Financial Accounting II Leases

IFRS FInancial Reporting Standards

Short-cut method. As in the case for short term leases in the US GAAP, IFRS allows the lessee to elect not to record a right of use asset and lease payable at the beginning of the lease term but instead to simply record lease payments as expense as they occur. US GAAP thought defines a short term lease as a lease that has a lease term of 12 months or less and does not include a purchase option that the lessee is reasonably certain to exercise. IFRS precludes a lease from being considered short term if the lease includes a purchase option regardless of whether the lessee is reasonably certain to exercise it. In addition though unlike US GAAP, IFRS allows small ticket leases also to apply this short cut method. Small ticket leases are defined as those having a value of 5000 or less

FRONT LOADED EXPENSE

The up-front costs such as producing a show with all the costs for rehearsals, construction of production elements, personnel and so on without any revenue to off-set the costs.

Reassessment Example

a lessee had no significant economic incentive as of the beginning of a 6 year lease to exercise a 2 year extension option...by the end of the third year the lessee has made significant improvements to the asset whose cost could be recovered only if it exercises the extension option. making extension of the lease reasonably certain...fso the full term of the lease is now expected to be a total of 8 years with 5 years remaining. At the end of the third year, the lessee would re-measure the lease liability as the present value of the remaining five lease payments.

Reassessment of the lease term

circumstances can change that require reassessment of a lease term. A triggering event gives the lessee an economic incentive to exercise an option that extends or terminates the lease

operating lease

contract in which the lessor owns the asset and the lessee simply uses the asset temporarily

Operating leases

doesn't meet any of the criteria for a finance lease Fundamental rights and responsibilities of ownership are retained by the lessor Lessee merely uses the asset temporarily A sale is not recorded by the lessor; the lessor records lease revenue on a straight line basis

carrying value

the balance in the bonds payable account, which equals the face value of bonds payable minus the discount or the face value plus the premium

What if the lease term is uncertain

the contractual lease term is adjusted for any periods covered by options to extend or terminate the lease for which exercise is deemed to be "reasonably certain". Factors that might create an economic incentive for the lessee includes bargain renewal rates, penalty payments for cancellation or non-renewal and economic penalties such as significant customization or installment costs.

Finance Lease

three-party lease agreement in which there is a lessor, a lessee, and a financier

IFRS No Operating Leases for Lessees under IFRS

under the IFRS, all leases are accounted for as finance leases by the lessee (one model approach). Only lessors apply the classification to criteria to distinguish between finance and operating leases. Thus even for leases that qualify under US GAAP (two model approach) as operating leases, the lessee amortizes the right of use asset on a straight line basis rather than "plugging" that amount to cause the total of interest and amortization to be a straight line amount. This means that those leases under IFRS will have a front-loaded expenses profile.