• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

PQ Awards Nominations

Please help us to win one of the PQ Magazine awards and send in the voting form >>
You can nominate us in any or all of the following categories: Online College of the Year, Study Resource of the Year, Private Sector Lecturer of the Year, and Accountancy Personality of the Year.

Specially for OpenTuition students: 20% off BPP Books for ACCA & CIMA exams – Get your BPP Discount Code >>

IFRS 16 – Initial deposits

Forums › ACCA Forums › ACCA FR Financial Reporting Forums › IFRS 16 – Initial deposits

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by f6ali.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • November 20, 2021 at 7:09 pm #641199
    stvincent89
    Member
    • Topics: 8
    • Replies: 11
    • ☆

    These are both from the BPP study kit:

    First scenario
    On 1 October 20X3, Fresco Co acquired an item of plant under a five-year lease agreement. The lease required an immediate deposit of $2 million with five payments of $6 million paid annually in arrears commencing on 30 September 20X4. The present value of the future lease payments was $22,746,000. The agreement had an implicit finance cost of 10% per annum.

    Second scenario
    On 1 January 20X6 Platinum Co entered into a lease agreement. The initial lease liability was $360,200 and a deposit of $120,000 was payable on 1 January 20X6 with three further instalments of $100,000 payable on 31 December 20X6, 31 December 20X7 and 31 December 20X8. The rate of interest implicit in the lease is 12%.

    Now in the first scenario the book doesn’t take the $2 million deposit into consideration at all and calculates interest on the PV of $22,746,000.

    In the second scenario however it first deducts the $120,000 deposit from the PV of $360,000 and then applies interest.

    I don’t get it. Both scenarios seem identical to me. Is it because in the second scenario it says the “initial” lease liability (so you have to deduct the deposit), whereas in the first it says the “PV of future lease payments” so the deposit has already been deducted?

    November 21, 2021 at 9:59 am #641235
    f6ali
    Member
    • Topics: 10
    • Replies: 342
    • ☆☆☆

    Hi.

    Please keep in mind that interest is always accrued on an amount that is ‘payable in the future’. How can you charge interest on an amount that will be paid immediately or is already paid?

    Initial deposits, whether included in the initial lease liability or otherwise, cannot accrue interest. Therefore they must not be used for calculating interest.

    Secondly, an alternate way of identifying which amounts to charge interest on can be identified using present values. Although there is no need to calculate PVs (they will be given in exam), you can still make your own calculation to confirm the proportion of liability that will accrue interest.

    In the first example, PVs are calculated for the five annual instalments of $6m only whereas in second example, the amount of $360,200 includes the initial deposit (it is obvious as the total of three annual instalments of $100,000 will be below $360,200 even before discounting).
    Therefore in first example, you don’t need to worry about initial deposit amount. In second example, however, you will need to deduct initial deposit to charge interest.

    I hope that this answers your query.

  • Author
    Posts
Viewing 2 posts - 1 through 2 (of 2 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

ACCA News:

 

ACCA My Exam Performance for non-variant Applied Skills exams is available NOW

NEW! Download the ACCA Pass Guide

FREE Verifiable CPD for ACCA Members

ACCA mock exams and debrief videos

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

Donate

If you have benefited from OpenTuition please donate.

ACCA CBE 2023 Exams

Instant Poll * How was your exam, and what was the result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Specially for OpenTuition students

20% off BPP Books

Get BPP Discount Code

Latest comments

  • Iby2012 on Introduction to Financial Accounting – ACCA Financial Accounting (FA) lectures
  • John Moffat on Activity Based Costing part 1 – ACCA Performance Management (PM)
  • John Moffat on Introduction to Financial Accounting – ACCA Financial Accounting (FA) lectures
  • tobimillz100 on Activity Based Costing part 1 – ACCA Performance Management (PM)
  • omarcham on IASB Conceptual Framework – Introduction – ACCA Financial Reporting (FR)

Copyright © 2023 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in


We use cookies to show you relevant advertising, find out more: Privacy Policy · Cookie Policy