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FINANCIAL LIABILITY: Accounting for Lease by the lessee

FINANCIAL LIABILITY: Accounting for Lease by the lessee. FRS 117 / MASB 10 : LEASES. DEFINITION. Lease is an agreement whereby the lessor conveys to the lessee in return for a payment or a series of payments the rights to use an asset for an agreed period of time. Classification of leases.

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FINANCIAL LIABILITY: Accounting for Lease by the lessee

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  1. FINANCIAL LIABILITY:Accounting for Lease by the lessee FRS 117 / MASB 10 : LEASES

  2. DEFINITION • Lease is an agreement whereby the lessor conveys to the lessee in return for a payment or a series of payments the rights to use an asset for an agreed period of time.

  3. Classification of leases 1. Finance lease • Lease that transfers substantially, all of the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. ( substance over form principle) • Operating lease • Lease that not transfers all of the risks and rewards incident to ownership of an asset.

  4. Criteria to classify lease as a finance lease • Classification depends on the substance of the transaction rather than the form of the contract. • At least one of the following criteria is satisfied. • The ownership of the asset is transferred to the lessee by the end of the lease term; • The lessee has the option to purchase the asset, and at the inception of the lease, it is certain that the option will be exercised • The lease term is for the major part of the economic life of the asset (>75%) • PV of the minimum lease payments amounts to or at least substantially equal to asset’s fair value (>90% of the assets fair value) • Lease assets are of a specialised nature

  5. FINANCE LEASES Recognition and measurement by Lessee • Recognise; • as assets and liabilities in the Balance Sheet • Measurement at inception date; • Amount equal to fair value of the lease assets or, • If lower, at the PV of the minimum lease payments. • Discount factor is the interest rate implicit in the lease ( if not practicable to determine, lease’s incremental borrowing rate)

  6. Minimum lease payment • Should include; • payment of rental over the lease term plus purchase option price (if any); • Exclude any contingent rent, costs for services and taxes to be paid to the lessor

  7. entry Dt. Asset under finance lease RM xxx Cr. Liability under finance lease RM xxx • THE ASSET should be recognised as fixed asset and accounted for according to MASB 15 / FRS 116- PPE • The lease asset should be depreciated over its useful life (if ownership is transferred); • Otherwise it should be depreciated over the shorter of the leases term or its useful life

  8. FINANCE LEASE LIABILITY • The lease liability should be recorded at the same amount as the leased asset. • The lease payment – apportioned between • Finance charge • Reduction of outstanding lease liability • INTEREST / FINANCE CHARGE is the different between the sum of the gross lease payments and the fair value of the leases asset. • This finance charge should be recognised over the lease term to produce a constant periodic rate of interest on the remaining balance of the lease liability.

  9. Method in allocating the finance charge; • Amortisation schedule using the effective/implicit interest rate • Sum year digit • Straight line method (only is finance charge is not material) • Standard requires the 1st method to be used to produce a constant periodic rate of interest.

  10. Entry • when lease payment is made Dt. Liability under finance lease Cr. Cash • When finance charge is recognised Dt. Lease interest expense Cr. Liability under finance lease

  11. Example • Illustration 12 (pg. 362) • Illustration 13 (pg. 367) with option to purchase

  12. OPERATING LEASE • Lesses should not capitalise operating lease • Lease payment should be recognised as an expense in IS. • Standard requires that the lease rental expense should be recognised on a straight line basis over the lease term

  13. DISCLOSURE by lessee • Finance lease [26] • net carrying amount of each class of asset • i) Reconciliation between minimum lease payment and their PV ii) total minimum lease payments at BS date and their PV for each of the following periods: a) no later than one year b) later than one year but no later than 5 years c) later than 5 years

  14. DISCLOSURE by lessee • Finance lease [26] • Contingent rents recognised • Total future sublease payments expected to be received under non-cancellable sublease at the BS date • General description of the lessee’s significant leasing arrangements

  15. DISCLOSURE by lessee • Operating lease [34] • Total future minimum lease payments under the non-cancellable operating lease for each of the following periods: i) no later than one year ii) later than one year but no later than 5 years iii) later than 5 years • Total future minimum sublease payments expected to be received under non-cancellable sublease at the BS date

  16. DISCLOSURE by lessee • Operating lease [34] • Lease and sublease payments recognised in IS for the period, with separate amounts of minimum lease payments, contingent rents and sublease payments • General description of the lessee’s significant leasing arrangements

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