Question Tag: Leases

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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

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

FR – May 2021 – L2 – Q6b – Conceptual Framework for Financial Reporting

Analysis of qualitative characteristics application in specific financial reporting scenarios.

Question

The following transactions and events took place in Jaye Investment Nigeria Limited during the year ended March 31, 2019.

(i) The company entered into a lease to rent an asset paying N150,000 a year for 5 years out of its useful economic life of 15 years. Assume a rate of interest implicit in the lease to be 10%. (6 Marks)

(ii) The company’s statement of profit or loss prepared using the historical cost method showed a loss from operating its hotels, but the company is aware that the increase in value of its properties during the year far outweigh the operating loss. (4 Marks)

(iii) A decision was made by Jaye Investment Nigeria Limited’s board of directors to change the company’s accounting policy from one of expensing the finance cost on building new retail outlets to one of capitalising such costs. (4 Marks)

Required:
Explain how you would treat the items in (i) to (iii) above in Jaye Investment Nigeria Limited’s financial statements and indicate on which of the qualitative characteristic framework your treatment is based.

Answer

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Tags: Financial Statements, Historical Cost, Leases, Policy Change, Qualitative Characteristics
Level: Level 2

Topic: Conceptual Framework for Financial Reporting
Series: MAY 2021

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 – 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 – 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

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

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

Question

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

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

FR – May 2021 – L2 – Q6b – Conceptual Framework for Financial Reporting

Analysis of qualitative characteristics application in specific financial reporting scenarios.

Question

The following transactions and events took place in Jaye Investment Nigeria Limited during the year ended March 31, 2019.

Answer

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Tags: Financial Statements, Historical Cost, Leases, Policy Change, Qualitative Characteristics
Level: Level 2

Topic: Conceptual Framework for Financial Reporting
Series: MAY 2021

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 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

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 – 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

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 – 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

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

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

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

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 – 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

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

Question Tag: Leases

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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

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

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

FR – May 2021 – L2 – Q6b – Conceptual Framework for Financial Reporting

Analysis of qualitative characteristics application in specific financial reporting scenarios.

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.

FR – May 2021 – L2 – Q2d – Lease Accounting

Show the accounting treatment for lease transactions.

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.

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.

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.

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

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

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

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

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

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

Explanation of IFRS 16 recognition and measurement for lessee lease obligations

FR – May 2021 – L2 – Q6b – Conceptual Framework for Financial Reporting

Analysis of qualitative characteristics application in specific financial reporting scenarios.

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.

FR – May 2021 – L2 – Q2d – Lease Accounting

Show the accounting treatment for lease transactions.

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.

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.

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.

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

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

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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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.

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.