- 4 Marks
Question
Odwira Ltd operates in the mining industry with a financial year end 31 December 2020. On 1 January 2020, Odwira Ltd began to lease a group of machines that were used in the production process. The lease was for five years, and the total annual rental (payable in arrears) was GH¢8 million. The lessor paid GH¢30 million for the machines on 31 December 2019. The lessor has advised Odwira Ltd that the interest rate implicit in the lease can be taken as 10%. The estimated useful economic life of the machines was five years.
Required:
In accordance with IFRS 16: Leases, show the accounting treatment of the above transaction.
Answer
Leased asset
| Description | Amount (GH¢’000) |
|---|---|
| Cost | 30,320 |
| Charge for the year | (6,064) |
| 24,256 |
The lessee is required under IFRS 16 to recognise a right-of-use asset and a corresponding liability. Accordingly, GH¢30.320 million is to be included both as asset and lease liability on initial recognition. The lease liability is treated as shown below:
| Year ended | Opening balance | Finance cost | Rental | Closing balance |
|---|---|---|---|---|
| 31-Dec-2020 | 30,320 | 3,032 | (8,000) | 25,352 |
| 31-Dec-2021 | 25,350 | 2,535 | (8,000) | 19,887 |
The statement of profit or loss in the first year will include a finance cost of GH¢3.032 million with a depreciation charge of GH¢6.064 million.
The statement of financial position will include closing lease liability in the current year, GH¢25.352 million, of which GH¢19.887 million is a non-current liability and GH¢5.465 million is a current liability. The right of use asset of GH¢30.320 million will be depreciated over five years (GH¢30.320 ÷ 5 years) = GH¢6.064 million. Therefore, the asset will be recognized in the statement of financial position at GH¢24.256 million (i.e. GH¢30.320 – 6.064) million.
Alternatively, the current lease liability GH¢5.465 million (GH¢8 million – GH¢2.535) million and the non-current lease obligation is GH¢19. 887 million (GH¢25.352 million – GH¢19.887 million).
- Tags: Accounting Treatment, IFRS 16, Leases
- Level: Level 2
- Topic: Preparation of Financial Statements
- Series: MAY 2021
- Uploader: Olaoluwa