined
by applying the interest rate implicit in the lease to the lease liability at the beginning of the period. The
lease payment is divided into interest expense and reduction in lease liability.
7.
How are finance leases to be accounted for by lessors?
See paras. 36-46 of AASB 117.
The lessor derecognises the leased asset and records a lease receivable.
The initial measurement of the receivable is at fair value of the leased asset plus initial direct costs
incurred by the lessor.
On receipt of lease payments from the lessee, the lessor records lease rental revenue and reduces
the lease receivable, based on an application of the interest rate implicit in the lease.

IFA 200536

Solutions - chap 14

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