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Introduction to IFRS 16 Leases – ACCA (SBR) lectures

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  2. Here’s my take on the answer, using the SAC method of answering

    IFRS 17 outlines the guidelines on leases. Leases where the underlying items is of low value or are leased for less than 12 months are operational leases. The guidance for this is to recognize the lease on a straight line basis for the entire lease period.

    Banana has leased an asset to Mango for 2000$ a year for a 4 year period, granting a rent free period for its 1st year. Under the principle of accruals, we are to recognize transactions and events that occur within the period of accounting. As Mango has gained use of the asset within the first year, we must account for it as well.

    Under the rules of IFRS 17 we can get the entire lease value and evenly distribute it among the four years. 2000 paid in cash for years 2-4 would be 6000.

    6000 would be the value of the lease, splitting this for the 4 years of use would result in 1500 being expensed on a yearly basis on the SPL for all 4 years.

    Regarding the SOFP, for Year 1 since there is no cash transaction, 1500 would instead be credited under Accrued expenses .
    For years 2-4, the entires would include 2000 to be reduced from the bank and 500 debited to Accrued Expenses. At year 4 Accrued expenses regarding the lease from Mango will drop to 0

  3. How is this for an answer for Example 1? Need feedback please.

    Since Mango has leased out an asset with Banana for 4 years and classified it as a low value exemption, this will be treated as an operational lease.
    The rental payments will be expensed out in profit or loss. Though the annual rentals are $2,000 payable in arrears starting from the second year and the first year being a rent-free period, Mango will record $1,500 (£2,000*3/4) as an expense every year due to matching concept.

    At the end of the first year, Mango will debit an expense of $1,500 in the SOPL but since they are not paying anything at the end of the first year, they will record an accrual in the SOFP. The entry will be

    DR Rental expense $1,500
    CR Accrued rental $1,500

    At the end of the second year, mango will pay $2,000 to banana as rental. This rental payment will credit the bank. An expense of $1,500 will be debited in the SOPL and accrued rent of $500 will be debited in the SOFP. The accounting entries will be

    DR Rental expense $1,500
    DR Accrued rent $500
    CR Bank $2,000

    The above treatment of the second year will be carried out for the third and fourth year as well and at the end of the fourth year the accrued rent will be down to zero.

  5. Hello sir,
    In the final sections of the idea, I m not able to get a fair idea of the journal entry and their explanation?
    could you explain it to me, sir? especially, i cant understand what accruals are over here? the expenditure ?

    thank you

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