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Leases – Example – ACCA Financial Reporting (FR)

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  1. Greetings,
    When calculating the right of use asset, the format says we need to add the PV of lease liability + any payments- incentives before commencement. So in the above question do we not take the 5000 as it is the regular lease payment? Would the question describe in specific the amount of payment before the commencement period?
    Thank you

  2. Hai Chris..thanx alot for your lectures there truly helpful, one question though in financial liability you charged interest on the brought forward figure but in your lecture on leases you charge interest after deducting the annual payment from the brought forward figure. was wondering why the difference and which method to stick to?

  3. Hi Chris, how do we deal with payment in arrears for leases? Like how is the liability table for it constructed and how is the NCL and CL calculations done?

  4. Hi,

    Why is the current portion of the lease liability for year 1 valued at 5,000? I am getting 4,319 because part of the 5,000 payment is interest valued at 681, which is not part of the lease liability balance. I’m confused, please enlighten me. Thank you!

  6. Hi, I’m a bit confused by the fact that year-on-year there is a misbalance between our asset (right-of-use asset) and financial liability. You can see it at minute 16 in the video. Maybe there is another entry on SFP, but I’m just not sure what that is.
    Thanks for shedding some light on this for me!
    Great lecture by the way!

  7. Dear Teacher,
    I have a question regarding the initial measurement of right of use asset. If a question states that before the commencement of the lease agreement, a deposit was made that is not the same figure as the annual payments required or if a payment was made in advance before the commencement date that was the same as the annual payments required, do we need to add the deposit to the initial figure or do we ignore it? What will be the respective treatment?

  8. I am a bit confused with the recognition of Initial Liability.

    The standard says: “The lease liability is initially measured at the present value of lease payments not paid at the commencement date, discounted at the interest rate implicit in the lease”.

    So, on 1st of January 5,000 were paid and 17’730 (22,730-5,000) should be recognised as Liability, as this is the present value of payments that were not made at the commencement date.

    I would say that initial journal entries on 1st of January would be:

    dr Asset 23,230 (Lease Liability 17,730 + 5,000 Initial Payment + 1,000 Direct cost – 500 Incentive)
    dr Cash reimbursed (or receivable) 500

    cr Liability 17,730
    cr Cash 6,000 (5,000 advance payment + 1,000 direct costs actually paid)

    At least this entries are explained in BPP book for Diploma in international financial reporting.

    Would be grateful if tutors could comment.

    • Well, this isn’t prepayment that meets the criteria for an asset recognition. Lease liability payments are obligations. The advance payment or the payment at the end of the yr(arrears), is just a payment structure agreed in the lease agreement between the lessee and lessor, meaning the payment which is due at the beginning of the year(advance payment) in the question in this video, indicates that an obligation which gives rise to liability is present.

    • I think the teacher got wrong here. 5000 total is not the lease liability payment. It consists of principal amount of 4113 and interest portion of 887 totaling 5000. Hence, the current liability out of 18617 in year 1 should be 4319 and non current liability should be 18617-4319= 14297.
      Please correct me if i am wrong here

  13. I’d like to comment on the point sir had made in regards to classifying the lease liability as current and non-current liability.

    This is NOT a requirement by IFRS 16, but it should only be considered best practice. ie, if in the exam you don’t distinguish between them, the examiner will not be able to cut marks. So save TIME and just leave it as is.

  14. Sir there is a question in bpp no 103. Where present value is 1871100 and advance payment of 700000 is effected. Here in the answer they took 6% interest on 1871100. As per this example should not it be 6 % of 1171100(1871100-700000)?

  15. Hi Chris,

    I actually recalculated the PV of the lease liability as per example (5000 with n=5 years and i=5% interest) but did not come to 22,730 but 21,647,39.

    My calculation:
    5000 x 1/1.05 = 4761.90
    5000 x 1/1.05^2 = 4535.15
    5000 x 1/1.05^3 = 4319.19
    5000 x 1/1.05^4 = 4113.51
    5000 x 1/1.05^5 = 3917.64

    Where did I go wrong please?
    Anja

    • Hi, this may be a bit late, but the present value of the lease liability is calculated as follows;

      5000 x 1 = 5000
      5000 x 1/1.05 = 4761.90
      5000 x 1/1.05^2 = 4535.15
      5000 x 1/1.05^3 = 4319.19
      5000 x 1/1.05^4 = 4113.51

      total 22,730.

      The reason for this is the payments are made in advance ie at the start of the year.

      Therefore the present value of the 5,000 paid in the first year is 5,000 – essentially all 5 payments are made within 48 months.

      I hope this is clear.

      • The first payment made is at the very start of the lease, so there is no discounting required. There are then four further payments that will then need discounting over each of the next four years. This has been done in the illustration above.

  16. Hi,

    Why is the recognition working for Right of use asset is DR asset 22730 CR liabiltiy
    22730 ?
    As per the notes shouldn’t it be DR asset 23230 CR liabiltiy 23230 ? as the initial value includes the cost of 500 incurred for acquiring the lease ?

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