- 5 Marks
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)
Find Related Questions by Tags, levels, etc.
- Tags: Alterations, Capitalization, IFRS 16, Leases, Provisions, Restoration Costs
- Level: Level 2
- Topic: IFRS 16: Leases
- Series: JULY 2023