IFRS 16 – Lessor accounting – finance lease – CIMA F2 #Finance

this is a lecture from open tuition to benefit from the lecture you should download the free lecture notes from open tuition comp so having gone through and looked an operating lease and how to look at it for less or Accounting we’re now gonna go through there and

look at it for Finance leases so remember with a none;">Finance lease the scenario that we have identified is that the risks and rewards are transferred from the lessor to the lessee and if that’s the case we no longer have those risks and rewards so therefore in substance it’s effectively no longer our asset so and

we’re looking at the Accounting here there’s some what look like reasonably straightforward steps to follow we all like steps don’t we okay a systematic method to approach things but some of the calculations can be quite complex ok some of the understanding behind

it can be quite challenging too ok so what we’ve got to do first of all is we need to remove the asset if the asset in substance now belongs to the lessee Aundre none;">Finance lease we need to remove the asset at the same time we then need to record a receivable the issue that we have is at what value do we record the receivable ok well what we’ve got there is we are going to record it at what is referred to as the net investment in the

lease ok what do we mean by the net investment in the lease ok well I think about it net we’re talking about things in in in today’s terms ok net if you like after any discounting so the receivable needs to be worth what we receive in the future so looking at the lease payments ok but

by looking at it net we’re looking at it in present value terms and effectively that’s what it says there in the standard net Investments in the leases the gross investment so you’re on discounted lease receipts discounted at the implicit rate of interest however

we just need to be very very careful when we’re looking at there’s gross investment in the lease because yes it is just your minimum lease payments that are going to be received and this is important we then need to add on any on guaranteed residual volume okay what’s that about

well when the lessor sets of the lease they will they should go through there and ensure that the payments that the lessee makes to the ensures that it covers the value of the asset at the end of the lease period okay so effectively within those lease payments they are guaranteeing the residual

value okay so even if the asset comes back damaged the Broker the lessee is already paid for that value okay so that will already be factored into the lease payments however the asset is not necessarily just going to be worth the guaranteed residual value there will be maybe an

other bit of the lease where by the lessee does not pay the lessor and therefore there is some unpaid worth within that asset okay so where’s the left sword just taking on board the fact that well you know it might come back it might be broke and bought that you know we can’t charge all

of it to the lessor you know some of it might just I can’t charge all of it to the lessee you know some of it might just be due to general wear and tear of the asset okay so that’s effectively the foreign guaranteed residual value but we need to include that within the

Investments in the lease because the investment in the lease is effectively the Investments in the asset isn’t it okay so that value what that asset is worth today okay so we need to work out the gross Investments is the minimum lease

payments plus any on guaranteed residual value if you want to put numbers on it if the residual value was a thousand if there was 800 that was guaranteed the 200 would be the on guaranteed amount it’s it’s as simple as that the difference between the full residual value and what is

guaranteed is the unguaranteed amount okay once we’ve done that we can then go through that record the lease receipt so debit the bank Credit the receivable and then as well don’t forget that we also need to charge interest and that will be interesting component whereby

you debit the receivable as you accrue the interest due to you as part of the payments and received and then you will go through there and Credit your interest Income okay it’s a challenge don’t get too het up with it let’s just focus if we can on

the basic so what have we got it says that calculate Cheri’s net investment in the lease so I’m working out the net investment in the lease that look so the gross investment discounted the required rate of return I feel like the rate implicit in the lease isn’t it and to do that

we need to look at the lease payments plus any on guaranteed residual value so here it wants us to show the guaranteed amount and also the odden guaranteed amounts okay so what have we got it says cherry leases out an item of property plant equipment and very five you

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance lease so it’s telling as it is a Finance lease

the lease commence on the fire to January 2015 and the rate implicit is four percent so four percent is what we will do our discounting back to present value the lease rentals are five thousand dollars and it’s then very important to understand for for discounting purposes they are paid at

the start of the lease period so if that is the case we’re going through there aren’t we and looking at the Income being received in year 40 0 1 2 3 4 okay so that covers those five payments it then says Cherie asked the base that the estimated residual value of the

equipment is 2000 the guaranteed amount is there is it as 1600 so therefore the on guaranteed amount is the 2,000 less the 1600 which is the 400 okay if that’s the case that is the own guaranteed residual value which will form part of the net investment in the lease that the guaranteed

residual amount will be funded in so the fact that we are paying the fired files and lease rental payments every single year okay so how do we work out the net investment in the lease okay well what we can go through and do that is we can work out the gross Investments as well so

the gross investment is that there is it five years or 5,000 plus is it there the on guaranteed amount does that go further and give me is it 25400 okay the net investment in Lita just a little bit more of a challenge okay if you were given the tables what you could do is you could say that if you

take an annuity fact that is it from naught to 4 that is it 4% multiply that by the 5,000 so which you can then add on is it a discount factor at t for careful it’s at the end of the lease isn’t it that’s the challenge careful Christopher T 5 because it’s a 5-year lease x is

it the 400 okay again if you were really clever an annuity fact that a naught to 4 in 1 plus an annuity factor a wonderful ok to complicated the best way to do it is to go from there as we have done in the answer go through the look at the year look at your Cash Flow forget about

your annuity factors use your discount factor at 4% to then work out is it the present value okay our years are T 0 1 2 3 4 5 and I think by doing this you’re less likely to make any mistakes because you’ve got 5 payments I should say 5 receipts makes no difference is it there 1 2 3 4 5

I’d missed one out in the middle there happens I just see it there we go and then in year five you’ve got is it 400 okay Texan let me just move that one down a little bit but careful rock bottom let’s just move that down a fraction let’s move that proper fraction

you’ve then got your discount factor so you discount factor at T zero is one okay whatever the percentage may be so is that there’s as five thousand in the exam you would be given discount factors okay you’ve never been expected to do any calculation of discount fact there’s

an MEP two exam I think that’s ridiculous you should have to do it before there we go so let’s just say they’re given to you in the exam is at noir point nine six two is it nor point nine two five nor point eight eight nine nor point eight five five and is it nought point eight

two two so like out the present value is your Cash Flow multiplied by your discount factor so again is that four eight one zero is that four six two five is that four four four five four two seven five I’m three to nine okay when you total that up gives you two three four

eight four okay the two three four eight four is the net investment in the lease okay so two three four 8:4 okay and it is that value that you would record their receivable okay you will go through their Credit the asset its value within the Financial Statements

debits is it the the receivable any difference if you were to have it we would just take their through Profit or loss okay excellent there you have it I don’t think you get much more than that in terms of the discounting the subsequent accountant treatment you might have to

deal with that in the exam but I’m not too worried about that at this point in time okay I want to make sure there that you are happy going through there and understanding the difference between the gross investment and the net investment okay so the gross investment is the minimum lease

payments plus the on guaranteed residual value which is there was that did we say 400 but then to work out the net investment that’s when you need to take out the discounting okay what we put there is the fancy way of doing it if you love your financial management’s ah alternatively if

you prefer just to go through it and look at its most simple fashion list out the table with the year the cash from the discount factor in the present value if you’re interested I want to try remember how to work out your discount fact that it’s 1 over 1 plus your discount rate to the

power and whereby remember here R is 4 percent that would be naught point oh four and then N and the years 0 1 2 3 4 5 okay excellent