Question Tag: Right-of-Use Assets

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  • 6 Marks

FR – April 2022 – L2 – Q2b – Financial Reporting Standards and Their Applications

Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for Kundugu Ltd in 2020 and 2021, accounting for a lease agreement under IFRS 16.

b) Kundugu Ltd (Kundugu) is a manufacturing company located in the Savannah Region. The reporting date of Kundugu is 31 December, and the company reports under International Financial Reporting Standards (IFRSs). Kundugu intends to expand its production to take advantage of emerging economic activities in the new region.

On 1 January 2020, the company entered into a lease agreement for production equipment with a useful economic life of 8 years. The lease term is for four years, and Kundugu agrees to pay annual rent of GH¢50,000 commencing on 1 January 2020 and annually thereafter. The interest rate implicit in the lease is 7.5%, and the lessee’s incremental borrowing rate is 10%. The present value of lease payments not yet paid on 1 January 2020 is GH¢130,026. Kundugu paid legal fees of GH¢1,000 to set up the lease.

Required:
Prepare extracts for the Statement of Financial Position and Statement of Profit or Loss for 2020 and 2021, showing how Kundugu should account for this transaction. (6 marks)

Kundugu Ltd
Statements of financial position extract as at 31st
December 2020

Kundugu Ltd


Annual depreciation = GHS181,026 ÷ 4 years GHS 45,257
Initial recognition of right-of-use asset 1 mark Initial recognition of lease liability 0.5 marks
Lease schedule 1.5 mark
SOFP (Extract) 2 marks
SOPL (Extract) 1 mark

  • 3 Marks

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

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

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.

  • Right-of-use asset: The lessee must recognize a right-of-use asset and a lease liability for all leases unless the lease term is less than 12 months or the underlying asset is of low value.
  • Lease liability: The lease liability is measured at the present value of lease payments that are not yet paid, discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate.
  • Depreciation and interest: The right-of-use asset is depreciated, and the lease liability incurs interest over the lease term. These are recorded in the lessee’s financial statements, replacing rental expense with depreciation and interest costs.

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