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Hi,
I wanted to ask whether deposits should affect lease liability calculations?
Because in the BPP Revision kit question No. 103 it seems like that deposit was excluded from lease liability calculations, but in the question No. 112 it was included in calculations (subtracted from initial lease liability).
And then again in question No.113 the deposit is added to ROA and lease liability is not affected.
And how come a deposit can affect lease liability, if in essence a deposit is an asset to the company?Hi,
The lease liability is the present value of the lease payments, so technically does include the payment of the deposit at the commencement of the lease. This ensures that the deposit is included in the cost of the ROU asset. The lease liability is then immediately reduced by the value of the deposit paid.
The questions that you refer to are playing around with the terminology and interchange between the words ‘present value of lease payments’ and ‘present value of future lease payments’.
The ‘present value of the lease payments’ includes all of the lease payments, so includes the deposit, and will mean that the ROU asset will be the same as this value. The ‘present value of the future lease payments’ excludes the deposit as it is not payment in the future given it is made immediately, meaning that the ROU asset will need the deposit adding to it.
It is just trying to cause unnecessary confusion in the questions.
Thanks
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