Question Tag: Variable Payments

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  • 10 Marks

CR – Nov 2023 – L3 – Q3a – IFRS 16: Leases

Financial reporting treatment for a lease agreement, including CPI-based increases and variable lease payments for Avoka Grains Plantation.

On 1 January 2022, Avoka Grains Plantation Plc (Avoka) acquired a combined harvester from Awulley Farm Technologies for a lease term of 5 years with instalments payable annually in advance. The useful life of the harvester was estimated at 5 years. Avoka paid the first instalment of GH¢60 million on 1 January 2022.

However, subsequent lease payments are subject to increase/decrease in line with the consumer price index (CPI). At the lease inception, Avoka estimated that CPI would increase by 10% annually. However, CPI increased by 14% in 2022, and consequently GH¢68.4 million was paid on 1 January 2023 as the second instalment. At 31 December 2022, Avoka estimated that the annual increase in CPI would continue to be 14% in future years.

Avoka is also required to pay a usage fee of GH¢0.3 per acre of harvest in excess of 30 million units per annum from the machine. At the lease inception, Avoka planned to use the harvester to achieve 40 million acres of harvest each year during the lease term. During 2022, Avoka harvested 40 million acres of grains and accordingly, an amount of GH¢3 million was also paid along with the second instalment. Avoka’s incremental borrowing rate is 11% per annum.

Required:
Advise Avoka Plc on the financial reporting treatment for the above in the financial statements for the year ended 31 December 2022.
(10 marks)

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  • 8 Marks

CR – Dec 2022 – L3 – Q2b – IFRS 16: Leases

Calculate lease liabilities and right-of-use assets for Zigi Plc under IFRS 16 for the years ended 2020 and 2021.

On 1 January 2020, Zigi Plc (Zigi) entered into a 6-year lease of a manufacturing plant with annual lease payments of GH¢5.5 million, starting from 31 December 2020. The lease agreement specified that the lease payments (except yearly baseline payments of GH¢1 million included in the GH¢5.5 million) would increase every two years on the basis of the Consumer Price Index (CPI) for the preceding 24 months. The CPI at the commencement date was 125. Additionally, Zigi is required to pay GH¢500,000 every year once cost savings in that year reach at least GH¢6 million. Zigi’s cost savings achieved with its other assets had been averaging GH¢5.1 million prior to 1 January 2020. The initial direct non-reimbursable cost incurred by Zigi was GH¢350,000.

The rate implicit in the lease, which should have been 12% per annum, was not readily determinable by Zigi. Zigi’s incremental borrowing rate was 14% per annum. At 31 December 2021, the CPI was revised to 138. The actual cost savings achieved by Zigi in the years ended 31 December 2020 and 31 December 2021 were GH¢5.3 million and GH¢6.8 million, respectively.

The cumulative discount factors based on 12% and 14% are provided below:

Years 12% 14%
6 4.11 3.89
5 3.60 3.43
4 3.04 2.91

Required:
In accordance with IFRS 16: Leases, explain how the above lease would affect Zigi’s financial statements for the years ended 31 December 2020 and 2021.
(Total: 8 marks)

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  • 10 Marks

CR – Nov 2023 – L3 – Q3a – IFRS 16: Leases

Financial reporting treatment for a lease agreement, including CPI-based increases and variable lease payments for Avoka Grains Plantation.

On 1 January 2022, Avoka Grains Plantation Plc (Avoka) acquired a combined harvester from Awulley Farm Technologies for a lease term of 5 years with instalments payable annually in advance. The useful life of the harvester was estimated at 5 years. Avoka paid the first instalment of GH¢60 million on 1 January 2022.

However, subsequent lease payments are subject to increase/decrease in line with the consumer price index (CPI). At the lease inception, Avoka estimated that CPI would increase by 10% annually. However, CPI increased by 14% in 2022, and consequently GH¢68.4 million was paid on 1 January 2023 as the second instalment. At 31 December 2022, Avoka estimated that the annual increase in CPI would continue to be 14% in future years.

Avoka is also required to pay a usage fee of GH¢0.3 per acre of harvest in excess of 30 million units per annum from the machine. At the lease inception, Avoka planned to use the harvester to achieve 40 million acres of harvest each year during the lease term. During 2022, Avoka harvested 40 million acres of grains and accordingly, an amount of GH¢3 million was also paid along with the second instalment. Avoka’s incremental borrowing rate is 11% per annum.

Required:
Advise Avoka Plc on the financial reporting treatment for the above in the financial statements for the year ended 31 December 2022.
(10 marks)

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  • 8 Marks

CR – Dec 2022 – L3 – Q2b – IFRS 16: Leases

Calculate lease liabilities and right-of-use assets for Zigi Plc under IFRS 16 for the years ended 2020 and 2021.

On 1 January 2020, Zigi Plc (Zigi) entered into a 6-year lease of a manufacturing plant with annual lease payments of GH¢5.5 million, starting from 31 December 2020. The lease agreement specified that the lease payments (except yearly baseline payments of GH¢1 million included in the GH¢5.5 million) would increase every two years on the basis of the Consumer Price Index (CPI) for the preceding 24 months. The CPI at the commencement date was 125. Additionally, Zigi is required to pay GH¢500,000 every year once cost savings in that year reach at least GH¢6 million. Zigi’s cost savings achieved with its other assets had been averaging GH¢5.1 million prior to 1 January 2020. The initial direct non-reimbursable cost incurred by Zigi was GH¢350,000.

The rate implicit in the lease, which should have been 12% per annum, was not readily determinable by Zigi. Zigi’s incremental borrowing rate was 14% per annum. At 31 December 2021, the CPI was revised to 138. The actual cost savings achieved by Zigi in the years ended 31 December 2020 and 31 December 2021 were GH¢5.3 million and GH¢6.8 million, respectively.

The cumulative discount factors based on 12% and 14% are provided below:

Years 12% 14%
6 4.11 3.89
5 3.60 3.43
4 3.04 2.91

Required:
In accordance with IFRS 16: Leases, explain how the above lease would affect Zigi’s financial statements for the years ended 31 December 2020 and 2021.
(Total: 8 marks)

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