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My question is in respect of the exemption under IFRS 16
“as per question 23 of BPP Revision Kit in order to maintain liquidity, and operating profit covenant, company instead of going into 5 years lease term enter into short term lease of 6 contract each of 10 months, we need to explain the ethical implication of this?”
even if we record its as a short term lease we need to book accrual and expense how could it be helpful for a company?
If lease is not capitalised gearing will be understated – companies do not want to capitalise leases
Sir
for the gearing I do understand there will be an impact.
question specifically ask for liquidity and operating profit margin. As liquidity ratio is short term and we consider current assets with current liabilities, does that treatment really impact this?
LIQUIDITY
Current liabilities higher because of the lease liability – so liquidity down
OP MARGIN
Higher because only depreciation is being charged instead of the full lease payment – remember that finance costs come out after operating profit
however standard answer in the revision kit say it opposite. it says “operating margins are adversely affected and liquidity ratios are misrepresented”
as per your explanation then from the perspective of liquidity ratio there is no use of showing low value short term lease under IFRS 16?
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