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Acc 3501 : Corporate Accounting Assessment Answers

Answer:

Solution 1:

A lease is a kind of arrangement made which allows one person to have the right to use the asset of another person in consideration of certain periodical payments. Lesser is the person who gives this right and lesser is the person who is benefitted out of this arrangement and makes the payment. There are two types of leases- operating lease and finance lease. We will discuss about the finance lease. A lease in which the risk as well as rewards are not transferred to the lessee is called the operating lease whereas the finance lease is the one in which both risk and rewards are transferred. (Rayman, 2009)

A lease is said to be a finance lease if it satisfies the following conditions-

• The ownership of the asset provided on lease will be passed on to the lesser at the conclusion of the lease term.
• The lessee has been provided with a right to purchase the asset from the lesser at a price which is substantially low than the fair price of the asset when the lease term comes to an end.
• The term of lease will cover a major portion of the total estimated life of the asset.
• The asset that has been provided on lease is of a special nature such that the asset can be used only by the lessee
• The present or the current value of the lease payments as on the date of inception is almost equal to the fair value of the asset that has been provided on lease.

There are certain other situations that might individually or together helps in the classification of the finance lease:

1. In case, the lessee cancels the lease contract before the expiration of the term, then any loss that has been incurred to the leaser in such a case has to be borne by the lessee.
2. If there is any gain or loss due to the change in the fair value of the asset, then this gain or loss will be of the lessee.
3. The lessee can decide to continue the lease for another period at a rent that is comparatively lower than the market rent prevailing.

The classification of risk is made at the beginning date. However, it has to be reassessed only if there is a change in the lease terms. However, changes in the estimate or any change in the circumstance does not lead to change in the classification of lease. (Wahlen, 2012)

The lesser is required to explain if there are any major changes in the carrying amount of the net investments whether of qualitative or quantitative nature in the finance lease. The leaser is required to disclose the undiscounted annual payments that he would receive for the coming 5 years and for the remaining period he can disclose the lump sum amount. He is also required to adjust and settle the undiscounted lease payments made by the lessee to the net investments in the lease. Such adjustments is done so that we get a clear picture of the unearned finance income in relation to the finance lease payments that are receivable and also if there is any discounted unguaranteed residual value that is present.

Recognising and measuring

During the date of the commencement, it is required by the leaser to recognize all the assets that are being held by the balance sheet and also have a clear presentation of them as the amount of the total receivables which is equal to the net investment in the lease.

Initial measurement

It should be clear that the leaser should use the interest rate implicit measure in the lease in order to calculate the net investment in the lease. It there exists a sublease, then the interest rate implicit in the sublease should not be determined readily and so an intermediate leaser may be take into consideration the use of the discount rate that was used for the Head lease to evaluate the net investment of the sublease.

Initial direct costs that are incurred by the manufacturers or the leasers are inclusive of the initial measurement of the net investment within the lease and thus lead to reduction in the amount of the income recognised over the lease term. The definition of the interest rate implicit in the lease can be explained as the direct costs that are included naturally in the net investment of the lease thus making no obligations to add them separately.

Subsequent measurement

A leaser is needed to ascertain income over the lease term as it is dependent on the pattern which reflects a stable periodic rate of return on the net investment made by the leaser in that particular lease. A leaser also tries to allocate the financial income over the lease term on the basis o systematic and rational terms thus making him apply the lease payments which are in relation to the period to reduce the principal and the accrued finance income as a whole.

A leaser may also apply for the rejection or the impairment terms as under AASB 9 in relation to the net investment made in the lease. Thus, it should be duly noted by the leaser that a review should be made on the regularly estimated residual values which are used in the valuation of the gross investment in the lease and if a change arises then the leaser should make changes in the income allocation over the period lease term and should recognise it as soon as possible any of the reduction costs which are in respect of the amounts accrued.

Lease modifications

The leaser should opt for the changes in the financial lease or issue a separate lease if:

1. The modifications which are too made for the increment of the scope of the lease by the addition of the usage of single or multiple underlying assets.
2. The value of the lease rises by the figure equal with the standalone price for the rise of the scope.

If there have no situation raised for the issue of new lease then:

1. It the lease is stated as an operating lease then it may be accounted as a new lease from the effective date and measurement of the carrying amount of the underlying assets should be made before the modification of the lease term was made.
2. Otherwise the leaser will have to apply the requirements stated as under AASB9.

Solution 2:

The table below shows the calculation of impairment loss.