IFRS 16 Leases

Prepared and compiled by:

Dr Adibah Jamaluddin (UiTM)
Rabiaini Ab. Rahman (UiTM)
Nur Syuhada Adnan (INTEC)
Ummi Raihana Mohd Sani (INTEC)

1. Amended FM1215_Q15 / Amended FM1216_Q12

An entity enters into a finance lease on 1 January 20X1 to lease an item of equipment for 6 years for $100,000 per
annum payable in advance commencing on 1 January 20X1. The present value of the total lease payments is
$484,000. The interest rate implicit in the lease is 9.5%.

How much is the lease liability reported in non-current liabilities in the statement of financial position as at 31
December 20X1?

$________________

2. PRK Q171
On 1 January 20X6 Fellini hired a machine under a lease. The present value of the lease payments was $3.3 million.
Instalments of $700,000 are payable annually in advance with the first payment made on 1 January 20X6. The
interest rate implicit in the lease is 6%.

What amount will appear under non-current liabilities in respect of this lease in the statement of financial
position of Fellini at 31 December 20X7? [Answers to nearest $'000]

$_________________

3. PRK Q172

Which of the following situations does NOT suggest that an arrangement constitutes a lease?

A. The lessee obtains substantially all of the economic benefits from use of the asset.
B. Ownership in the asset is transferred at the end of the lease term.
C. The contract relates to an identified asset.
D. If it suits them to do so, the lessor can substitute an identical asset.

4. PRK Q173
A company acquired an item of plant under a lease on 1 April 20X7. The present value of the lease payments was
$15.6 million and the rentals are $6 million per annum paid in arrears for three years on 31 March each year.
The interest rate implicit in the lease is 8% per annum.

What amount will appear under current liabilities in respect of this lease in the statement of financial position at
31 March 20X8? [Answers to nearest $'000]

$_________________
5. PRK Q174
At what amount does IFRS 16 Leases require a lessee to measure a right-of-use asset acquired under a lease?

A. Lease liability + other direct costs + incentives received

B. Lease liability – other direct costs – prepayments
C. Lease liability + other direct costs + prepayments – incentives received
D. Lease liability – other direct costs – prepayments + incentives received

6. PRK Q175
On 1 October 20X3, Fresco acquired an item of plant under a five-year lease agreement. The initial measurement
of the right-of-use asset was $25 million. The agreement had an implicit finance cost of 10% per annum and
required an immediate deposit of $2 million and annual rentals of $6 million paid on 30 September each year for
five years.

What will be the interest charged in respect of this lease in Fresco's statement of profit or loss as at 30
September 20X5?

$_________________

7. PRK Q176
The objective of IFRS 16 Leases is to prescribe the appropriate accounting treatment and required disclosures in
relation to leases.

Which TWO of the following are among the criteria set out in IFRS 16 for an arrangement to be classified as a
lease?

The lessee has the right to substantially all of the economic benefits from use of the asset.
The lease term is for substantially all of the economic life of the asset.
The agreement concerns an identified asset which cannot be substituted.
The lessor has the right to direct the use of the asset.

8. PRK Q177
Tourmalet sold an item of plant for $50 million on 1 April 20X4. The plant had a carrying amount of $40 million at
the date of sale, which was charged to cost of sales. On the same date, Tourmalet entered into an agreement to
lease back the plant for the next five years (being the estimated remaining life of the plant) at a cost of $14 million
per annum payable annually in arrears. An arrangement of this type is normally deemed to have a financing cost of
10% per annum. Tourmalet retained the rights to direct the use of and retain substantially all the remaining
benefits from the plant.

What amount will be shown as income from this transaction in the statement of profit or loss for the year ended
30 September 20X4?

$___________________

9. PRK Q178
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset.

If the arrangement meets the IFRS 15 criteria to be recognised as a sale, how should any 'profit' on the sale be
treated?

Recognise whole amount of profit immediately in profit or loss

Defer profit and amortise over the lease term
 Recognise proportion relating to right of use retained
Recognise proportion relating to right of use transferred

10. PRK Q179

During the year ended 30 September 20X4 Hyper entered into two lease transactions:
On 1 October 20X3 a payment of $90,000, being the first of five equal annual payments of a lease for an item of
plant which has a five-year useful life. The lease has an implicit interest rate of 10% and the initial measurement of
the right-of-use asset and the lease liability on 1 October 20X3 was $340,000.

On 1 August 20X4 a payment of $18,000 for a nine-month lease of an item of excavation equipment.

What amount in total would be charged to Hyper's statement of profit or loss for the year ended 30 September
20X4 in respect of the above transactions?

$_________________

11. PRK Q180

On 1 January 20X6 Platinum entered into a lease agreement. The right-of-use asset was $360,000 and the terms of
the lease were a deposit of $120,000 payable on 1 January 20X6 and three further instalments of $100,000 payable
on 31 December 20X6, 31 December 20X7 and 31 December 20X8. The rate of interest implicit in the lease is 12%.

What will be the amount of the finance charge arising from this lease which will be charged to profit or loss for
the year ended 31 December 20X7?

$__________________

12. Kap Q76

During the year ended 30 September 20X4 Hyper entered into two lease transactions.

On 1 October 20X3, Hyper made a payment of $90,000 being the first of five equal annual payments under a lease
for an item of plant. The lease has an implicit interest rate of 10% and the present value of the total lease
payments on 1 October 20X3 was $340,000.

On 1 January 20X4, Hyper made a payment of $18,000 for a one-year lease of an item of equipment.

What amount in total would be charged to Hyper’s statement of profit or loss for the year ended 30 September
20X4 in respect of the above transactions?

$_________________

13. Kap Q77

Z entered into a lease agreement on 1 November 20X2. The lease was for five years, the present value of the lease
payments was $45,000 and the interest rate implicit in the lease was 7%. The annual payment was $10,975 in
arrears.

What is the amount to be shown within non-current liabilities at 31 October 20X3?

A. $26,200
B. $28,802
C. $37,175
D. $36,407
14. Kap Q78
IFRS 16 Leases permits certain assets to be exempt from the recognition treatment for right-of-use assets.

Which of the following assets leased to an entity would be permitted to be exempt?

A. A used motor vehicle with a cost of $15,000, fair value of $700, leased for 24 months
B. A new motor vehicle with a cost of $15,000, leased for 24 months
C. A new motor vehicle with a cost of $15,000, leased for 24 months, to be rented to customers on a daily
rental basis
D. A new motor vehicle with a cost of $15,000, leased for 12 months

15. Kap Q79

On 1 January 20X3 Rabbit acquires a new machine with an estimated useful life of 6 years under the following
agreement:
An initial payment of $13,760 will be payable straight away
5 further annual payments of $20,000 will be due, beginning on 1 January 20X3 The interest rate implicit in the
lease is 8%
The present value of the lease payments, excluding the initial payment, is $86,240.

What will be recorded in Rabbit’s financial statements at 31 December 20X4 in respect of the lease liability?

Finance cost Non-current liability Current liability

A. 4,123 35,662 20,000
B. 5,299 51,539 20,000
C. 5,312 51,712 20,000
D. 5,851 43,709 15,281

16. Kap Q80

On 1 April 20X7 Pigeon entered into a 5-year lease agreement for a machine with an estimated life of 7 years.

Which of the following conditions would require the machine to be depreciated over 7 years?

A. Pigeon has the option to extend the lease for two years at a market-rate rental
B. Pigeon has the option to purchase the asset at market value at the end of the lease
C. Ownership of the asset passes to Pigeon at the end of the lease period
D. Pigeon’s policy for purchased assets is to depreciate over 7 years

17. Kap Q81

On 1 January 20X4 Badger entered into a lease agreement to lease an item of machinery for 4 years with rentals of
$210,000 payable annually in arrears. The asset has a useful life of 5 years and at the end of the lease term legal
ownership will pass to Badger. The present value of the lease payments at the inception of the lease was $635,000
and the interest rate implicit in the lease is 12.2%. For the year ended 31 December 20X4 Badger accounted for
this lease by recording the payment of $210,000 as an operating expense. This treatment was discovered during
20X5, after the financial statements for 20X4 had been finalised.

In the statement of changes in equity for 20X5 what adjustment will be necessary to retained earnings brought
forward?

Debit/ Credit Amount ($)

18. Kap Q82
Owl leases an asset with an estimated useful life of 6 years for an initial period of 5 years and an optional
secondary period of 2 years during which a nominal rental will be payable. The present value of the initial period
lease payments is $87,000.
What will be the carrying amount of the asset in Owl's statement of financial position at the end of the second year
of the lease?

$_____________

19. Kap Q83

On 1 January 20X6, Sideshow sold a property for its fair value of $2 million, transferring title to the property on
that date. Sideshow then leased it back under a 5-year lease, paying $150,000 per annum on 31 December each
year. The present value of rentals payable was $599,000 and the interest rate implicit in the lease was 8%. The
carrying amount of the property on 1 January 20X6 was $1.6 million and it had a remaining useful life of 20 years.

What entries would be made in Sideshow’s statement of profit or loss for the year ended 31 December 20X6?

A. Profit on disposal of $280,200, depreciation of $95,840, finance cost of $47,920

B. Profit on disposal of $400,000, rental expense of $150,000
C. Profit on disposal of $400,000, depreciation expense of $95,840, finance cost of $47,920
D. Profit on disposal of $280,200, depreciation of $119,800, finance cost of $47,920

20. Kap Q84

On 1 October 20X3, Fresco acquired an item of plant under a five-year lease agreement. The agreement had an
implicit interest rate of 10% and required annual rentals of $6 million to be paid on 30 September each year for
five years. The present value of the annual rental payments was $23 million.

What would be the current liability for the leased plant in Fresco’s statement of financial position as at 30
September 20X4?

$________________

21. Kap Q85

Which of the following would not be included within the initial cost of a right-of-use asset?

A. Installation costs of the asset

B. Estimated costs of dismantling the asset at the end of the lease period
C. Payments made to the lessor before commencement of the lease
D. Total lease rentals payable under the lease agreement

22. Kap Q86

On 1 January 20X4, Stark entered into a sale and leaseback of its property. When it was sold, the asset had a
carrying amount of $6 million and a remaining life of 10 years. Stark sold the asset for $7 million and leased it back
on a 10 year lease, paying $1 million on 31 December each year. The lease carried an implicit interest rate of 7%.

What is the total expense that should be recorded in the statement of profit or loss for the year ended 31
December 20X4?

$______________
23. Bec_Q14.1
On 1 January 20X7, Melon leased an asset under the following terms:
$
Cash price 18,000
Deposit (16,000)
12,000
Interest (9% for two years) 2,160
Balance 14,160

The balance is payable in two annual instalments commencing 31 December 20X7. The interest rate imlicit in
the contract is approximately 12%.

Applying the requirements of IFRS 16 Leases, what is the finance charge to profit and loss for the year ended
31 December 20X7?

$______________

24. Bec_Q14.2
IFRS 16 Leases requires a lessee to capitalise a right-of-use asset initially at cost.

Which of the following amounts will be included in the initial costs?

1 The amount of lease liability

2 Total interest expense over the period of the lease
3 Initial direct cost incurred by the lessor
4 Estimated cost of dismantling the asset at the end of the lease term

A. 1 and 2
B. 1 and 4
C. 2 and 3
D. 3 and 4

25. Bec_Q14.3
Alpha enters into a lease with Omega of an aircraft which had a fair value of $240,000 at the inception of the
lease. The lease terms require Alpha to pay 10 annual rentals of $36,000 in arrears. Alpha is wholly responsible
for the maintenance of the aircraft which has a useful life of approximately 15 years.

The present value of the 10 annual rentals of $36,000 discounted at the interest rate implicit in the lease is
$220,000.

Applying the requirements of IFRS Lease to this agreement, what is the increase in Alpha’s non-current
assets

$_____________

26. Bec_Q14.4
Acor leases a new machine. The interest rate implicit in the lease is 13% per annum. The initial amount
recognised for the right to use asset is $1,750,000. The lease is for four years and Acor is required to make
four annual payments of $520,000, with the first payment due on commencement of the lease agreement.

Acor’s policy is to depreciate similar machinery over five years on the straight line basis.
 What is the correct total charge to profit and loss for the first year of the lease?

$_______________

27. Bec_Q14.6
During the year ended 30 September 20X4 Hyper entered into two lease transactions:

On 1 October 20X3, a payment of $90,000 being the first of five equal annual payments of a lease for an item
of plant. The lease has an implicit interest rate of 10% and the leased asset was initially measured at $340,000.

On 1 January 20X4, a payment of $18,000 for an eight month lease of an item of excavation equipment.

What amount in total should be charged to Hyper’s statement of profit and loss for the year ended 30
September 20X4 in respect of the above transactions?

$_____________

28. Amended ERJ16_E2

Blue Co entered into a four-year lease agreement on 1 January 20X0. It required payments of $19,000 to be
made annually in arrears. The asset had an estimated economic life of four years and the PVFLP of $60,000
with nil residual value. The interest rate implicit in the lease is 10%.

Blue has incorrectly treated the lease agreement as an operating lease in its financial statements.

What is the effect of the incorrect treatment on Blue Co’s profit for the year ended 31 December 20X0?

A. Overstated by $2,000
B. Understated by $2,000
C. Overstated by $13,000
D. Understated by $13,000

29. ERS17_E1
Jetsam Co entered into a lease for an item of plant on 1 April 20X0 which required payments of $15,000 to be
made annually in arrears. The present value of the lease payments was estimated to be $100,650 at the inception
of the lease and the rate of interest implicit in the lease was 8%. Both the lease term and the plant’s estimated
useful life was ten years.

What is the total amount that should be charged to profit or loss for the right-of-use asset for the year ended 31
December 20X0?

A. $11,250
B. $6,039
C. $7,549
D. $13,588

30. Bec_Amended_S16_Q8
Shiba Co entered into a lease for a right-of-use asset on 1 January 20X7; the lease contract is for four years and the
useful life of the asset is six years. Information relating to the lease is as follows:

Initial lease liability $48,000

Deposit paid on 1 January 20X7 $2,000
Direct costs incurred by Shiba $5,000
Maintenance costs of $2,000 per annum $8,000

What will be the carrying amount of the right-of-use asset as at 31 December 20X8?

$_____________

31. Bec_Amended_n
On 1 October 20X4, Flash Co acquired an item of plant under a five-year lease. The plant was initially recognised at
an amount of $25m. The agreement specified the interest rate implicit in the lease as 10% per annum and required
an immediate deposit of $2m and annual rentals of $6m paid on 30 September each year for five years.

What is the current liability for the leased plant In Flash’s Co statement of financial position as at 30 September
20X5?

$_____________

A.