Topic: IFRS 16: Leases

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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

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 – 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

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.

Question

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)

Answer

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Tags: CPI Adjustment, Depreciation, Lease Accounting, Lease Liability, Right-of-Use Asset, Variable Payments
Level: Level 3

Topic: IFRS 16: Leases
Series: NOV 2023

CR – Nov 2016 – L3 – Q2a – IFRS 16: Leases

Account for a sale and leaseback transaction in accordance with IAS 17.

Question

Hard-Work Ltd is a public limited company in Ghana and owned a building on which it raised finance to support its operations. On 1 June 2015, Hard-Work Ltd disposed of the building for GH¢5 million to a finance company when the carrying amount of the building was GH¢3.5 million. However, the same building was immediately leased back from the finance company for a period of 20 years, which was considered to be equivalent to the majority of the asset’s useful economic life. The lease rentals for the period amounted to GH¢441,000 payable annually in arrears. The interest rate implicit in the lease is 7%. The present value of the guaranteed minimum lease payments is the same as the sale proceeds.

Required:
Demonstrate how Hard-Work Ltd will account for the above transaction for the year ended 31 May 2016 in accordance with IAS 17 Leases. Show relevant extracts to the statement of profit or loss and the statement of financial position as at 31 May 2016.

Answer

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Tags: Finance lease, Leases, Sale and Leaseback
Level: Level 3

Topic: IFRS 16: Leases
Series: NOV 2016

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

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.

Question

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)

Answer

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Tags: CPI Adjustments, Finance Costs, Lease Liability, Right-of-Use Asset, Variable Payments
Level: Level 3

Topic: IFRS 16: Leases
Series: DEC 2022

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

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

Question

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:

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

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 – 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

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.

Question

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)

Answer

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Tags: CPI Adjustment, Depreciation, Lease Accounting, Lease Liability, Right-of-Use Asset, Variable Payments
Level: Level 3

Topic: IFRS 16: Leases
Series: NOV 2023

CR – Nov 2016 – L3 – Q2a – IFRS 16: Leases

Account for a sale and leaseback transaction in accordance with IAS 17.

Question

Answer

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Tags: Finance lease, Leases, Sale and Leaseback
Level: Level 3

Topic: IFRS 16: Leases
Series: NOV 2016

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

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

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.

Question

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)

Answer

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Tags: CPI Adjustments, Finance Costs, Lease Liability, Right-of-Use Asset, Variable Payments
Level: Level 3