Lessee Ltd.- Lease Case

Lessee Ltd. Lease Case 1. Was the younger controllers analysis even up? Why or wherefore non? No, the junior accountants analysis is not remediate in classifying the occupy as an operating chthonictake in unity with IFRS. Whether or not a require is classified as a finance or an operating betroth depends on if all of the benefits as well as risks of self-command have been shifted from the lessor to the lessee. correspond to IAS 17-10(d), a take moldiness be classified as a finance if either the lease term is for the major portion of the summations economic sprightliness or at the inception of the lease the present survey of the lower limit stipend amounts to at least substantially all of the fair valuate of the lease asset. With regards to this case, the term of the lease is equal to 75% of the equipments recyclable life. Also, the present value of the annual payments would equal $263,716 with the fair value of asset only being $265,000, which makes the pre sent value of the minimum lease payment 99. % of the fair value of the lease asset. With these criteria being met it satisfies the requirements of IAS 17 and would therefore be classified as a finance lease 2. Was the ranking(prenominal) accountants analysis neutralize? Why or why not? The senior accountants analysis is correct according to IAS 17. The federal agency the senior accountant lays out his thought process in a step-by-step process creates a nice checklist to compare to the IAS.Beginning with step one, the senior accountant classifies the lease as a finance lease on the terms that the life of the contract encompasses the majority of the equipments useful life. According to IAS 17. 10, the senior accountant is correct. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form. Situations that would normally lead to a lease being classified as a finance lease include the following IAS 17. 0 * the lease tra nsfers self-possession of the asset to the lessee by the end of the lease term * the lessee has the option to obtain the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised * the lease term is for the major part of the economic life of the asset, even if appellation is not transferred * at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset * the lease assets are of a specialized nature such(prenominal) that only the lessee can use them without major modifications being made In his second step, the senior accountant uses the wrong recreate pass judgment. He states, Since the lessees additive acceptation estimate is greater than the lessors understood rate in the lease, compute the present value of the minimum lease payments victimisation the 11 percent rate. This is wrong because IFRS does not permit the lessee to use the incremental rate if the implicate rate known. He should have used %10 for his calculations. At commencement of the lease term, finance leases should be translateed as an asset and a indebtedness at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entitys incremental borrowing rate) IAS 17. 20 * PV of the minimum lease payments = $100,0002. 4896 + $20,000 x 0. 7513 = $263,716 Lastly, the senior accountant uses the wrong egress from step 2 and therefore is incorrect in determining the amortization tabulates. Table 1 below shows the corrected table. * Finance lease payments should be apportioned between the finance charge and the reduction of the outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining counterbalance of the liability) IAS 17. 25 * The depreciation policy for assets held under finance leases should be consistent with that for own assets.If there is no reasonable certainty that the lessee will obtain ownership at the end of the lease the asset should be depreciated over the shorter of the lease term or the life of the asset IAS 17. 27 3. How would the answer differ under U. S. GAPP? Under U. S. GAAP many things in the Senior Accountants computations would change. First you would allocate the payments based on the 10 percent implicit rate from the lessor not the 11 percent incremental borrowing rate from the lessee. This would change the total Lease Obligation to $263,716. Below is the new table allocating payments between interest and lease obligation. Table 1 Year capital pmt Interest expense (10%) Reduction in Lease Obligation eternal rest of Lease Obligation 0 $263,716 $100,000 $26,372 $75,131 $190,088 2 $100,000 $19,009 $80 ,991 $109,097 3 $100,000 $10,910 $89090 $20,007 The balance is the residue value at the end of the lease ($20,007? $20,000). The journal entry to record the lease obligation would have to change based on the correct percentage. Leased Equipment under Capital Lease $263,716 Lease payable$263,716 The correct journal entry to record Year 1 payment would be Rent Expense $2,000 Interest Expense$26,372 Lease payable$73,628 bills$102,000 There would not be any depreciation recorded on this leased equipment due to the title not transferring or a agreement purchase option.