IFRS-16 : LEASES PAST PAPERS

Question 1 (D-20)

Health Pharma Limited (HPL) entered into the following arrangements during 2019:
On 1 January 2019, HPL acquired a capsule manufacturing machine from Hi-Tech Industries Limited for a lease
term of 5 years with instalments payable annually in advance. The useful life of the machine was estimated at 6
years.
1. HPL paid the 1st instalment of Rs. 50 million on 1 January 2019. However, subsequent lease payments are
subject to increase/decrease in line with consumer price index (CPI). At lease inception, HPL estimated that
CPI will increase by 10% annually. However, CPI increased by 14% in 2019 and consequently Rs. 57 million was
paid on 1 January 2020 as 2nd instalment. At 31 December 2019, HPL estimated that the annual increase in
CPI will continue to be 14% in future years.
HPL is also required to pay a usage fee of Rs. 0.3 per capsule produced in excess of 30 million capsules per
annum from the machine. At lease inception, HPL planned to produce 40 million capsules each year during
the lease term. During 2019, HPL produced 40 million capsules and accordingly an amount of Rs. 3 million was
also paid along with 2nd instalment.

2. On 1 April 2019, HPL entered into a contract with Auto Limited (AL) for the use of 8 Refrigerated Trucks for a
period of 3 years at semi-annual payment of Rs. 10 million payable in arrears. AL is also required to provide
two drivers along with each truck. The amount of Rs. 10 million can be allocated to the trucks’ rental and
drivers’ cost in the ratio of 70:30 respectively.
All costs pertaining to running and maintenance of trucks, would be paid by AL. However, HPL is required to
reimburse 30% of the fuel cost to AL. Fuel cost for 2019 was Rs. 4 million. HPL paid its share of fuel cost in
2020.
HPL uses these trucks for transportation of inventory all over the country. In order to save fuel and time, AL
often replaces a similar truck at the required location from one of AL’s nearby office. AL is also required to
provide a substitute truck in case of accident and maintenance work.

3. On 1 July 2019, HPL sold its warehouse building to Macro Finance Limited (MFL) for cash of Rs. 1,400 million.
Immediately before the transaction, the building was carried at Rs. 900 million and had remaining useful life
of 18 years. At the same time, HPL entered into a contract with MFL for the right to use the warehouse
building for 10 years, with annual payment of Rs. 180 million payable in arrears. Fair value of the building at
the date of sale was Rs. 1,500 million. The rate of interest implicit in the lease is 11% per annum.
The terms and conditions of the transaction are such that the transfer of the building by HPL satisfies the
requirements for determining when a performance obligation is
satisfied in IFRS 15.
HPL's incremental borrowing rate is 12% per annum.

Required:
Prepare the extracts relevant to the above transactions from HPL's statement of financial position and statement
of profit or loss for the year ended 31 December 2019 in accordance with the IFRS. (Comparative figures and
notes to the financial statements are not required) (20)

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Question 2 (J-19)
On 1 January 2018, FL acquired a building on lease for a non-cancellable period of 6 years. Lease contains rent
free period of 2 years and 4 annual rentals of Rs. 60 million each are payable starting from the end of 3rd year.
Applicable discount rate is 12%. Nothing has been recorded in the FL’s books in this respect.
Required:
Discuss how the above transactions/events should be dealt with in FL’s books for the year ended 31 December
2018. (Show all calculations wherever possible. Also mention any additional information needed to account for
the above transactions/events) (03)

Question 3 (D-18)

On 1 January 2015, Datsun Motors Limited (DML) acquired a machine on lease through Bolan Leasing Company
(BLC) to manufacture components of a new model of vehicle, on the following terms:

(i) Non-cancellable lease period is 7 years.

(ii) The agreement contains an option for DML to extend the lease for further 3 years in which case the legal
title of the machine will be transferred to DML at the end of 10 years.
(iii) Lease installments are payable annually in advance as under:
 first seven installments at Rs. 80 million each.
 three installments at Rs. 70 million each for the optional period.

DML also incurred initial direct cost of Rs. 15 million for the lease. DML's incremental borrowing rate on 1 January
2015 was 8% per annum. Useful life of the machine is 12 years.
On commencement of the lease, DML was reasonably certain that the option to extend the term will be exercised.
However, after first year of production of the new model, DML assessed that the model is not popular in the
market. Therefore, in 2016, DML concluded that it is not reasonably certain that DML would exercise the option
to extend the lease for three years. DML's incremental borrowing rate on 1 January 2016 was 9% per annum.
Advanced Accounting and Financial Reporting Page 5 of 6
After another disappointing year of the new model, DML negotiated with BLC and the lease contract was
amended on 1 January 2017 by reducing the original lease term from 7 years to 5 years with the same annual
payments. DML's incremental borrowing rate on 1 January 2017 was 10% per annum.

Required:
Determine the amounts of ‘Right of use asset’ and ‘Lease liability’ as at 31 December 2015, 2016 and 2017 and
reconcile the opening and closing balances of each year. (17)

Question 4 (D-17)

a) Following are the details of lease related transactions of Patel Limited (PL):
On 1 July 2015 PL acquired a plant for lease term of 5 years at Rs. 18 million per annum, payable in arrears. Fair value
and useful life of this plant as on 1 July 2015 were Rs. 60 million and 6 years respectively. Bargain purchase option at

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the end of lease term would be exercisable at Rs. 1 million. On July 2015 PL’s incremental borrowing rate was 9% per
annum.
After one year, PL sub-let this plant for Rs. 21 million per annum, payable in arrears for lease term of 5 years.
Implicit rate of this transaction was 11% per annum. (06)

b) On 1 July 2014, PL acquired a building for its head office for lease term of 8 years at Rs. 50 million per annum,
payable in arrears.
However, after the board’s decision of constructing own head office building, PL negotiated with the lessor and
the lease contract was amended on July 2016 by reducing the original lease term from 8 to 6 years with same
annual payments.
Incremental borrowing rates on 1 July 2014 and 1 July 2016 were 12% and 10% per annum
respectively. (07)

Required:
Prepare the extracts relevant to the above transactions from PL’s statements of financial position and profit or
loss for the year ended 30 June 2017, in accordance with the International Financial Reporting Standards.
(Comparatives figures and notes to the financial statements are not required)

Question 5 (J-16)

United Front (Private) Limited (UFPL) is a company engaged in manufacturing and marketing of automotive
components for auto assemblers in Pakistan. On 1 January 2015 the company entered into two sale and leaseback
agreements with Sun Leasing Limited.
The details of machines sold and leased back under the two agreements are as under:
Machine-A Machine-B
Date of purchase 1-Jan-10 1-Jan-13
Cost (Rs. in million) 150 48
Useful life (in years) 10 10
Sale price to the lessor (Rs. in million) 78 41
Fair market value (Rs. in million) 80 44
The terms of lease agreements are as follows:

Machine-A Machine-B
Lease term 5 years 3 years
Annual rentals (Rs. in million) 18.283 4
Installment due in arrears in advance
Down payment 10% Nil

The market interest rate is 9.5% per annum while the market rates of rentals for machines similar to Machine-A
and Machine-B are Rs. 19 million and Rs. 7 million per annum respectively.

Required:
Prepare the relevant extracts from the statements of financial position and comprehensive income for the year
ended 31 December 2015, in accordance with the International Financial Reporting Standards. (18)

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Solution 1

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Solution 2

Even though the agreement contains a rent-free period of two years, right of use asset and
corresponding lease liability should be recognized in the books on 1 January 2018 at the present value
of lease payment
i.e. Rs. 145 million [60×1.12–2×{(1–1.12–4)÷0.12}]
Depreciation of Rs. 24.2 million (145÷6) should be recognized.
Interest of Rs. 17.4 million (145×12%) would be recognized making the lease liability to Rs. 162.4
million.

Solution 3

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Solution 4

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Solution 5

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