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Dear sir,
I just went through IFRS 16 Leases and upon coming across the identification of a lease and its accounting treatment in the lessee’s books, I was extremely confused as I found most of the terms too technical to follow. Could you explain these terms in a simple language with examples I could follow?Thanks!
Where did you read the IFRS? I thought that, in the course notes, I had reduced the IFRS to simple language
In addition, I have no idea which specific expressions are causing you difficulties and I can’t paraphrase the entire IFRS for you
Let me know specifically the expressions that are causing you problems (after you have read the course notes!)
Dear sir,
Well, I did go through your notes. What I don’t understand is from after Accounting in the lessee’s books right from the right to use asset and lease liability ie, I don’t understand the logic behind the accounting treatment for both the asset and liability!Hope it is clear now.
Also, what does the part after right to control mean?
Also, another quick question, in sale and leaseback. If the transfer of asset is NOT under IFRS 15, why is it a financial liability in the seller’s books and a financial asset in the buyer’s books?
Thanks!
If we sign a lease that gives us a right-of-use to an asset so no-one can take that asset away from us during the period of the lease, that asset is effectively ours
However, in law, it isn’t ours. So this is where accounting considers substance over form
If (effectively) it’s our asset, then we should be showing it on our statement of financial position as an asset
But it isn’t our asset, so we must also show the liability to the lessor (the legal owner of that asset) as a liability
“Also, what does the part after right to control mean?”
From the top of page 88?
A right to control means exactly what it says! We are able to exclude access to that asset by anyone, including the owner in the same way that if we had bought the asset instead of leasing it, we would be able to exclude access to that asset – it’s ours and no-one else has the right to use it or to obtain any economic benefit from its use
But if the true owner (the lessor) has the right to take that asset away from us and to replace it with a substitute asset, then that situation suggests that we don’t have any right to control
“Also, another quick question, in sale and leaseback. If the transfer of asset is NOT under IFRS 15, why is it a financial liability in the seller’s books and a financial asset in the buyer’s books?”
If it doesn’t satisfy the criteria as a sale under IFRS 15, then it isn’t a sale and therefore it’s not a leaseback either
So, if IFRS 15 doesn’t apply, but we’ve entered into a lease agreement for the use of that asset, that lease agreement creates the financial liability in our records and correspondingly it creates the financial asset in the other party’s records (the buyer’s records)
What that lease agreement DOESN’T do is create a right of use asset so the accounting treatment (where IFRS 15 doesn’t apply) is not the same as for ‘genuine’ sale and lease-back arrangements
(Your quotation is not from my notes so I assume it’s from a text book. Does the text book not tell you the answer?)
OK?
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