FINANCIAL ACCOUNTING II

2022/2023

MSc in Management

CHAPTER 4

RESOLUTION

(EXERCISES 4.3 AND 4.4)

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 EXERCISE 4.3.
a) Journal entries, during N, for the lessee accounting
Date Description Debit Credit Amount Obs
Initial recognition of PPE – Basic Equipment Financing – Finance
Jun. 1, N 35.000,00 i)
the asset (433) Lease (2513)
Financing – Finance
2.531,30
Lease (2513)
Financing expenses –
Interest expenses 700,00
Sep. 1, N 1st instalment (691)
GOPE – VAT
743,20
Deductible (24322)
Bank Deposits (12) 3.974,50
Financing – Finance
2.581,92
Lease (2513)
Financing expenses –
Interest expenses 649,37
Dec. 1, N 2nd instalment (691)
GOPE – VAT
743,21
Deductible (24322)
Bank Deposits (12) 3.974,50
PPE –
Depreciation Accumulated
Annual depreciation 2.552,08 ii)
expenses – PPE (642) depreciations
(438)
Dec. 31, N
Other accounts
Financing expenses –
Interest of the payable – Accrued
Interest expenses 199,25 iii)
period expenses
(691)
creditors (2722)
i) Can be also recognized on Other Accounts Payable – Investment suppliers (271), as a transitory movement.
ii) Assuming that the asset became available for its intended use on June of N:
Annual depreciation = (35.000/8)/12 x 7 = 2.552,08
iii) Lease liability – 35.000 + (700+649,37) – (3.231,30 x 2) = 29.886,78
Interest expense – 29.886,78 x 0,02 / 3 = 199,25€

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According to §32 of IFRS 16, “If the lease transfers ownership of the underlying asset to the lessee by the
end of the lease term or if the cost of the right-of-use asset reflects that the lessee will exercise a
purchase option, the lessee shall depreciate the right-of use asset from the commencement date to the
end of the useful life of the underlying asset.”

b) Journal entries for the purchase option by the lessee, at the end of the lease.

Date Description Debit Credit Amount Obs

Financing – Finance
1.050,00
Lease (2513)
Purchase option used
Jun. N+3 GOPE – VAT
by the lessee 241,50
Deductible (24322)
Bank deposits (12) 1.291,50

c) If the asset was acquired without purchase option, what differences would occur in the lessee
accounting at recognition? Justify your answer according to IFRS 16. Prepare the journal entry.

“At the commencement date, a lessee shall measure the lease liability at the present value of the lease
payments that are not paid at that date. The lease payments shall be discounted using the interest rate
implicit in the lease (…)” (§26 of IFRS 16).

Because the residual value is unguaranteed and there is no purchase option, Present Value is computed
only for the 12 rents of 3.231,30.

PV = 3.231,30 x (1+2%)-1 + 3.231,30 x (1+2%)-2 + …. + 3.231,30 x (1+2%)-12 = 34.172,10

Date Description Debit Credit Amount Obs

Initial recognition of PPE – Basic Equipment Financing – Finance
Jun. 1, N 34.172,10
the asset (433) Lease (2513)

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 EXERCISE 4.4.
1) Compute Provisions’ carrying amount for years N and N-1. Explain its meaning.

The carrying amount on Provisions (non-current liability) was 1.564.975 euros on 31/12/N and
1.358.333 euros on 31/12/N-1. Those values match with present obligations resulting from past
events and a probable outflow of resources is expected, although time and amount are uncertain
(estimation).
According with §14 of IAS 37, a provision should only be recognized when:
a) an entity has a present obligation (legal or constructive) as a result of a past event;
b) it is probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; and
c) a reliable estimate can be made of the amount of the obligation.
If these conditions are not met, no provision shall be recognised.

2) Explain the difference between “Provisions” and “Impairments”. Discuss possible elements
of convergence between the two concepts.
According with §10 of IAS 37, a Provision is a liability of uncertain in timing or amount. Therefore,
provisions are recognized as “Liability”, different from other liabilities (such as accounts payable,
salaries and wages payable) due to the uncertain in timing or amount (estimation). Impairments are
losses on Assets, that represent the exceeding amount between the carrying amount and the
recoverable amount.

However, the two concepts converge in the following aspects:

1. They are “Expenses” with impact in the income statement (Provision expenses (67) and
Impairment loss expenses (65));
2. Both values are probable and represent potential losses of uncertain in timing and amount;
3. At the recognition there is no cash outflow, therefore they do not operate any change in the
Statement of Cash Flow.

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 3) Identify if the following statements are True or False:

a. During year N, the company did not recognize any provisions.

FALSE. On year N the company recognize provisions by the amount of 250.000 euros.

b. Provisions disclosed in the statement of financial position are related with clients’
warranties.
FALSE. The amount of 1.564.975 euros registered in the statement of financial position is the best
estimate to support potential losses with legal and tax processes in course (recognized as
Provisions – Lawsuits (293)).

c. During year N no provisions were used.

TRUE. According with note 23 no provisions were used.

d. The company does not disclose any contingent liabilities.

TRUE. According with note 23 “Provisions and contingencies”, the Board decided to disclose that
on 31/12/N there were no contingencies.

4) Journal entries on January, N+1.

No. Description Debit Credit Amount

Provisions – Lawsuits Reversals – Provisions –
a. Provision reversal 250.000
liabilities (293) Lawsuits (7633)
Provision expenses – Provisions –
Provision for company’s
b. Restructuring liabilities Restructuring liabilities 2.000.000
restructuring plan
(677) (297)

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 5) Explain the reason why contingent liabilities should not be recognized and are only
disclosed.

According with §10 of IAS 37 a contingent liability is:

a) a possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the entity; or
b) a present obligation that arises from past events but is not recognised because:
i. it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
ii. the amount of the obligation cannot be measured with sufficient reliability.

According with §13 of IAS 37, contingent liabilities are not recognized as liabilities because they
are possible obligations and not probable obligations. Present obligations or a future outflow of
resources need confirmation and a sufficiently reliable estimate of the amount of the obligation
may not be possible. Therefore, contingencies are only disclosed.

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