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TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 21.1 (Time 15–25 minutes)
Purpose—to provide the student with an understanding of the theoretical reasons for requiring leases to be
CA 21.2 (Time 25–35 minutes)
Purpose—to provide an understanding of the factors underlying the accounting for a leasing arrangement from
CA 21.3 (Time 20–30 minutes)
CA 21.4 (Time 20–25 minutes)
Purpose—to provide the student with a lease arrangement with a bargain-purchase option in order to examine
the ethical issues of lease accounting.
CA 21.5 (Time 30–40 minutes)
Purpose—to develop a memo to your audit supervisor to discuss: (a) why you inspected the lease agreement,
*CA 21.6 (Time 15–25 minutes)
Purpose— The student is required to discuss the accounting issues related to a sale-leaseback.
SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 21.1
(a) The IASB believes that the reporting of an asset and liability for a lease arrangement is
consistent with the conceptual framework definition of assets and liabilities. That is, assets are
(b) Evans should account for this lease at its commencement as an asset and an obligation at an
amount equal to the present value at the beginning of the lease term of lease payments during
the lease term. From the information provided, this lease represents transfer of ownership.
(d) The right-of-use asset recorded under the finance lease should be classified on Evans’
December 31, 2019, statement of financial position as noncurrent and should be separately
identified by Evans in its statement of financial position or footnotes thereto. The related
CA 21.2
(a) (1) Since the given facts state that Sylvan (lessee) does not have access to information that
(2) The amount recorded as an asset on Sylvan’s books should be shown in the non-current
asset section of the statement of financial position as “Right-of-Use Asset” or another
similar title. At the same time as the asset is recorded, a corresponding liability (“Lease
Liability” or similar title) is recognized in the same amount. This liability is classified as both
(3) The lessee should make the following qualitative disclosures:
• Nature of its leases, including general description of those leases.
In addition the quantitative information that should be disclosed by the lessee is as follows:
• Total lease cost.
CA 21.2 (Continued)
(b) (1) Based on the given facts, Breton has entered into a sales-type lease. The discounted
present value of the lease payments is in excess of 90 percent of the fair value of the asset
at commencement of the lease arrangement and collectibility of lease payments is
probable.
(2) Breton should record a Lease Receivable for the present value of the lease payments and
the present value of the residual value. It might be noted that since the residual value is
(3) During the life of the lease, Breton will record payments received as a reduction in the
receivable. Interest is recognized as interest revenue by applying the implicit interest rate
(4) Breton must make the following disclosures with respect to this lease:
▪ Lease-related income, including profit and loss recognized at lease commencement for
sales-type leases, and Interest Income.
CA 21.3
(a) For Lease L, Santiago SA should record as a liability at the commencement of the lease an
amount equal to the present value of the lease payments during the lease term.
CA 21.3 (Continued)
(b) For Lease L, M, and N, Santiago Company should apply the finance lease method and allocate
CA 21.4
(a) The ethical issues are fairness and integrity of financial reporting versus profits and possibly
misleading financial statements. On one hand, if Buchanan can substantiate her position, it is
possible that the agreement should be recorded at the lower amount. On the other hand, if
*CA 21.5
Memorandum Prepared by: (Your Initials)
Date:
HOCKNEY PLC
December 31, 2019
Reclassification of Leased Auto
While performing a routine inspection of the client’s garage, I found a used automobile which was not
CA 21.5 (Continued)
Examining the noncancelable lease agreement entered into with Crown New and Used Cars on
January 1, 2019, I determined that the automobile should be capitalized as a finance lease because
its lease term is greater than 1 year.
I advised the client to capitalize this lease at the present value of its rental payments: £5,778 (the present
Right-of-Use Asset ........................................................................... 5,778
Lease Liability .......................................................................... 5,778
To account for the first year’s payments as well as to reverse the original entries, I advised the client
to make the following entry:
*CA 21.6
(a) The major accounting issue is whether the transaction is a sale or a financing. To determine
whether it is a sale, the revenue recognition guidelines are used. That is, if control has passed
from seller to buyer then a sale has occurred. Conversely, if control has not passed from seller
to buyer the transaction is recorded as a financing (often referred to as a failed sale).
(b) This transaction should be reported as a financing as control of the leased asset has not passed
from the seller to the buyer. In essence, Perriman is borrowing money from the purchaser-
FINANCIAL REPORTING PROBLEM
(a) M&S uses both finance leases and operating leases.
(c) M&S disclosed future minimum rentals (in millions) under non-cancelable
operating lease agreements as of 30 March 2016, of:
Not later than one year .................................... £ 311.3
Later than one year and
COMPARATIVE ANALYSIS CASE
(a) Air France uses both finance leases and operating leases on its aircraft,
buildings, and other property, plant, and equipment.
(b) Some of Air France’s leases are longer than five years. Some characteristics
of the leases are the assets held under a finance lease are recognized as
(c) Future minimum commitments under capital leases are set forth below (in
millions):
2015
2014
One year .............................................
€ 583
€ 655
(d) At year-end 2015, the present value of minimum lease payments under
capital leases was €3,789 million. Imputed interest deducted from the future
minimum annual rental commitments was €260 million.
COMPARATIVE ANALYSIS CASE (Continued)
(f) British Airways uses leases for its aircraft fleet and property and equipment,
while Air France uses leases for its aircraft, buildings, and other property,
FINANCIAL STATEMENT ANALYSIS CASE
(a) The total obligations under finance leases at year-end 2015 for Delhaize is €555
million (the present value of the future lease payments).
(b) The total rental expense for Delhaize in 2015 was €352,000,000.
(c) To estimate the present value of the operating leases, the same portion of
Total operating lease payments due ................................. €1,563,000
Less estimated interest ...................................................... 697,254
Estimated present value of net operating
lease payments ............................................................... € 865,746
This answer is an approximation. This answer is somewhat incorrect
because the proportion of payments after five years may be different
ACCOUNTING, ANALYSIS, AND PRINCIPLES
Accounting
(a) The lease liability is computed as follows:
Present value of lease payments
Therefore Salaur makes the following journal entries at the commencement date.
1/1/19
SALAUR SpA
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (12%)
on Liability
Reduction
of Lease
Liability
Lease Liability
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
The entry to record lease expense in 2019 is as follows.
12/31/19
Interest Expense .......................... 620.03
(b) With the bargain purchase option, Salaur computes the lease liability and
right-of-use asset, as follows.
Present value of lease payments
Salaur makes the following entries at lease commencement.
1/1/19
Right-of-Use Asset ..................... 8,295.34
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
SALAUR SpA
Lease Amortization Schedule
Date
Annual Lease
Payment Plus
BPO
Interest
(12%) on
Liability
Reduction
of Lease
Liability
Lease
Liability
1/1/19
€8,295.34
12/31/19
Interest Expense ......................... 628.57
Lease Liability ..................... 628.57
Analysis
While all leases with terms longer than one year are capitalized (recorded on the
statement of financial position), the amounts differ depending on whether the
lease is classified as a finance or operating lease. As indicated in the entries
above, the right-of-use asset increases and the denominator of the return on
assets ratio (ROA = Net income ÷ Average assets) will increase, but by different
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)
This reporting is in contrast to prior IFRS, under which many operating leases
Principles
The fundamental quality is faithful representation. The lease criteria are
designed to report leases according to their economic substance. Thus, if
RESEARCH CASE
(a) (1) According to IFRS 16, (paragraphs 26-28), a lessee shall measure the
lease liability at the present value of the lease payments that are not paid at
The lease payments included in the measurement of the lease liability
comprise the following payments for the right to use the underlying asset
during the lease term that are not paid at the commencement date:
(a) fixed payments less any lease incentives receivable;
(b) variable lease payments that depend on an index or a rate, initially
Variable lease payments that depend on an index or a rate described in
paragraph 27(b) include, for example, payments linked to a consumer price
index, payments linked to a benchmark interest rate (such as LIBOR) or
payments that vary to reflect changes in market rental rates.
(2) (paragraphs 23-24) Initial measurement of the right-of-use asset shall
comprise:
(a) the amount of the initial measurement of the lease liability;
(b) any lease payments made at or before the commencement date, less
RESEARCH CASE (Continued)
(b) According to IFRS 16 (paragraphs 18-19), an entity shall determine the lease
term as the non-cancellable period of a lease, together with both:
1. periods covered by an option to extend the lease if the lessee is reasonably
In assessing whether a lessee is reasonably certain to exercise an option to
extend a lease, or not to exercise an option to terminate a lease, an entity shall
(c) IFRS 16 (paragraph 44) indicates that a lessee shall account for a lease
modification as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to
GAAP CONCEPTS AND APPLICATION
GAAP21.1
The accounting for leases is found in Accounting Standards Codification section
842, which was updated in February 2016.
GAAP21.2
The following are similarities and differences between lease accounting under
IFRS and U.S. GAAP.
Similarities
• Both GAAP and IFRS share the same objective of recording leases by
lessees and lessors according to their economic substance—that is,
according to the definitions of assets and liabilities.
Differences
• There is no classification test for lessees under IFRS 16. Thus, lessees
account for all leases using the finance lease method; that is, leases
GAAP CONCEPTS AND APPLICATION (Continued)
• In addition to the short term lease exception, IFRS has an additional lessee
recognition and measurement exemption for leases of assets of low value
GAAP21.3
1/1/19
Right-of-Use Asset (2.83339* X $23,000) ...................... 65,168
Lease Liability ....................................................... 65,168
Schedule A
LEBRON JAMES CORPORATION
Lease Amortization Schedule
Annuity-Due Basis
Date
Annual
Payment
Interest (6%) on
Liability
Reduction
of Lease
Liability
Lease Liability
GAAP CONCEPTS AND APPLICATION (Continued)
Schedule B
Lease Expense Schedule
Date
(A)
Lease Expense
(Straight-Line)
(B)
Interest (6%) on
Lease Liability
(C)
Amortization
of ROU Asset
(A-B)
Carrying Value
of ROU Asset
1/1/19
$65,168
12/31/19
Lease Expense ............................................................... 23,000
Lease Liability (Schedule A) ........................... 2,530*
