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Hi can you please explain to me the logic behind accounting for right to use asset. Like why does it need to be = initial liability over proceeds. Is this a standard formula.
Actually can you explain right to use asset.
Scenario 1:
Asset useful life: 10 years
Lease it back for 10 years
= Seller retained control (control not passed hence cant be treated as sold)
= asset retained at carrying amount in PPE (B/S)Scenario 2:
Asset useful life: 20 years
Lease it back: 5 years
= Control passed
= asset retained at what value?Is this what its called right to use asset? to account for the carrying amount to be included at the y/e B/S?
@aarina said:
Hi can you please explain to me the logic behind accounting for right to use asset. Like why does it need to be = initial liability over proceeds. Is this a standard formula.Actually can you explain right to use asset.
Hi,
Have you looked up the definition of a right to use asset? I’d recommend that you do and if you are struggling then let me know and I can help. Also, I don’t fully understand the formula you mention above.
Thanks
@aarina said:
Scenario 1:
Asset useful life: 10 years
Lease it back for 10 years
= Seller retained control (control not passed hence cant be treated as sold)
= asset retained at carrying amount in PPE (B/S)Scenario 2:
Asset useful life: 20 years
Lease it back: 5 years
= Control passed
= asset retained at what value?Is this what its called right to use asset? to account for the carrying amount to be included at the y/e B/S?
Hi,
In the first scenario the proceeds are treated as a loan because there is no sale given control has not transferred.
In the second scenario we derecognise the asset as control has passed and therefore a sale has taken place.
Thanks
Okay right. Done my reading.
Want to ask you about these two questions:
1. A seller-lessee sells a building for 2,000. Its carrying amount at that time was 1,000 and FV 1,800. The seller-lessee then leases back the building for 18 years, for 120 p.a in arrears. The interest rate implicit in the lease is 4.5%, which results in a present value of the annual payments of 1,459. The transfer of the asset to the buyer-lessor has been assessed as meeting the definition of a sale under IFRS 15.
2. Property valued FV $2m transfer title on that day. Leaseback for 5 years paying $150K pa on 31/12 PV rental payable was $599K ( this is PVMPL right?) interest 8% Carrying amount on 1/1 was $1.6m remaining UL: 20 years.
I want to know why the solutions differs for the two questions even though the concept should be the same.
the solution given for Q1:
Recognise right to use asset
= (PV of lease payment / FV of asset) x Carrying amount
= PV of lease payment : PVMPL – ((Sales price – FV); financing transaction as SP >FV)Finance liability
= PV of lease paymentMy question:
1) Whats the difference between PVMLP and PV of lease payment anyway or have i mixed up the term?
2) The finance liability is the finance cost yes? and it is the initial liability to be shown in I/s right?In Q2.
The solution given:
Financial liability = 8% x PVML = 8% x 599,000Profit on disposal is given in a formula as:
(FV – PVMLP)/ FV x (FV- CA)My question:
1) why is Q1 we cant take the EIR x PVML to find the financial liability ( use the same method in Q2 for Q1 .2) how to calculate the profit on disposal for Q1 using formula in Q2.
3) in Q1 the SP and FV are different so we have a financing
in Q2 we are given SP as FV. So please tell me how i can not get confused by these detailsI mean i want to consolidated the method of working for Q1 and Q2 so that its consistent. The point being control is passed and asset is sold. So in SOPL values needed are
1. RTUA (right to use asset)
2. Financial liabilitybut im having trouble how to differentiate this.
as i compare (from the solutions) q2 “profit on disposal” working is almost the same as calculating profit on this disposal. Can you illustrate and example where SP<FV and it creates a prepayment?
@aarina said:
Okay right. Done my reading.Want to ask you about these two questions:
1. A seller-lessee sells a building for 2,000. Its carrying amount at that time was 1,000 and FV 1,800. The seller-lessee then leases back the building for 18 years, for 120 p.a in arrears. The interest rate implicit in the lease is 4.5%, which results in a present value of the annual payments of 1,459. The transfer of the asset to the buyer-lessor has been assessed as meeting the definition of a sale under IFRS 15.
2. Property valued FV $2m transfer title on that day. Leaseback for 5 years paying $150K pa on 31/12 PV rental payable was $599K ( this is PVMPL right?) interest 8% Carrying amount on 1/1 was $1.6m remaining UL: 20 years.
I want to know why the solutions differs for the two questions even though the concept should be the same.
Hi,
In the first scenario as there has been a sale then we derecognise the asset, record the lease liability and recognise a right of use asset alongside the gain/loss transferred to the buyer.
In the second scenario, there isn’t anything that indicates whether there has or hasn’t been a sale.
Thanks
@aarina said:
the solution given for Q1:Recognise right to use asset
= (PV of lease payment / FV of asset) x Carrying amount
= PV of lease payment : PVMPL – ((Sales price – FV); financing transaction as SP >FV)Finance liability
= PV of lease paymentMy question:
1) Whats the difference between PVMLP and PV of lease payment anyway or have i mixed up the term?
2) The finance liability is the finance cost yes? and it is the initial liability to be shown in I/s right?In Q2.
The solution given:
Financial liability = 8% x PVML = 8% x 599,000Profit on disposal is given in a formula as:
(FV – PVMLP)/ FV x (FV- CA)My question:
1) why is Q1 we cant take the EIR x PVML to find the financial liability ( use the same method in Q2 for Q1 .2) how to calculate the profit on disposal for Q1 using formula in Q2.
3) in Q1 the SP and FV are different so we have a financing
in Q2 we are given SP as FV. So please tell me how i can not get confused by these detailsHi,
I’m not too sure where you are getting these formulae from but it isn’t how I’d approach it in the exam. If you cannot remember the formula in the exam there is no formula sheet to help you. It seems like the approach does give the same answer for the right of use asset at 729.5 but I’d work it like the tabular format in the class notes. I’d also do the same to work out the gain/loss on transfer of the asset.
The lease liability is recognised on the SFP and the finance cost is calculated upon the outstanding liability. Here the lease liability is the present value of the lease payments at 1,459 and then this is adjusted for the fact that the sale is above fair value and the additional amount above fair value is treated as additional financing and added to the lease liability.
Don’t spend too long upon the sale and leaseback as you are likely to find the time and effort spent on trying to understand it is not worth it.
Thanks
I spent 3 hours in p4 trying to figure out a value. Talk about butt strapping myself to the chair. lol sometimes i wonder what is the point in life. But wondering is time wasting.
Hi,
You need to stop spending too much of your time on small aspects. You and hundreds of other students out there cannot get everything correct, it is impossible. If you are spending too long on something move on quickly.
You only get one life, so make the most of it. Worry about its point once its over, you’re better enjoying it now than think about the point of it. I’m sure once you’ve done all of your exams then you will be able to have more fun and enjoy the benefits of the hard work that you’ve done.
Thanks
Funny thing was after suffering in silence of xx years in previous uni.
I dropped out, became obese at 100kg and depressed.
Decided to learn gatrosnomic culinary and dabbed into interior/graphic design freelance work for about 3 years. Was the happiest little bean. Travelled around the globe. Did yoga running, mount climbing, losing half of my body weight.
Then, everything turns, I was working at this awesome place but the job was the s**** and it was devaluing my worth, i had depression and almost went suicidal.
So i quit the job and decide to resume ACCA. I used to be afraid of a lot of things, now i’m most scared of my unfulfilled potential.Anyway, thanks. Yes, i keep that in mind even though right now i feel somewhat pressured by time.. i just need to keep up a momentum of positivity.
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