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Hi Chris,
I need to Thank you for your availability to take the time to clarify our gaps (my gaps).
Please, a question related to this example. Someone else has previously (2 years ago) already responded to this question but not given the right answer, I guess.
So, when we recognize the asset at the first step we DR “right of use asset” and CR Liability with the PV:
DR Asset 22,730
CR Liability 22,730After, when we make works, in amortizing liability everything seems Ok since we are working on the opening value of the liability (22,730 figure above).
But, when we calculate the depreciation we make the adjustment with +1000-500 and have the figure (23,230) over which would be the final figure for annual depreciation, which is 4,646.
Here come what makes me a little confused,
When we deduct this figure (4,646) to obtain the carrying value from the value of asset already recognize in the first step of the beginning (Dr & CR above), we don’t subtract this amount of depreciation from 22,730 (which is the first recognition) but we subtract this 4,646 from the amount 23,230 to obtain the carrying value of 18,584 for the first year.
Question: the figure for the first booking should be 22,730 or 23,230? Or something else is escaping from me ?!?!The beauty of my confusion, if the asset is recognized in the first step by DR “right of use” with the amount of 22,730, how can it be possible to obtain “NIL” at the end of the period when we subtract the depreciation 4,646 from the figure 23,230 and reach the CV of 18,584 at 1 year-end and so on til “NIL” at the end of total period ?!?!?!
If, in the first step of recognizing the figure of “right use of asset” should be DR 23,230 (like mentioned in the lesson at SPF ” right of use” an subtract the depreciation 4,646 to reach the CV 18,584) then the figure of CR Liability should be 23,230 to balance the amount in the first double entry, but workings in amortizing the liability are “NIL” at the end of period by using the first figure booked for liability which is 22,730.
So, at this point what makes me confused is the first double entry done at the beginning by:
DR Asset with 22,730 (which I guess should be, according to workings 23,230 since we subtract the depreciation of 4,646 from this figure and have the Carrying Value at the 1 year-end of 18,584 and “NIL” by the end of the total period that we held this asset),
&
CR Liability 22,730 (Which is Ok respecting the IFRS requisitions but don’t match the figure of first DR entry since it should be 23,230 since we had calculated the amount of Asset and subtract the depreciation from this figure).I guess something is missing me and is giving me a lot of headaches (Guess you were right at the begging of the lesson regarding this 🙂 )
Your help is very appreciated.
Once again, thank you a lot in advance for your time and comprehension.
The first step in recognition:
DR right of use asset 22,730
CR Liability 22,730DR Right of use asset 500 =>(1000 – 500)
CR CASH 500 =>(what we have paid)Hi,
I think I took a short cut. You could, if you wish, recognise the 1,000 and 500 as part of the liability when you capitalise the asset. Then when the payment is made, you can reduce the value of the liability by these amounts. I think it is quicker and easier to take the amounts straight to the right of use asset and cash.
Hope that help. Let me know if I’ve missed something in your question.
Thanks
Hi,
You’re right, is easy and quick to put the amount straight to the use of right, but just at the beginning, the difference makes me a little bit confused. Now, everything is clear.
Thank you a lot for your time.
B.R
DenisHi Chris,
Following on from the above, in the example the lease liability begins its life in the amortized cost working at 22,730, the PV of the $5k annual payments over the 5-year term. However, the lease liability column in section 1.1 of the notes reads to me that we should be using fixed payments less incentives for initial recognition.
My question is, why is the $500 reimbursement not counted as an incentive?
Thanks in advance!
Best,
Kyle
Hi Chris,
Further to the above, for the following example – Ex. 3 – Sale and Leaseback (1) A – I have attempted to calculate the amortised cost and have run into a problem…
In the lecture working the example, you mentioned that the financial liability for the seller-lessee is recorded at fair value/transfer proceeds using amortised cost.
In the first instance, I attempted to use the fair value of 10,000 (000s), however, this got me nowhere close to NIL at the end of the calculation. I, therefore, decided to try discounting the lease payments back to Present Value, resulting in a b/f figure of $8,109 (000s), but I was then unsure as to whether or not my amortised cost working headers should be:
1) B/F – Cash – O/S – Int @5 % – C/F which is the same as the earlier example in this chapter and results in the final figures for O/S, Interest and C/F being 2, 0 and 2, respectively.
or
2) B/F – Int @5% – Cash – C/F which is the same as for financial instruments from the previous chapter and results in the final figures for Interest, Cash and C’F being 78, -1000 and 631, respectively.
As both calculations result in relatively low final c/f figures, I am a little confused as to which is correct – assuming that I am not way off base and should be using $10m in a manner I cannot seem to determine.
Any and all help greatly appreciated.
Best,
Kyle
Ok, think I have figured out where I went wrong, updated answer below. Best,
Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr. 5 Yr. 6 Yr. 7 Yr. 8 Yr. 9 Yr. 10
SFP
FL 7,109 6,465 5,788 5,077 4,331 3,548 2,725 1,861 954 NIL (2)SPL
Fin. Cost 386 355 323 289 254 217 177 136 93 48Workings: PV of future cash flows
Year 1 1,000 0.952 952
Year 2 1,000 0.907 907
Year 3 1,000 0.864 864
Year 4 1,000 0.823 823
Year 5 1,000 0.784 784
Year 6 1,000 0.746 746
Year 7 1,000 0.711 711
Year 8 1,000 0.677 677
Year 9 1,000 0.645 645
Year 10 1,000 0.614 6147723
Workings: Amortised Cost
B/F Int. @ 5% Cash C/F
Year 1 7,723 386 -1,000 7,109
Year 2 7,109 355 -1,000 6,465
Year 3 6,465 323 -1,000 5,788
Year 4 5,788 289 -1,000 5,077
Year 5 5,077 254 -1,000 4,331
Year 6 4,331 217 -1,000 3,548
Year 7 3,548 177 -1,000 2,725
Year 8 2,725 136 -1,000 1,861
Year 9 1,861 93 -1,000 954
Year 10 954 48 -1,000 2
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