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Leasing per IFRS

14. Feb 2013
3

Hello, I would like to ask about information on depreciation for leases.

A financial leasing where the asset is value at 1.000.000 CU. The duration of the lease contract is at 7 years. Useful life of the asset 10 years (120 months). The company will pay lease payments of 10.000 CU per month and have an option to buy the asset for 5.000 CU.

Under IFRS will the correct procedure be:

Property will be recorded at the beginning at 1.000.000 CU.

For simplicity depreciation would be a straight-line annually 100.000 CU (after the lease period will 700.000 CU will be written off)

Is it necessary to take into account the option price when classifying the depreciation of the leased and start depreciating the asset per IFRS after the lease period, at a time when the leased property becomes company’s?

The sum payments, which the company will have to pay over the lease and the purchase price for the assets will be 1,205,000 CU.

Is it possible per IFRS say that the difference between the sum of the payments and the property value (including the option price) is the value of interest? Or is the liability (ie, the sum of which the company is obliged to pay) divided by IFRS into two parts - one part current installments (which are remunerated according to the payment schedule) and a second part of the purchase price (which according to the payment schedule is not subject to interest).

Submitted by Mladek on Thu, 02/14/2013 - 00:00

If the lease term is 7 years and monthly payments 10.000, they sum to 840,000.00 not 1,205,000. 

I think you need to revise your example.

 

Submitted by Mladek on Thu, 02/14/2013 - 00:00

That would give you an implcit rate of 5.563%, significnalty higher than the 3.8% you started with.

Assuming the same implicit rate of 3.8%, the payments would be 13,496.35, and they would sum to 1,138,693.40 (incuding the 5,000 bargain purchase).

Given these facts, the lease would qualify as a financial lease per IAS 17 due to the bargain purchase option.

Under IFRS, a lease is treated the same way as a debt purchase, the leased asset is amortized over its useful life (using the same method as similar assets the company owns, if any) while the liability is amortized over the term of the lease.

Assuming a fair vlaue of 1,000,000, useful life is 10 years, residual value of zero and using straight-line depreciation, the company amortize the asset at 100,000 per year or 8,333.33 per month.

The liability would be amortized each month using the rate implicit in the lease (technically about 3.802% annually or 0.3114% monthly).  This is, obviously, if you can confirm that the asset’s fair value is really 1,000,000.

The following table summarizes the liability amortization:

Period

Net liability

Discount rate

Implicit interest

Payment

Liability amortization

 

A, A(A+1) - E

B

C = A x B

D

E = D - C

1

1,000,000.00

0.31%

3,114.18

13,496.35

10,382.17

2

989,617.83

0.31%

3,081.85

13,496.35

10,414.50

3

979,203.33

0.31%

3,049.42

13,496.35

10,446.93

-

-

-

-

-

-

82

45,150.41

0.31%

140.61

13,496.35

13,355.74

83

31,794.67

0.31%

99.01

13,496.35

13,397.34

84

18,397.34

0.31%

57.29

18,496.35

18,397.34







Entries at acquisition:

Dr. Asset: 1,000,000 / Cr. Liability: 1,000,000

First month

Dr. Amortization Expense 8,333.33 / Cr. Accumulated Amortization: 8,333.33

Dr. Interest Expense 3,114.18, Liability: 10,382.17 / Cr. Cash in Bank: 13,496.35

 

Note, while the object of the lease is a tangible asset, the lease agreement itself is an intangible asset. 

Therefore, it is technically proper to amortize not depreciate the asset.

 

Nevertheless, if the entries were:

Dr. Depreciation Expense 8,333.33 / Cr. Accumulated Depreciation: 8,333.33

Dr. Interest Expense 3,114.18, Liability: 10,382.17 / Cr. Cash in Bank: 13,496.35

I don’t think anyone would mind.


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