Lease Question Diploma in IFRS

Shergar81

Folks anybody else doing the Diploma in IFRS Assigment 1 question?

Would be interested in anybody views on how to approach as regards the rental of a building aspect.

Appears to be quite vague with room for interpretation.

A rental agreement is entered into for a building, no time period is specified but the renter has obtain management and control of the building.

no contract is in place and nothing was signed

rent is paid for a number of years but then falls into arrears

key idea seems to be whether you are allowed capatilise ( ie finance lease) or not to capatilise ( operating lease) would be my view at outset

like does gaining management and control of building equate to receiveing risks and rewards of ownership as per ias 17

any views on this?

jjjd

Shergar81 wrote: »

Folks anybody else doing the Diploma in IFRS Assigment 1 question?

Would be interested in anybody views on how to approach as regards the rental of a building aspect.

Appears to be quite vague with room for interpretation.

A rental agreement is entered into for a building, no time period is specified but the renter has obtain management and control of the building.

no contract is in place and nothing was signed

rent is paid for a number of years but then falls into arrears

key idea seems to be whether you are allowed capatilise ( ie finance lease) or not to capatilise ( operating lease) would be my view at outset

like does gaining management and control of building equate to receiveing risks and rewards of ownership as per ias 17

any views on this?

I think questions like this are supposed to be open to interpretation and are deliberately vague for you to tease the possibilities out.

The real question is do you know the difference between an operating lease and a finance lease? Essentially can you determine if the risks and rewards of ownership of the asset rest with the lessor or the lessee? Can you explain the accounting treatment for each? Can you give the reasons for the need for IAS 17 and the need to account for substance over form transactions, i.e. the commercial reality of the transaction? And also the need to avoid off balance sheet finance arrangements, the importance of comparability of financial statements as set out in the IASB Framework.

If you think it is an operating lease you will need to explain why it's not a finance lease and vice versa. If you feel it is a finance lease think of reasons that support this, think of indicators that would deem the use of the building as a finance lease. Consider the substance of the transaction, the life expectancy of the building, has the lessee got the right to use the asset for most or all of its useful economic life, who is responsible for maintenance, insurance, repairs to the asset, has the entity charged depreciation in previous periods, have capital allowances been claimed in prior tax returns, that sort of thing. If you cannot say for sure that it is a finance lease then by definition it must be an operating lease. If it is an operating lease then the asset will not have been shown on the sofp and any rental payments will have been expensed on a straight line basis on the income statement.

Essentially you will need to give a discussion on the need for the standard, how it fits in with the objectives of the Framework, how you identify the different types of leases and how they are presented and accounted for in the financial statements.

Bmomoran

Hi i dont think that this is a lease question at all. No formal agreement and no period of time defined. Fails to meet recognition of lease.

This is looking at ias 8 ?


Ias 17 in module 3. Assessment looking at module 1 and 2 only ?

Shergar81

my reading of it, and i could very much be taking an incorrect view was that IAS 17 must be at least considered given that there is some form of a rental agreement in place.

Given that the company capatilised the asset, my understanding would be that this could only be allowed under an ias thorugh ias 17 under a finance lease

so ias 17 would need to be at least considered

my further view would be that given the circumstances mentioned that it does not in fact meet the requirement of a finance lease and so it was an incorrect treatment to capatilise and so correction of errors ias 8 comes into play

just not sure if my view is correct!!

Also there might be the confliction whereby under the conceptual framework it might be deemed eligible to be capatilise but not under ias 17

my concern is that as ias 17 isnt covered until module 3 and the assignment was on modules 1 and 2 only im barking up the wrong tree entirely!