Question Tag: IFRS 16

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CR – Nov 2024 – L3 – Q2a – Lease Accounting and Foreign Exchange

Discuss lease accounting treatment and foreign exchange effects on lease payments.

Question

On 1 January 2023, Fabin Ghana Airlines PLC (FGA) leased a new fuel-efficient aircraft from German Jets Builders PLC (GJB) for ten (10) years, with an option to extend the lease period for five (5) additional years. However, at lease inception, FGA determined that the renewal option was not economically beneficial and would not be exercised.

The lease formed part of FGA’s sustainability strategy to green its air operations. Lease payments were structured as follows:

Fixed annual lease payments of €6 million, payable at each year-end starting 31 December 2023.
An additional 5% annual payment, conditional on FGA’s aircraft noise footprints and nitrogen oxide emissions declining by at least 15% and 10%, respectively.
At 31 December 2023, the Sustainability Committee determined that these environmental targets were met.

Additional lease details:

Estimated residual value of €15 million at 31 December 2032 and €10 million at 31 December 2037.
Residual Value Guarantee: FGA guaranteed that the relevant residual value will not drop below 30%.
Initial Direct Costs: GH¢500,000 was incurred in setting up the lease.
Discount Rate: 12%
Exchange Rates:
- 1 January 2023: €1 = GH¢10
- 31 December 2023: €1 = GH¢12
- Average rate: €1 = GH¢11

Discount Factors at 12%:

Year	Single-Period Factor	Annuity Factor
10	0.32	5.65
14	0.20	6.63
15	0.18	6.81

Required:

In line with IFRS 16: Leases and IAS 21: Effects of Changes in Foreign Exchange Rates, discuss how this lease should be accounted for in the financial statements of FGA for the year ended 31 December 2023.

Answer

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Tags: Foreign Exchange, IAS 21, IFRS 16, Lease Accounting, Lease Liability, Right-of-Use Asset, Variable Lease Payments
Level: Level 3

Topic: Effects of Changes in Foreign Exchange Rates, IFRS 16: Leases
Series: Nov 2024

AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

Question

Pegrace Nigeria Limited (PNL), your audit client, is a national hotel group with substantial cash resources. Its accounting functions are well managed and the group’s accounting policies are rigorously applied. The company’s financial year-end is December 31.

The company has been seeking to acquire a construction company for some time in order to bring in-house the building and refurbishment of hotels and related leisure facilities, like swimming pools, volleyball courts, and restaurants. The management has recently identified Robin Construction Company Limited (RCCL) as a potential target and has urgently requested that you undertake a limited due diligence review.

Further to the preliminary talks between the management of RCCL and PNL, you were provided with the following brief on Robin Construction Company Limited:

The Chief Executive, Managing Director, and Finance Director are all family members and major shareholders. The company has an established reputation for quality constructions.
Due to a recession in the building business, the company has been operating at its overdraft limit for the last 18 months and has been close to breaching debt obligations on several occasions.
Robin’s accounting policies are generally less prudent than those of Pegrace (assets are depreciated over longer estimated useful lives).
Contract revenue is recognized on the percentage of completion method, measured by reference to costs incurred to date. Provisions are made for loss-making contracts.
The company’s management team includes a qualified and experienced quantity surveyor, whose main responsibilities are:
- Supervising quarterly physical counts at major construction sites;
- Comparing costs to date against quarterly rolling budgets; and
- Determining profits or losses, by contract, at each financial year-end.
Labour force is provided under subcontracts. During construction, the regulatory body visited the site and discovered non-compliance with site health and safety regulations.

In February 2021, Robin received a claim that a site on which it built a housing development in Banana Estate was not properly drained and is now sinking. Residents are demanding rectification and asking for payment or damages. Robin has referred the matter to its legal counsel and denied all liability, as the site preparation was subcontracted to Sahara Services Company Limited. No provisions have been made in respect of the claims, nor has any disclosure been made.

The auditor’s report on Robin’s financial statements for the year ended December 31, 2020, was signed, without modification, in March 2021.

Required:

a. Prepare a document to give the explanatory meaning of the term ‘due diligence’ and subsequently discuss items to investigate in a due diligence exercise. (12 Marks)

b. Advise on how to recognize, measure, present, and disclose leases as required by IFRS 16. (8 Marks)

Answer

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Tags: Audit Recommendations, Due diligence, Financial instruments, IFRS 16, Lease Accounting
Level: Level 3

Topic: Assurance Engagements

AAA – Nov 2020 – L3 – Q5 – Advanced Audit Planning and Strategy

Identification of financial statement risks in planning the final audit for Maideline Nigeria Limited’s winding-up.

Question

Maideline Nigeria Limited manufactures tyres for use by cars, trucks, and trailers. The company is owner-managed, meaning the shareholders are also the directors. On June 1, 2020, the directors decided to wind up the company due to the high cost of operations, the Naira’s depreciation against the US dollar, and the economic impact of COVID-19, which have severely impacted the company’s ability to continue business.

Management notified employees, suppliers, and customers that Maideline would cease all manufacturing activities by September 30. Consequently, all factory workers and most employees in accounts and administration were terminated effective September 30. Remaining employees will face redundancy by November 30. A minimal head office team, including the Company Secretary and some support staff, will remain operational for a few more years until the company winds down completely.

Maideline operated 20 branches and a head office. Of these, 12 branches are located in company-owned buildings, while the remaining 8 operate from leased buildings with lease terms of three to five years. Lease agreements prohibit sub-letting and sale. On adopting IFRS 16, the entity assumed lease renewals at term end, recording lease liabilities and right-of-use assets. A small head office building will remain in use until its lease expires in three years. Maideline accounts for its tangible non-current assets at cost, less depreciation, and has recognized deferred tax assets due to past tax losses and unutilized capital allowances.

All products sold carry a one-year warranty. Until May 31, 2020, the company offered two- and three-year extended warranties, but these were discontinued from March 1, 2020. Maideline distributes products nationally and internationally under three-year agreements and maintains annual supplier contracts. While no distributors or suppliers have pursued legal actions, some are withholding payments, awaiting penalty settlements they claim are due.

Required:
Using the information provided, identify and explain the financial statement risks to be taken into account in planning the final audit of Maideline in respect of the year ended December 31, 2020. (20 Marks)

Answer

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Tags: COVID-19 Impact, Deferred Tax, financial statement risks, IFRS 16, Inventory Valuation, Legal claims, Winding-up
Level: Level 3

Topic: Advanced Audit Planning and Strategy

CR – Nov 2020 – L3 – Q5 – Leases (IFRS 16)

Discuss lease classification, loan liability derecognition under IFRS 9, and tax offsetting rules under IAS 12.

Question

Muzana Limited owns tractors used for farming purposes and sometimes enters into lease arrangements with other agricultural companies. A particular tractor when leased out by Muzana is for 8 years. The useful economic life of each tractor is estimated at 10 years while the fair value of each tractor is estimated at N26 million. The present value of minimum lease payments in the lease arrangement is N28 million. Lease payments are made to Muzana by the lessee on a monthly basis and has a purchase option at the end of the lease term to acquire the machine for N2.2 million. A similar fairly used machine in the market will cost the buyer N2.5 million. Following the transition to IFRS 16, the management of Muzana have classified this lease as an operating lease in its year-end financial statements.

In order to expand its operations, Muzana accessed the Agricultural Loan Credit Programme set up by the government of Nigeria. In the year 2016, Muzana was granted a 5-year interest free loan of N100 million. At year end September 30, 2019, Muzana had been able to set aside N100 million in a special trust to be used for no other purpose than to pay off the loan in full on its due date in 2020. The management of Muzana are currently preparing their year-end 2019 financial statements and have derecognised the loan liability due to the fact that funds have been set aside in full to satisfy the loan payment in 2020.

Muzana Limited have just concluded a meeting with its tax consultant. The amounts due to the state tax authorities in the current year is N2.3 million. Muzana also has a tax credit of N1.8 million due from the Federal government in the current year. The tax consultant has advised Muzana that these amounts can be offset in their year-end financial statements to show only a tax liability of N500,000.

Required: a. Explain how the lease arrangement should be classified in Muzana‘s 2018 year-end financial statements? (7 Marks) b. Advise the management of Muzana, based on IFRS 9 derecognition rules, if the loan liability can be recognised in their year-end September 30, 2019 financial statements. (7 Marks) c. Explain if the advise provided by the tax consultant is consistent with the offsetting rules under IAS 12 Income Taxes? (6 Marks)

Answer

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Tags: Derecognition, IAS 12, IFRS 16, IFRS 9, Lease Accounting, Tax Offsetting
Level: Level 3

Topic: Leases (IFRS 16)

CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

Question

As the financial controller of Ododoeye PLC, an NGX-quoted company, you are preparing the financial statements for the year ended March 31, 2023. Chief Okechukwu, the finance director, has requested the following information about the treatment of the company’s leased assets in view of IFRS 16-Leases:

Chief Okechukwu noticed a new component in the financial statements titled “right-of-use” relating to a leased warehouse. This component did not appear in previous years’ statements and has raised questions on its treatment under IFRS 16 compared to IAS 17.

Required:

Write an internal memo addressing Chief Okechukwu’s concerns and explaining:

The key changes under IFRS 16 related to right-of-use assets.
Accounting treatments for the right-of-use assets.
Financial statement impact of right-of-use assets.

Answer

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Tags: Corporate Reporting, Financial Statements, IFRS 16, Leases, NGX-Quoted Company, Right-of-Use Assets
Level: Level 3

Topic: Leases (IFRS 16)
Series: MAY 2024

CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

Question

Lease gives lessees the right to use assets in return for the lessee accepting an obligation to make a series of payments to the owner of the assets (the lessor). The previous accounting rules set out in IAS 17-Leases focused on identifying leases that were economically similar to purchasing the assets being leased. However, IFRS 16-Leases was issued subsequently and applies to accounting periods beginning on or after January 1, 2019. Earlier application is also permitted. Therefore, IFRS 16 replaced IAS 17, introducing material changes to the requirements for recognition of rights and obligations under leasing arrangements.

Required:

i. Explain how IFRS 16 requires lessees to recognize and measure rights and obligations under lease arrangements. (4 Marks)

ii. Discuss how a lessee should measure the rights and obligation under short-term lease arrangements.

(4 Marks)

Answer

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Tags: Corporate Reporting, IFRS 16, Lease Obligations, Leases, Right-of-Use, Short-Term Leases
Level: Level 3

Topic: Leases (IFRS 16)
Series: MAY 2024

CR – Nov 2020 – L3 – Q2b – Sale and Leaseback of Warehouse

Accounting treatment for sale and leaseback transaction under IFRS 16 for Tekyiman Ltd.

Question

Tekyiman Ltd (Tekyiman) sold one of its warehouses on 1 July 2019 to a finance house and leased it back under an operating lease on the same date. The carrying amount of the warehouse on 1 July 2019 was GH¢16 million. The terms of the sale and leaseback were as follows; sale proceeds of GH¢23.5 million and half-yearly lease rental payments of GH¢1 million paid in arrears on 31 December and 30 June over a period of 4 years.

The open market value of the property would have been GH¢20 million if not leased back on these terms. The lease rental payments were approximately double market rates for such a lease. The finance house can terminate the lease at any time with a month’s notice to Tekyiman, at which point any excess of the sales proceeds over market value of the property not yet repaid becomes repayable immediately.

Tekyiman depreciated the property up to 1 July 2019 and then derecognised it, recognising a profit of GH¢7.5 million (netted against expenses in the statement of profit or loss). The first GH¢1 million, 6 monthly lease rental payment, made on 31 December 2019 has been charged to cost of sales. No other accounting entries have been made.

Tekyiman now wishes to amortize the excess of the sales proceeds over market value on a straight-line basis over the period the warehouse will be used (4 years).

Required:
Advise the directors of the entity of the correct accounting treatment of the above transaction under IFRS 16: Leases (as the information permits) for the year ended 31 December 2019.

Answer

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Tags: Accounting for Leases, Financial Reporting, IFRS 16, Leases, Sale and Leaseback
Level: Level 3

Topic: IFRS 16: Leases
Series: NOV 2020

FR – May 2021 – L2 – Q2d – Lease Accounting

Show the accounting treatment for lease transactions.

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

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Tags: Accounting Treatment, IFRS 16, Leases
Level: Level 2

Topic: Preparation of Financial Statements
Series: MAY 2021

FR – April 2022 – L2 – Q2b – Financial Reporting Standards and Their Applications

Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for Kundugu Ltd in 2020 and 2021, accounting for a lease agreement under IFRS 16.

Question

b) Kundugu Ltd (Kundugu) is a manufacturing company located in the Savannah Region. The reporting date of Kundugu is 31 December, and the company reports under International Financial Reporting Standards (IFRSs). Kundugu intends to expand its production to take advantage of emerging economic activities in the new region.

On 1 January 2020, the company entered into a lease agreement for production equipment with a useful economic life of 8 years. The lease term is for four years, and Kundugu agrees to pay annual rent of GH¢50,000 commencing on 1 January 2020 and annually thereafter. The interest rate implicit in the lease is 7.5%, and the lessee’s incremental borrowing rate is 10%. The present value of lease payments not yet paid on 1 January 2020 is GH¢130,026. Kundugu paid legal fees of GH¢1,000 to set up the lease.

Required:
Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for 2020 and 2021, showing how Kundugu should account for this transaction. (6 marks)

Answer

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Tags: Depreciation, Finance Costs, IFRS 16, Lease Accounting, Lease Liabilities, Right-of-Use Assets, Statement of Financial Position
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: APR 2022

FR – Nov 2023 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of a lease transaction for Fugu Ltd in accordance with IFRS 16.

Question

Fugu Ltd (Fugu) operates in the automobile industry. The following transaction relates to Fugu for the year-end 31 July 2023: On August 1, 2022, Fugu entered into a ten-year lease, agreeing to pay GH¢3 million annually in arrears in exchange for the use of a building. The present value of the minimum lease payments was GH¢20.13 million at 1 August 2022, and the useful economic life of the building was 50 years. Fugu’s cost of capital is 8%.

Required:
In accordance with IFRS 16: Leases, show the financial reporting treatment of the above transactions in the financial statements of Fugu for the year ended 31 July 2023.

Answer

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Tags: Financial Reporting Treatment, IFRS 16, Leases, Present Value, Right-of-Use Asset

Topic: Financial Reporting Standards and Their Applications, Leases
Series: NOV 2023

FR – Nov 2019 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculation and accounting entries for lease under IFRS 16 in the financial statements of Asawase Ltd.

Question

On 1 August 2018, Asawase Ltd entered into an agreement to acquire a motor vehicle. The terms of the agreement were that the vehicle would be leased for five years from the date of inception, subject to a deposit of GH¢19,972 and five annual payments of GH¢6,500 in advance, commencing on 1 August 2018. The fair value of the vehicle and the present value of the lease payments were GH¢48,000 at inception. The interest rate implicit in the lease is 8%.

Required:
In accordance with IFRS 16: Leases, show with appropriate calculations, the accounting entries required to record the transaction in the financial statements for the year ended 31 July 2019. (7 marks)

Answer

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Tags: Depreciation, Finance lease, Financial Reporting, IFRS 16, Lease Accounting

Series: NOV 2019

FR – July 2023 – L2 – Q2b – Leases (IFRS 16)

Namba Ltd’s treatment of leasehold alteration and restoration costs according to IFRS 16 for the year ended 30 June 2022.

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

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Tags: Alterations, Capitalization, IFRS 16, Leases, Provisions, Restoration Costs
Level: Level 2

Topic: IFRS 16: Leases
Series: JULY 2023

FR – May 2017 – L2 – Q5a – Professional and Ethical Issues in Financial Reporting

Compare and contrast Hire Purchase and Lease as methods of acquiring an asset.

Question

a) Compare and contrast Hire Purchase and Lease as a mode of acquiring an asset.

Answer

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Tags: Asset Acquisition, Hire Purchase, IAS 17, IFRS 16, Lease
Level: Level 2

Topic: Professional and Ethical Issues in Financial Reporting
Series: MAY 2017

FR – Nov 2016 – L2 – Q2a – Financial Reporting Standards and Their Applications

Prepare financial statement extracts showing how the lease transaction of Asokwa Ltd should be treated for the year ended 31 December 2014.

Question

You are employed as the Financial Accountant for Asokwa Ltd. Asokwa Ltd leased a new piece of equipment from Amakom Ltd for three years commencing on 30 September 2014. The fair value of the equipment is GH¢70,000. A deposit of GH¢4,000 was payable on 30 September 2014 followed by six half-yearly payments of GH¢13,500, payable in arrears, and commencing on 31 March 2015. Asokwa Ltd allocates finance charges on a sum of the period digits basis.

Required:
Prepare financial statement extracts showing how the lease transaction of Asokwa Ltd should be treated for the year ended 31 December 2014.

Answer

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Tags: Finance lease, Financial Statements, IFRS 16, Lease Accounting
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2016

Aug 2022 – L2 – Q2a – Financial Reporting Standards and Their Applications

Discuss the accounting treatment of specific transactions for Hiba Ltd under IFRS for the year ending December 31, 2021.

Question

Hiba Ltd is a Ghanaian company located in the Bono region, and the directors are unsure of the implications of the International Financial Reporting Standards (IFRSs) on the following specific transactions that took place during the accounting period:

i) On 1 January 2021, Hiba sold one of its mining equipment to Wontumi Ltd for GH¢900,000. The carrying amount of the equipment before the transaction was GH¢500,000, with a remaining useful life of 10 years. On the same day, Hiba entered into a contract with Wontumi Ltd to use the equipment for 5 years, with annual payments of GH¢200,000 payable in arrears. The fair value of the equipment was GH¢800,000, and the interest implicit in the lease was 10% per annum. The sale satisfies the performance obligation criteria in IFRS 15.

ii) On 1 January 2021, Hiba issued 1.5 million shares at GH¢1 each for GH¢1.5 million. Each share is convertible on 31 December 2025 into 2 ordinary shares with a par value of GH¢0.10 each. Interest is payable at 8% per annum. The market interest rate for similar debt without a conversion option was 11%.

iii) On 1 January 2021, Hiba received notice of a lawsuit from an ex-employee claiming unjust dismissal, with an 85% chance of losing the case and being required to pay GH¢1.275 million by 1 January 2022. Based on legal advice, Hiba recorded a provision of GH¢1 million and made no further adjustments. The cost of capital is 9%, and the discount factor at 9% for one year is 0.9174.

Required:
Discuss how the above transactions (i) – (iii) should be treated in Hiba’s financial statements for the year ending 31 December 2021 in accordance with IFRSs. (Show all calculations wherever possible).

Answer

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Tags: Financial instruments, IFRS 16, IFRS 9, Leases, Provisions, Revenue from Contracts
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: AUG 2022

FR – May 2019 – L2 – Q2e – Financial Reporting Standards and Their Applications

Identification of key principles behind the accounting treatment for leases under IFRS 16.

Question

IFRS 16: Leases was issued in January 2016 and is effective for accounting periods beginning on or after 1 January 2019. However, early adoption is permitted, provided IFRS 15: Revenue from Contracts with Customers is implemented also. This standard applies to all leases, except those shorter than 12 months and small assets. It also brings additional disclosure requirements for both lessees and lessors. The IFRS brings significant changes to those leases formerly classified as operating leases under IAS 17: Leases, the previous standard.

Required:

Identify THREE (3) key principles behind the accounting treatment for leases as required by IFRS 16.

Answer

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Tags: Financial Liabilities, IFRS 16, Leases, Right-of-Use Assets
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2019

CR – April 2022 – L3 – Q3a – Financial instruments: Recognition and measurement

Account for finance lease and financial liability transactions according to relevant IFRS.

Question

a) Zeus Ltd manufactures equipment for lease or sale. The following transactions relate to Zeus Ltd for the year ended 31 December 2020:

i) On 31 December 2020, Zeus Ltd leased out equipment under a 10-year finance lease. The selling price of the leased item was GH¢50 million, and the net present value of the minimum lease payments was GH¢47 million. The carrying value of the leased asset was GH¢40 million, and the present value of the residual value of the product when it reverts to Zeus Ltd at the end of the lease term is GH¢2.8 million. Zeus Ltd has shown sales of GH¢50 million and cost of sales of GH¢40 million in its financial statements.
(5 marks)

ii) On 1 January 2020, Zeus Ltd raised finance by issuing a two-year deeply discounted 2% bond with a nominal value of GH¢20,000 that was issued at a discount of 5% and is redeemable at a premium of GH¢2,150. There were no issue costs. The bond has an effective interest rate of 10%.
(5 marks)

Required:
Recommend to the directors of Zeus Ltd how the above transactions should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards.

Answer

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Tags: Financial Liabilities, IFRS 16, IFRS 9, Lease
Level: Level 3

Topic: Financial instruments: Recognition and measurement Corporate reporting
Series: APR 2022

CR – Nov 2018 – L3 – Q5b – Regulatory Framework and Ethics

Appraise the ethical issues arising from the email received by Peter Anokye regarding liquidity challenges and lease accounting implications in Nanton Ltd

Question

You are Peter Anokye, a newly qualified accountant and have recently been appointed as the deputy financial controller in Nanton Ltd (Nanton). You report directly to the finance director, Maria Wakasu. Just last week, you received the following email from Maria.

“As you are aware, I have to present some financial information at the board meeting scheduled in two days’ time and I need your help. I should be grateful if you could give me some advice on this issue. I don’t know whether you heard the news that Mamprugo Ltd (Mamprugo), an important customer of ours, is having some liquidity challenges. I think it is a case of not being able to manage their working capital cycle effectively. I know the financial controller of Mamprugo well, and he has mentioned that they have approached Yendi Ltd (Yendi) for credit. Of course, if they are successful, we should have no problems in getting paid. Today, I have received a request from Yendi asking for a credit reference for Mamprugo. I think if you check their credit history you will find they were good payers. Do you think I should mention anything about the liquidity issue to Yendi?

As I mentioned to you yesterday, over coffee, the Chief Executive Officer (CEO) regards leasing as an important method of financing the company. However, you are probably more up to date with the existing accounting requirements than me. The current accounting standard has some significant deficiencies and no longer meets the needs of users of financial statements. On 1 January 2016, we entered into a sale and finance leaseback transaction with our bank. The arrangement involved the sale, at fair value, of a building for GH¢8 million. The book value of the building in the financial statements at that date was GH¢6 million. I know that the CEO is particularly concerned that showing the lease as a finance lease could be detrimental to any loan applications that we might make over the next twelve months. Between you and I, we need to keep him happy: my year-end bonus could be in jeopardy if we get this area wrong. In the medium term, I am worried about the implications of the introduction of IFRS 16: Leases, particularly the effects on the statement of financial position, statement of profit and loss and other comprehensive income, and our key financial ratios. Surely our gearing ratio will be higher. Maybe we can get round the problem of including leases on the statement of financial position by classifying some of them as short-term (i.e., less than twelve months).

Peter, I should be grateful if you could give me some advice on this issue.”

Required:
Appraise the ethical issues arising from the information provided in the mail sent by Maria, and propose and justify appropriate steps that Peter Anokye should take to address them.

Answer

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Tags: Ethics, Financial Reporting, Gearing Ratio, IFRS 16, Leases, Liquidity, Working Capital
Level: Level 3

Topic: Regulatory Framework and Ethics
Series: NOV 2018

CR – July 2023 – L3 – Q2c – IFRS 16: Leases

Account for a finance lease from the lessor's perspective under IFRS 16, including initial recognition and subsequent measurement of lease receivable.

Question

c) On 1 January 2021 Partey Leasing PLC (Partey), acquired a large-scale custom-made equipment and leased it to Mane Ltd (Mane) for six years. Mane makes annual payments of GH¢10 million, commencing on 31 December 2021. The equipment has a useful life of seven years. Mane is responsible for insuring and maintaining the equipment, and is required to pay additional GH¢1.5 million at the end of each year provided a defined performance target is met. Mane has guaranteed that the value of the equipment at 31 December 2026 will not be less than GH¢1 million, although Partey anticipates that the open market value at that date will be approximately GH¢2.5 million. The costs incurred by Partey and Mane in arranging the lease amounted to GH¢2.1 million and GH¢1.6 million respectively. The rate of interest implicit in the lease is 9.49% per annum. Mane achieved the defined performance target on 31 December 2021 and made the required payment.

Required: In line with IFRS 16: Leases, explain how Partey would account for the above lease in its financial statements for the year ended 31 December 2021.

(7 marks)

Answer

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Tags: Finance lease, IFRS 16, Initial Recognition, Lease Receivable, Leases, Subsequent Measurement
Level: Level 3

Topic: IFRS 16: Leases
Series: JULY 2023

Question Tag: IFRS 16

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CR – Nov 2024 – L3 – Q2a – Lease Accounting and Foreign Exchange

Discuss lease accounting treatment and foreign exchange effects on lease payments.

Required:

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AAA – May 2022 – L3 – Q2 – Assurance Engagements

Discuss due diligence processes and provide IFRS 16 guidance on lease recognition, measurement, and disclosure.

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AAA – Nov 2020 – L3 – Q5 – Advanced Audit Planning and Strategy

Identification of financial statement risks in planning the final audit for Maideline Nigeria Limited’s winding-up.

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CR – Nov 2020 – L3 – Q5 – Leases (IFRS 16)

Discuss lease classification, loan liability derecognition under IFRS 9, and tax offsetting rules under IAS 12.

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CR – May 2024 – L3 – SB – Q4b – Leases (IFRS 16)

Memo on IFRS 16 changes and right-of-use assets treatment for Ododoeye PLC

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CR – May 2024 – L3 – SB – Q4a – Leases (IFRS 16)

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

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CR – Nov 2020 – L3 – Q2b – Sale and Leaseback of Warehouse

Accounting treatment for sale and leaseback transaction under IFRS 16 for Tekyiman Ltd.

Required: Advise the directors of the entity of the correct accounting treatment of the above transaction under IFRS 16: Leases (as the information permits) for the year ended 31 December 2019.

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FR – May 2021 – L2 – Q2d – Lease Accounting

Show the accounting treatment for lease transactions.

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FR – April 2022 – L2 – Q2b – Financial Reporting Standards and Their Applications

Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for Kundugu Ltd in 2020 and 2021, accounting for a lease agreement under IFRS 16.

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FR – Nov 2023 – L2 – Q2b – Financial Reporting Standards and Their Applications

Explain the financial reporting treatment of a lease transaction for Fugu Ltd in accordance with IFRS 16.

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FR – Nov 2019 – L2 – Q2c – Financial Reporting Standards and Their Applications

Calculation and accounting entries for lease under IFRS 16 in the financial statements of Asawase Ltd.

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FR – July 2023 – L2 – Q2b – Leases (IFRS 16)

Namba Ltd’s treatment of leasehold alteration and restoration costs according to IFRS 16 for the year ended 30 June 2022.

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FR – May 2017 – L2 – Q5a – Professional and Ethical Issues in Financial Reporting

Compare and contrast Hire Purchase and Lease as methods of acquiring an asset.

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FR – Nov 2016 – L2 – Q2a – Financial Reporting Standards and Their Applications

Prepare financial statement extracts showing how the lease transaction of Asokwa Ltd should be treated for the year ended 31 December 2014.

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Aug 2022 – L2 – Q2a – Financial Reporting Standards and Their Applications

Discuss the accounting treatment of specific transactions for Hiba Ltd under IFRS for the year ending December 31, 2021.

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FR – May 2019 – L2 – Q2e – Financial Reporting Standards and Their Applications

Identification of key principles behind the accounting treatment for leases under IFRS 16.

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CR – April 2022 – L3 – Q3a – Financial instruments: Recognition and measurement

Account for finance lease and financial liability transactions according to relevant IFRS.

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CR – Nov 2018 – L3 – Q5b – Regulatory Framework and Ethics

Appraise the ethical issues arising from the email received by Peter Anokye regarding liquidity challenges and lease accounting implications in Nanton Ltd

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CR – July 2023 – L3 – Q2c – IFRS 16: Leases

Account for a finance lease from the lessor's perspective under IFRS 16, including initial recognition and subsequent measurement of lease receivable.

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Advise the directors of the entity of the correct accounting treatment of the above transaction under IFRS 16: Leases (as the information permits) for the year ended 31 December 2019.