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Dear Sir,
Good morning.
What is the treatment of deposit and non-refundable deposit for right-of-use asset and lease liability under IFRS16 Lease?
I went through BPP MCQ questions on leasing and there were confusing answers , one answer added both non-refundable deposit and deposit in arriving right-of-use asset and not included in lease liability but another answer show that non-refundable deposit is included in lease liability. Therefore please help to clarify and explain what are the correct treatment of the deposit in right-of-use and lease liability.
Thank you very much for your kind assistance.
Warmest Regards,
Eric LamHi,
The deposit is a payment that will be included in the value of the right of use asset. Then on payment of the deposit we will DR Liability CR Bank.
If you point me I the direction of the specific questions then I can look at them properly and identify the specifics in the questions that may be confusing you.
Thanks
Hi Sir,
Good day. Thank you for your valuable sharing. I hereby include two questions whereby first question non-refundable deposit is added to lease liability and the other not included for your persual.
1) On 1 Jan 2016 Fellini Co hired a machine under a five year lease. A non-refundable deposit if $700,000 was payable on 1 Jan 20×6. The present value of the future lease payment was $2,426,000. The remaining 4 installments of $700,000 are payable annually in advance with the first payment made on 1 Jan 20×6. The interest rate implicit in the lease is 6%. What amount will appear under non-current liabilities in respect of this lease in the statement of financial position of Fellini Co at 31 Dec 20×6? Answer is 1872000 which is arrived at with non-refundable deposit included in the calculation.
2) On 1April 20×7, Fino Co increased the operating capacity of its plant. On the recommendation of the finance director, Fino Co entered into an agreement to lease the plant from the manufacturer. The present value of the future payments is $350,000. The lease requires three annual payments in advance of $100,000 each, commencing on 1April 20×8. The rate of interest implicit in the lease is 10%. The lease does not transfer ownership of the plant to Fino Co by the end of the lease term and there is no purchase option available. A non-refundable deposit of $100,000 is payable on 1 April 20×7. What is the amount that should be shown under non-current liabilities at 31 March 20×9 in respect of this plant? Answer is 247380 where the deposit is not included in the calculation.
Please advice which is correct in the treatment of non-refundable deposit.
Thank you very much.
Warmest Regards,
Eric LamHi,
1) I can get the answer of 1,872,000 (rounding) but this has not been done using the present value of the lease payments given in the question. I have also had to assume that there are five remaining lease payments as it doesn’t appear to make sense in that there would only be four payments for a five year lease.
2) The present value of the lease payments looks correct, where we have included the amount of the deposit and the three future lease payments, but I cannot work out the answer for the NCL at 31 March X9. The answer seems a bit high given that we are at the end of the second year of the lease.
If you have the answers then I can see where we’re going wrong.
Thanks
Hi Sir,
Thank you for your reply.
1) Now I understand that the 700,000 added to the PV is the first advance lease payment out of the five payments and not the deposit originally thought. Deposit is added to Right-of-use assets only. Am I right?
2) This is part of Scenario question which related to Fino Co incurred initial direct cost of $20,000 and received lease incentives from the manufacturer totalling $7,000. After four years it will have to dismantle the plant at an estimated (discounted) cost of $15,000. What is the measurement of the right-of-use as at 1 April 2017? Answer is $478000=350000+20000+15000+100000-7000. As mentioned in your last reply that 350000 is correct if the deposit is included But PV should be 248700 (100,000*2.487) if the deposit is not included as stated in 1) calculation above. Why the deposit is included in this case. Please clarify and explain the confusion here. Thanks.
Warmest Regards,
Eric LAMHi,
Yes, the deposit is added to the right of use asset, in the same way it has been in the second of your questions.
Once the right of use asset value has been calculated in the question then this is the same as the lease liability and we can work out the non-current liability using the lease payable table.
Thanks
Hi Sir,
Good day. Thank you for your reply. However, the model answer given is excluding the deposit as follows
Right of use asset calculation 478000
Less non-refundable deposit on 1.4.×7 100000
Lease liability 378000
Interest accrued 1.4.×7-31.3.×8(378000×10%) 37800
Lease liability as at 31.3.×8 415800
Payment made 1.4×8 (100000)
Interest accrued 1.4.×8-31.3.×9 (315800×10%) 31580
Lease liability as at 31.3.×9 347380
Current liabilities as at 31.3.×9 100000
Non-current liabilities as at 31.3.×9 247380Please advice and thank you.
Warmest Regards,
Eric LamHi Sir,
Good morning. Please kindly reply to my last question. Thank you very much.
Warmest Regards,
Eric LamHi,
The deposit is included in both the value of the initial liability and the right-of-use asset, and from what I can see the 100,000 is part of the 478,000, as shown in your calculation. The 478,000 is then immediately reduced by the deposit payment.
Thanks
Hi Sir,
Good day. Thank you for the clear explanation.
Deposit, whether refundable or not, is included in right of use asset but excluded from the initial lease liability . Am I correct with that understanding?
Thank you very much Sir and God blessed you.
Warmest Regards,
Eric LamHi,
It is included in both the right-of-use asset and lease liability, but as the payment is made immediately at the start of the lease it then reduces the lease liability immediately.
Thanks
Q. Suppose a Company has made a intial non refundable deposit made to a land which they will be using it for 50 years.
This classifies under IFRS 16 based on the agreement and my question is how would you account for this, coz clearly there is no lease liability ryt?What is the accounting treatment of this?
Monthly rentals= Rs 40,021
Discount rate= 0.88%This is actually a practical scenario which Im engaged with.
Thanks.Hi,
You account for it as a normal lease er IFRS 16, recognising a right-to-use asset and a corresponding liability at inception of the lease. So you would discount the lease rentals to present value to get the values.
Thanks
hello sir,a very big confusion here,,,,,
one question subtracts innitial deposits from the lease liability while another similar question ignores the innitial deposits….
I have two questions to show1).On 1 October 20X4, Flash Co acquired an item of plant under a five-year lease agreement. The present value of the total lease payments was $25m. The agreement had an implicit finance cost of 10% per annum and required an immediate deposit of $2m and annual rentals of $6m paid on the 30 September each year for five years.
Calculate the current liability of the lease in Flash Co’s statement of financial position as at 30 September 20X5.
2)7 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.
What will be the current liability in Fresco Co’s statement of financial position as atThe first question had the lease liability subtracted by the deposit.
The second question had ignored the deposit amount and never subtracted the lease liability by the deposit.
please clear this confusion of mine,thanksHi,
The confusion is in the narrative used in the question.
In Q1 it says “present value of TOTAL lease” payments” so the deposit will be included within this and therefore the lease liability. The payment of the deposit will therefore need to be deducted.
In Q2 it says “present value of the FUTURE lease payments” so the deposit will not be included within this (the payment is not made in the future as it is paid today at the start of the lease) and therefore not included in the lease liability. The payment of the deposit will not therefore need to be deducted.
Thanks
Thank you so much Sir,,U have no idea how helpful your response was.
Stay blessed always.Last question please.
should the ROU Asset incorporate the deposit payments?
in question 1 and 2?because i remember ROU should have initial payments added to it.
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