Seminar 7 Q1

Team 2
Shermaine Ang
Jonathan Tay
Nadya Nadhirah
Koo Kai Siang

1
Part I - (1)

For a lease contract under SFRS(I) 16 Leases, the lease

payments (LPs) for the lessee and the lessor must
necessarily always be the same.

TRUE OR FALSE?

2
Part I - (1)
Lessor Lessee

LPs for lessor represent future economic LPs for lessee represent future obligations
benefits to lessor under lease contract for payments by lessee under lease contract

Lessor’s LPs include guaranteed residual Lessee’s LPs include amounts expected to be
value (GRV) payable under a residual value guarantee

GRV - guarantee made to lessor by party **Guaranteed residual value minus expected
unrelated to lessor: lessee or any third party residual value of the asset at end of lease
term. Does not include amounts guaranteed
Slide 24 of Seminar 4 by a party related to the lessee. (eg. parent of
lessee)
FALSE
Slide 7 of Seminar 4 3
Part I - (1)
(Refer to SFRS(I) 16 Leases Appendix A Lease Payments)

For lessee, LPs include amounts expected to be payable by the lessee under RV guarantees. Lessee
payments do not include payments allocated to non-lease components of a contract, unless the
lessee elects to combine non-lease components with a lease component and to account for
them as a single lease component.

For the lessor, LPs include any residual value guarantees provided to the lessor by the lessee, a party
related to the lessee or a third obligations under the guarantee. LPs do not include payments
allocated to non-lease components.

4
Part I - (2)
For a lease contract under SFRS(I) 16 Leases, the existence
of a purchase option whose exercise by the lessee is
reasonably certain implies that there will be no
guaranteed or unguaranteed residual value accruing to
the lessor.

TRUE OR FALSE?

5
Part I - (2)
TRUE

Refer to SFRS(I) 27(d)

6
Part I - (3)

In a sale and leaseback under SFRS(I) 16, there is a

genuine sale only if the buyer-lessor accounts for the
lease as an operating lease and not as a finance lease.

TRUE OR FALSE?

7
Part I - (3)
FALSE

To determine whether there is a genuine sale → Apply SFRS(I) 15 / (FRS 115)

● Transfer control of good/service to buyer-lessor

● Performance obligations satisfied
● Risks associated transferred to buyer-lessor etc.

If transfer of asset is NOT a sale: SFRS(I) 16 requires seller-lessee and buyer-lessor to account for SLB
transaction as financing transaction

Whether the buyer-lessor accounts for lease as operating or finance lease is NOT the criteria to
determine whether there is a genuine sale

8
Part II (Discuss if these are lease transactions)
SFRS(I) 16:B9
To assess whether a contract conveys the right to control the use of an
identified asset (refer to paragraphs B13-B20) for a period of time, an entity
shall assess whether, throughout the period of use, the customer has both of
the following:

(a) the right to obtain substantially all of the economic benefits from use of
the identified asset (refer to paragraphs B21-B23); and

(b) the right to direct the use of the identified asset (refer to paragraphs
B24-B30)
9
SFRS(I) 16:B31
Flowchart

10
Is there an Does the customer Does the customer, Does the customer
identified asset? have the right to the supplier, or Neither; have the right to
how and for operate the asset
(SFRS(I) Yes obtain substantially Yes neither party, have what purpose
16:B13-B20) all of the economic the right to direct the asset will throughout the period
benefits from use of how and for what be used is of use (or to direct
predetermined. others to operate the
the asset purpose the asset is
throughout the used throughout the asset in a manner it
period of use? period of use? determines), without
(SFRS(I) 16:B21- (SFRS(I) 16:B25- the supplier having
B23) B30) the right to change
those operating
No
instructions?
Customer has Yes
(SFRS(I)
No the right to direct
Supplier has the how and for what 16:B24(b)(i))
right to direct purpose
how and for what No
purpose

I’M SORRY, THAT’S YES THAT’S A

NOT A LEASE. LEASE! (contract Did the customer
Yes
(contract does not contains a lease) design the asset in a
contain a lease) way that predetermines
how and for what
purpose the asset will
be used throughout the
No period of use? (SFRS(I)
16:B24(b)(ii)) 11
Part II - (1)
Entity A enters into a contract with an airport operator to use a space
in the airport to sell its goods. The contract states that the space
may be located at any one of several boarding areas within the
airport. The operator has the right to change the location of the
space allocated to entity A at any time during the period of use. There
are minimal costs to the operator to change space for entity A. Entity
A uses a kiosk (that it owns) that can be moved easily to sell its goods.
There are many areas in the airport that are available and that would
meet the specifications for the space in contract.

12
 Is there an Assuming

Part II - (1)
identified asset? that airport
(that the space is the
customer uses?) identified
asset SFRS(I) 16:B14(a)
Entity A
controls its Airport Operator can
own kiosk change the space
Entity A uses

SFRS(I) 16:B14(b)

No Minimal costs to the

operator to change
space for Entity A

Entity A does not have

I’M SORRY, the right to use the
THAT’S NOT A “space” because the
LEASE. (contract Airport Operator has the
does not contain a substantive right to
lease) substitute the asset
throughout period of
use.
13
Part II - (2)
Entity B enters a contract with an electricity supplier
(which operates several power plants) to purchase all
electricity produced by a specific power plant for ten
years. The electricity power plant is for the use of entity B,
which will accept all electricity produced by the plant,
the quantum of which is decided by the supplier.

14
Is there an Does the customer Does the customer, Neither; Does the customer
how and for have the right to
identified asset? have the right to the supplier, or what purpose
Yes obtain substantially Yes neither party, have the power plant operate the asset
Specified: all of the economic the right to direct will be used throughout the period
has been of use (or to direct
Power plant benefits from use of how and for what predetermined -
the asset purpose the asset is essentially its others to operate the
throughout the used throughout the purpose is to asset in a manner it
produce determines), without
period of use? period of use? electricity.
(SFRS(I) 16:B25- the supplier having
Entity B obtains B30) the right to change
the entire those operating
economic benefit: instructions?
electricity - Did the customer
primary output of Entity B cannot
design the asset in a
the power plant determine the
way that predetermines
(SFRS(I) 16:B21) quantity of
how and for what
electricity
purpose the asset will
produced. (SFRS(I)
be used throughout the
I’M SORRY, 16:B24(b)(i))
period of use?
THAT’S NOT A
LEASE.
No Power plant wasn’t
(contract does No
designed by Entity B.
not contain a
(SFRS(I) 16:B24(b)(ii))
lease)

15
Part II - (3)
Entity C enters into a contract with an aircraft owner for the use of an explicitly
specified aircraft. The contract details the interior and exterior aircraft
specifications. There are contractual and legal restrictions in the contract
on where the aircraft can fly. Subject to those restrictions, entity C determines
where and when aircraft can fly, and which passengers will be
transported. The owner is responsible for operating the aircraft, using its own
crew. Entity C is prohibited from hiring another operator for the aircraft, or
operating the aircraft itself during contractual term. The owner is permitted to
substitute the aircraft at any time during the contractual period, and any
substitute aircraft must meet the interior and exterior specifications in contract.
There are significant costs to outfit an aircraft in owner’s fleet to meet entity
C’s specifications. 16
Part II - Is there an Does the customer Does the customer, the

(3)
identified asset? have the right to supplier, or neither party, have
Yes obtain substantially Yes the right to direct how and for
Explicitly all of the economic what purpose the asset is used
specified benefits from use of throughout the period of use?
aircraft. the asset
throughout the Yes. Entity C determines
No Substantive period of use? when, where and who flies on
substitution the aircraft. (SFRS(I)
rights due to Economic Benefit: 16:B24(a),B26(c))
high cost of Usage of the
substitution. aircraft Contractual and legal
Thus, (SFRS(I) 16:B21) restrictions: SFRS(I) 16:B30 -
condition in these protective rights define
SFRS(I) the scope of Entity C’s use
16:B14(b) is Customer has the but do not, in isolation,
not fulfilled. right to direct how prevent the customer from
and for what having the rights to direct the
purpose use of the aircraft.

YES THAT’S A
LEASE! (contract
contains a lease)
17
Part II - (4)
Entity D leases an asset to entity E for its entire
economic life and then leases the same asset back
under the same terms and conditions as the original lease.
The two entities have a legally enforceable right to set
off the amounts owing to one another, and an intention to
settle the amounts on a net basis.

18
 FASB’s New Standard Brings Most Leases
IFRS 16 – a new era of lease accounting!
https://www.pwc.com/gx/en/audit-
Onto the Balance Sheet
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/ASC/HU/2016/us-
services/ifrs/publications/ifrs-16/ifrs-in-depth-a-new- aers-headsup-fasb-new-standard-brings-most-leases-onto-the-balance-sheet.pdf
era.pdf

19
Part II - (4) Entity D Head Lease
Entity E
(Head (Intermedia
Lessor) Sublease te Lessor)

- Head Lease: Classified as a Finance Lease (entire economic

life)

- Sublease: Classified as a Finance Lease (entire economic

life, long-term lease SFRS(I) 16:B58)

- As such, right-of-use asset is now classified back in Entity

D’s books.

20
 Part II - (4)
Indicators that demonstrate that an arrangement may not, in substance, involve
a lease:

(a) an entity retains all the risks and rewards incident to ownership of an
underlying asset and enjoys substantially the same rights to its use as before the
arrangement;

(b) the primary reason for the arrangement is to achieve a particular tax result, and not
to convey the right to use an asset;

Evaluating the Substance of Transactions Involving the Legal Form of a Lease (AASB):
https://www.aasb.gov.au/admin/file/content105/c9/INT127_07-04.pdf
21
 Part II - (4)
Verdict:
The terms and conditions and period of each of the leases are the
same. Therefore, the risks and rewards incident to ownership
of the underlying asset are the same as before the
arrangement. Further, the amounts owing are offset against
one another, and so there is no retained credit risk. The
substance of the arrangement is that no lease transaction has
occurred.
Evaluating the Substance of Transactions Involving the Legal Form of a Lease (AASB):
https://www.aasb.gov.au/admin/file/content105/c9/INT127_07-04.pdf
22
 Is there an Does the customer have the

Part II - (4)
identified asset? right to obtain substantially all
Yes of the economic benefits from
The “asset” use of the asset throughout
the period of use?

Economic Benefit: Using

indirectly by subleasing -
supposed to obtain cash
flows from sublease, but it
is legally set off as the asset
is subleased back to the
No head lessor.
(SFRS(I) 16:B21)

I’M SORRY, THAT’S

NOT A LEASE.
(contract does not
contain a lease)

23
 Part III
To raise operating funds, Casuarina Ltd sold a tractor on 1 January 20x1 to a finance
company for $770,000.

Casuarina Ltd immediately leased the tractor back for an 11-year period. At the end of the
lease period, the tractor will return to the finance company with an expected residual value
of $195,000. On sale date, the tractor has a fair value of $800,000. Its net book value was
$620,000 (cost of $820,000 and accumulated depreciation of $200,000). The tractor has a
remaining useful life of 15 years, and will have zero residual value at the end of its useful
life. The lease requires Casuarina to make payments of $102,788 to the finance company
each January with the first payment on 1 January 20x1. The lease has an implicit interest
rate of 11%.

Casuarina Ltd has a 31 December financial year end and complies with SFRS(I) 16 Leases.
The company depreciates property, plant and equipment on a straight-line basis.
24
Part III - (a)
Assume that the transfer by Casuarina Ltd satisfied the
requirement of SFRS(I) 15 to be accounted for as a sale of
the asset. Prepare the journal entries for Casuarina Ltd on
1 January 20x1 and 31 December 20x1 to record the
transactions associated with the sale-leaseback.

25
Part III (a)
To calculate lease liability using FC,

n= 11 IY= 11 PMT= 102,788 FV=0

PV= lease liability= $708,130

ROU Asset =

= $572,051

Gain on rights transferred=

= $13,921

26
1/1/20x1
Dr Cash 770,000

ROU Asset 572,051

Acc Dep 200,000

Cr Equipment 820,000

Gain on rights transferred 13,921

Lease liability 708,130

Dr Lease Liability 102,788

Cr Cash 102,788
27
31/12/20x1
Dr Interest expense 66,588 (708,130-102788) x 0.11

Cr Interest payable 66,588

Dr Depreciation expense 52,005 572,051/11

Cr Accumulated Depreciation 52,005

28
Part III - (b)
Assume all other information remains the same as in (a),
except that the tractor was sold for $850,000 to raise
operating funds. Casuarina continues to be charged an
implicit interest rate of 11%. Prepare the journal entries
for Casuarina Ltd on 1 January 20x1 and 31 December
20x1 to record the transactions associated with the sale-
leaseback.

29
Part III - (b)
To find ALP using FC, BGN

n=11 IY= 11 pv= -850,000 fv= 195,000

PMT= ALP= $114,400

To find lease liability using FC,

n=11 IY=11 PMT= -114,400 FV=0

PV= lease liability= $788,128

ROU asset = = $572,049

Gain on rights transferred =

= $13,921

30
1/1/20x1
Dr Cash 850,000

ROU Asset 572,049

Acc Dep 200,000

Cr Equipment 820,000

Gain on rights transferred 13,921

Lease liability 788,128

Dr Lease Liability 114,400

Cr Cash 114,400
31
31/12/20x1
Dr Interest expense 74,110 (788,128-114,400) x 0.11

Cr Interest payable 74,110

Dr Depreciation expense 52,005 572,051/11

Cr Accumulated Depreciation 52,005

32
Part III - (c)
Assume all other information remains the same in (a),
except the lease term was for 15 years, and the transfer
of the asset by Casuarina Ltd did not meet the
requirements of SFRS(I) 15 as a sale of the asset.
Casuarina continues to charge an implicit interest rate of
11%. Prepare the journal entries for Casuarina Ltd on 1
January 20x1 and 31 December 20x1 to record the
transactions associated with the sale-leaseback.
33
Part III - (c)
Since transfer of asset did not met requirements of SFRS(I) 15, the sale and leaseback transaction
should be accounted for as a financing transaction.

Residual value of asset is $0 after its full useful life of 15 years

To find “ALP” (which is this case is loan payable) using FC,

n=15 IY=11 pv=770,000 fv =0

PMT = ALP = $96,469

34
1/1/20x1
Dr Cash 770,000

Cr Loan Payable 770,000

Dr Loan Payable 96,469

Cr Cash 96,469

35
31/12/20x1
Dr Interest Expense 74,088 (770,000-96,469) x 0.11

Cr Interest Payable 74,088

Dr Depreciation Expense 41,333 620,000/15

Cr Accumulated Depreciation 41,333

36
 Acknowledgements
1. SFRS(I) 16 Leases

(from: https://www.asc.gov.sg/CEPafter1Jan2018)

2. SFRS(I) 16 Leases (Illustrative Examples)

(from: https://www.asc.gov.sg/CEPafter1Jan2018)

3. Evaluating the Substance of Transactions Involving the Legal Form of a Lease (AASB)

(from: https://www.aasb.gov.au/admin/file/content105/c9/INT127_07-04.pdf)

4. IFRS 16 – a new era of lease accounting! (PWC)

(from: https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-16/ifrs-in-depth-a-new-era.pdf)

5. FASB’s New Standard Brings Most Leases Onto the Balance Sheet (Deloitte)

(from: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/ASC/HU/2016/us-aers-headsup-fasb-new-standard-brings-most-leases-onto-the-balance-sheet.pdf

37
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