- 5 Marks
Question
Namba Ltd is a multinational with financial reporting year end 30 June. On 1 July 2021, Namba Ltd acquired a manufacturing unit under an eight-year lease. The lease rentals have been recorded correctly in the financial statements of Namba Ltd. However, Namba Ltd could not operate effectively from the unit until alterations to its structure costing GH¢13.2 million were completed. The manufacturing unit was ready for use on 30 June 2022. The alteration costs of GH¢13.2 million were charged to administration expenses. The lease requires Namba Ltd to restore the unit to its original condition at the end of the lease term. Namba Ltd estimates that this will cost a further GH¢10 million. Market interest rates are currently 6%.
The following discount factors may be relevant:
| Periods | 6% Discount Factor |
|---|---|
| 7 | 0.665 |
| 8 | 0.627 |
Required:
Recommend to the directors of Namba Ltd how to account for the above transactions as at 30 June 2022 in accordance with International Financial Reporting Standards.
(Total: 5 marks)
Answer
The alteration costs of GH¢13.2 million should be capitalized and not charged as an expense. This amount should be added to the carrying value of the leased asset as per IFRS 16.
A provision for the restoration costs of GH¢6.65 million (GH¢10 million x 0.665) should also be recognized and capitalized as part of the carrying amount of the asset. Therefore, the required adjustments are as follows:
| Transaction | GH¢ million |
|---|---|
| DR Property, plant, and equipment | 19.85 |
| CR Retained earnings | 13.2 |
| CR Non-current liabilities (restoration provision) | 6.65 |
Marks Allocation:
- Capitalization of alteration cost: 1 mark
- Making provision for restoration cost: 2 marks
- Increase of Property, plant, and equipment: 2 marks
- Tags: Alterations, Capitalization, IFRS 16, Leases, Provisions, Restoration Costs
- Level: Level 2
- Topic: IFRS 16: Leases
- Series: JULY 2023
- Uploader: Uploader1