Leases
CHAPTER 23
Q.1: Solution: The lease asset and liability will be recorded at RM38.5 million, which is the present value of the minimum lease payments. The asset and liability have to be recorded at the lower of fair value and the present value of the minimum lease payments.
Q. 2 Solution: The number of payments is si with a total value of RM5.! million. Payment Opening Interest O!tstan"ing balance 9.3 balance RM RM RM " !,85#,### ' 3,%5#,### "83,()5 !,"33,()5 3 3,'33,()5 "5#,3(5 3,38!,#!# ! ',!8!,#!# ""5,5#8 ',5%%,5!8 5 ",(%%,5!8 )%,#'% ",))8,5)) ( 8)8,5)) *'",!'3 %##,### * rounded up
Payment
Cl#sing balance
RM $%##,###& $%##,###& $%##,###& $%##,###& $%##,###& $%##,###&
RM 3,%5#,### 3,'33,()5 ',!8!,#!# ",(%%,5!8 8)8,5)) #
3.Q: Solution: $a& $an"man $tatement #% pr#%it #r l#ss %#r t&e year en"e" 3' (!ne )* R+ "(#,### !5,### )",)(!
+epreciation on lant $'#- 8##,###& ease rental $mobile liftin/ e0uipment& 1inance char/e 2 see workings
$an"man $tatement #% %inancial %inancial p#siti#n as at 3' (!ne )* R+ ,#n-c!rrent Assets lant and machinery $leased plant&
!8#,###
fallin/ due in less than one year year .Payables : mounts fallin/ 4bli/ations under finance leases $includin/ interest&
'#8,###
in more than one year .Payables : amounts failin/ due in 4bli/ations under finance leases
33),!5'
,#tes t# t&e Acc#!nts #% $an"man $i& $i& 4pe 4perat ratin/ lease pay payment ment comm ommitm itment ents: pirin/: 6et year Two to five years
$ii $ii&
sse ssetts held held unde underr fina inance nce lease eases: s:
lant $iii $iii&&
!5,### "35,###
7ost RM 8##,###
ccumulated +epreciation RM 3'#,###
6et RM !8#,###
4bli 4bli/a /ati tion onss und under er 1ina 1inanc ncee eas easee $see $see workings& workings&
FRS for Malaysia 4th ed
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Lazar & Huang Huang
Leases
ayable net year ayable in two to five years
'#8,### !"(,### ('!,###
ess : 1inance char/es allocated to future periods $5","'! '),!'!& $"5(,8)( 388,5)(&
$)8,5!8& 5!5,!5'
/#r0ings :
9ear ended 3# une
4penin/ 4bli/ation
4utstandin/ 4bli/ation
1inance
7losin/ 4bli/ation
char/e $"5."5-&
RM 8##,### (8",(88 5!5,!5' 388,5)( '#8,###
;3 ;! ;5 ;( ;)
Rental paid
RM '#8,### '#8,### '#8,### '#8,### '#8,### ",#!#,###
RM 5%',### !)3,(88 33),!5' "8#,5)( <
RM
RM 8%,(88 )",)(! 5","'! '),!'! $balance& <
(8",(88 5!5,!5' 388,5)( '#8,### <
'!#,###
3$b& Easylease $tatement #% Pr#%it #r #ss %#r t&e year en"e" 3' (!ne )*
RM '5,### !5,### )",)(!
+epreciation on 0uipment $3#####="'& ease rental income 1inance income 2 see workings
Easylease $tatement #% %inancial p#siti#n as at 3' (!ne * R+ ,#n-c!rrent Assets 0uipment
'5#,###
ease Receiables : mounts fallin/ due in less than one year
'#8,###
ease Receiables: mount fallin/ due in more than one year
33),!5'
,#tes t# t&e Acc#!nts #% $an"man $i& 4peratin/ lease receivable: 6et year Two to five years
$ii&
0uipment
lant $iii&
!5,### "35,###
7ost RM 3##,###
1inance ease Receivable: Receivable net year Receivable in two to five years
FRS for Malaysia 4th ed
ccumulated +epreciation RM 5#,###
6et RM '5#,###
'#8,### !"(,### ('!,###
5%
Lazar & Huang
Leases
ess : 1inance income to future periods $5","'! '),!'!& $"5(,8)( 388,5)(&
$)8,5!8& 5!5,!5'
3$c& $an"man $tatement #% Pr#%it #r #ss %#r t&e year en"e" 3' (!ne * R+ "(#,### !5,### )',###
+epreciation on lant $'#- 8##,###& ease rental $mobile liftin/ e0uipment& 1inance char/e 2 see workings
$an"man $tatement #% %inancial p#siti#n as at 3' (!ne * R+ ,#n-c!rrent Assets lant and machinery $leased plant&
!8#,###
ease Payables : mounts fallin/ due in less than one year 4bli/ations under finance leases
'#8,###
ease Payables : amounts failin/ due in more than one year 4bli/ations under finance leases
3!!,###
,#tes t# t&e Acc#!nts #% $an"man $i& 4peratin/ lease payment commitments pirin/: 6et year Two to five years
$ii&
ssets held under finance leases C#st R+ 8##,###
lant $iii&
!5,### "35,###
Acc. ep. R+ 3'#,###
,et R+ !8#,###
4bli/ations under 1inance ease $see workings& ayable net year ayable in two to five years
'#8,### !"(,### ('!,###
ess : 1inance char/es allocated to future periods $!8,###'!,###& $"(#,###3%',###&
$)',###& 55',###
/#r0ings: 4ear en"e" 3' (!ne
3 ! 5 ( )
Opening Obligati#n R+ 8##,### (88,### 55',### 3%',### '#8,###
Rental pai" R+ '#8,### '#8,### '#8,### '#8,### '#8,### ",#!#,###
O!tstan"ing Obligati#n
5inance c&arge
R+ 5%',### !8#,### 3!!,### "8!,### <
R+ %(,### )',### !8,### '!,### < '!#,###
Cl#sing Obligati#n R+ (88,### 55',### 3%',### '#8,### <
3$d& +epreciation char/e per annum to be char/ed in Sandman>s accounts will be RM"33,333 $8##,###=(&.
FRS for Malaysia 4th ed
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Lazar & Huang
Leases
*.Q. 6#rr#7ing R+ 8"#,### ()),))5 53",%%)
".".' ".".3 ".".!
Payment R+ $"##,###& $"##,###& $"##,###&
Interest R+ 35,5## '8,88% '",(##
Payment R+ $"##,###& $"##,###& $"##,###&
Interest R+ 3',')5 '5,333 "),(8#
6alance R+ ()),))5 53",%%) 3)",'))
$tatement #% pr#%it #r l#ss etract
+epreciation $8'#,###=(& 1inance cost
2 R+ "3(,(() (),))5
3 R+ "3(,(() 5!,'''
)2 R+ 8'#,### $"3(,(()& (83,333
)3 R+ 8'#,### $')3,33!& 5!(,(((
5#(,((!
353,5%)
")","""
")8,!##
$tatement #% %inancial p#siti#n etract
lant on finance lease ess accumulated depreciation
6on
Since ? of M A %#- of fair value, it is a finance lease. )!,)!8 A (),')" )$b& In t&e b##0s #% $ycam#re $"n 6&" 8essee:
+r Machinery 7r ease ayable
9ear ! )!,)!(
9ear 5 <
9ear ( <
)!,)!(
+r +epreciation 7r cc +ep.
'!,%"5 '!,%"5
+r Bnterest p. 7r ease ayable
%,8!!
'!,%"5 '!,%"5
'!,%"5 '!,%"5
5,!"# %,8!!
< 5,!"#
<
Workings: Open 6al.
9ear ! 9ear 5 9ear (
)!,)!( 5!,5%# 3#,###
FRS for Malaysia 4th ed
3#,### 3#,### 3#,###
Payments %,8!! 5,!"# <
Int. 22 Cl#sing 6al.
5!,5%# 3#,### < "5,'5!
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Lazar & Huang
Leases
$tatement #% pr#%it #r l#ss %#r year en"e" 3' (!ne ! +epreciation '!,%"5 Bnterest %,8!! 5 +epreciation '!,%"5 Bnterest 5,!"# ( +epreciation '!,%"5 $tatement #% %inancial p#siti#n as at 3' (!ne ease ayable : ! 5 ( 7urrent '!,5%# 3#,### 6on<7urrent 3#,### < 5!,5%# 3#,###
< <
In t&e b##0s #% Oa0 $"n 6&" 8ess#r: $tatement #% pr#%it #r l#ss %#r t&e year en"e" 3' (!ne
! 1inance Bncome 5 1inance Bncome
%,8!! 5,!"#
$tatement #% %inancial p#siti#n as at 3' (!ne ease Receivable : ! 5 ( 7urrent '!,5%# 3#,### 6on<7urrent 3#,### < 5!,5%# 3#,### )$c& resent ?alue of Minimum ease ayments @ 3#,### $#.8"%)& 3#,### $#.()"%& 3#,### $#.55#)& @ '!,5%" '#,"5) "(,5'" @ (",'(%
< <
Total Bnterest @ $3#,### ;3& 2 (",'(% @ '8,)3" Sum
3=( '8,)3" '=( '8,)3" "=( '8,)3"
@
"!,3(( @ @
%,5)) !,)88 '8,)3"
$tatement #% pr#%it #r l#ss #% Oa0 %#r t&e year en"e" 3' (!ne ! 1inance Bncome "!,3(( 5 1inance Bncome %,5)) ( 1inance Bncome !,)88
9ear
4p. Cal. RM
! 5 (
Bnterest RM
(",'(% !5,(35 '5,'"'
RM "!,3(( %,5)) !,)88
$tatement #% %inancial p#siti#n #% Oa0 as at 3' (!ne ease Receivable: ! 7urrent '#,!'3 6on 7urrent '5,'"' !5,(35
FRS for Malaysia 4th ed
ayment 7l. Cal. RM 3#,### 3#,### 3#,###
!5,(35 '5,'"' <
5 '5,'"' DDDDD '5,'"'
('
Lazar & Huang
Leases
8$a& $tatement #% %inancial p#siti#n as at 31.12.1 ,#n-c!rrent Assets roperty cc. +ep. $3.'m=5# ; "# years&
R+;''' !,!## (!#
R+;'''
ebit R+;''' !,8##
Cre"it R+;'''
3,)(#
8$b&
CanE roperty Statement of profit or loss : /ain
3,)(# ",#!#
ease rental CanE
3'# 3'#
%$a& $i& statement #% pr#%it #r l#ss #% Prints&#p 6&" %#r t&e year 31.12.< ease pense $!,'##=3& ",!##
Bnterest Bncome $8#,3)! 2 '8###& "8-
$%,!')&
%$a&$ii& $tatement #% %inancial p#siti#n 8Etract as at ease Receiable: 7urrent 6on 7urrent repaid pense
31.12.<
'8,###
31.12.= '8,###
33,8#" ',8##
"",885 ",!##
Working :
9ear
;( ;) ;8
4penin/ ayment Bnterest 7losin/ Calance "8Calance RM RM RM RM 8#,3)! $'8,###& %,!') (",8#" (",8#" $'8,###& (,#8! 3%,885 3%,885 $'8,###& ',""5 "!,### $R?&
FRS for Malaysia 4th ed
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Lazar & Huang
Leases
%$b&$i& Foodest Chd had borrowed RM(','88 from rintshop. The risE and rewards were not transferred to rintshop. Bt is a finance ease. Bn substance, the asset is still that of Foodest Chd. %$b&$ii& +r CanE +r +eferred loss 7r Machine $nbv&
(','88 ),)"' )#,###
+r Machine 7r ease ayable
(','88
+r ease ayable 7r CanE
"8,)5#
(','88
"8,)5#
+r = : Bnterest 7r ease ayable $(','88 2 "8,)5#& "!-
(,#%5
+r +epreciation 7r cc. +ep. $(','88=!&
"5,5)'
+r =l 7r +eferred oss $),)"'=!&
(,#%5
"5,5)'
",%'8 ",%'8
"# s land normally has indefinite economic life, the lease of land is an operatin/ lease. Cut, if the lease of land transfers substantially all the risEs and rewards incidental to ownership to the lessee, then it is a finance lease. lease of land with a lon/ term may be classified as a finance lease even if the title does not pass to the lessee. The option to etend the lease at substantially less than a marEet rent or purchase it at a discount of %#- on the marEet value implies that SyaEira epects to achieve its return on investment mainly throu/h the lease payments and therefore is content to continue the lease for a secondary period at an immaterial rental or sell it at a substantial discount to the marEet value. This is an indicator of a finance lease. Bt is reasonable to assume that the sha will etend the lease or purchase the land in these circumstances. Bn addition, it appears that the M would e0uate to the fair value of the asset, /iven the fact that the lease premium is )#of the current fair value and the rent is !- of the fair value for 3# years. Bf land values rise, there is a revision of the rental every five years to ensure that SyaEira achieves the return on the investment. s a result of the above, it would appear that the lease is a finance lease. t the inception of the lease, premium plus ? of annual payments would be debited to property, plant and e0uipment with a correspondin/ liability. The interest would be reco/niGed over the lease term so as to produce a constant periodic rate of interest on the remainin/ balance of liability. ""$a& The alterations to the leased property do not affect the lease itself and this should continue to be treated as an o peratin/ lease and char/in/ profit or loss with the annual rental of RM'H3 million. The initial cost of the alterations should be capitalised and depreciated over the remainin/ life of the lease. Bn addition to this, M1RS "3) Provisions, Contingent ssets and Contingent Lia!ilities re0uires that the cost of restorin/ the property to its ori/inal condition should be provided for on " 4ctober "' as this is when the obli/ation to incur the restoration cost arises $as the time taEen to do the alterations is ne/li/ible&. The present value of the restoration costs, /iven as RM5 million, should be added to the initial cost of the alterations and depreciated over the remainin/ life of the lease. correspondin/ FRS for Malaysia 4th ed
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Lazar & Huang
Leases
provision should be created and a finance cost of 8- per annum should be char/ed to profit or loss and accrued on this provision.
""$b& tracts from the financial statements of 1undo RM>### Statement of profit or loss for the year ended 3# September '#"3 4peratin/ lease rental +epreciation of alterations to leased property $"',###=8 years& 1inance cost $5,### 8-& Statement of financial position as at 3# September '#"3 6on
',3## ",5## !##
"',### $",5##& 2222222
7arryin/ amount
"#,5## 2222222
6on
5,!## 2222222
"'$a& The lease of the land is subIect to the /eneral lease classification criteria of M1RS ") Leases and the fact that land normally has an indefinite economic life is an important consideration. Thus, if the lease of land transfers substantially all the risEs and rewards incidental to o wnership to the lessee, then the lease is a finance lease, otherwise it is an operatin/ lease. lease of land with a lon/ term may be classified as a finance lease even if the title does not pass to the lessee. Situations set out in M1RS ") that would normally lead to a lease bein/ classified as a finance lease include the followin/: $"& the lease transfers ownership of the asset to the lessee by the end of the lease termJ $'& the lease term is for the maIor part of the economic life of the asset, even if title is not transferredJ $3& at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased assetJ $!& the lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than marEet rent. contin/ent rent is an amount that is paid as part of the lease payments but is not fied or a/reed in advance at the inception of the lease, rather the amount to be paid is dependent on some future event. Kowever, it is not an interest payment, as it is not connected with the passa/e of time, therefore time value of money is n ot an issue. Lnder M1RS "), contin/ent rents are ecluded from minimum lease payments and are accounted as epense=income in the period in which they are incurred=earned. 7ontin/ent rents may indicate that a lease is an operatin/ lease if the nature of the contin/ency provides evidence that the lessor has not transferred substantially all of the risEs and rewards of ownership of the land. Kowever, other factors have to be taEen into account besides the contin/ent rental. The presence of an option to etend the lease at substantially less than a marEet rent or purchase it at a discount of %#- on the marEet value implies that the lessor epects to achieve its return on investment mainly throu/h the lease payments and therefore is content to continue the lease for a secondary period at an immaterial rental or sell it at a substantial discount to the marEet value. This is an indicator of a finance lease. Bt is reasonable to assume that the lessee will etend the lease or purchase the land in these circumstances. Kowever, an option to etend it at a marEet rental without the purchase provision may indicate that the lessor has not achieved its return on investment throu/h the lease rentals and therefore is relyin/ on a subse0uent lease or sale to do so. This is an indicator of an operatin/ lease as there will be no compellin/ commercial reason FRS for Malaysia 4th ed
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Lazar & Huang
Leases
why the lessee should etend the a/reement. Bn this case, the lease term is not for the maIor part of the economic life of the asset as the asset is land. Kowever, it would appear that the minimum lease payments would e0uate to the fair value of the asset, /iven the fact that the lease premium is )#- of the current fair value and the rent is !- of the fair value for 3# years. dditionally, if land values rise, then there is a revision of the rental every five years to ensure that the lessor achieves the return on the investment. s a result of the above, it would appear that the lease is a finance lease. The upfront premium plus the present value of the annual payments at the commencement of the lease would be capitalised as property, plant and e0uipment and the annual lease payments would be shown as a liability. The interest epense would be reco/nised over the lease term so as to produce a constant periodic rate of interest on the remainin/ balance of the liability. dditionally, anne plans to use the land in its business but may hold the land for capital /ain. Thus the lease may meet the definition of an investment property if it is to be held for capital /ain. Bn the latter case, M1RS "!# "nvest#ent Pro$erty should be used to account for the land with the lessee>s chosen model used to account for it. Bf a lease contains a clean breaE clause, where the lessee is free to walE away from the lease a/reement after a certain time without penalty, then the lease term for accountin/ purposes will normally be the period between the commencement of the lease and the earliest point at which the breaE option is eercisable by the lessee. Bf a lease contains an early termination clause that re0uires the lessee to maEe a termination payment to compensate the lessor such that the recovery of the lessor>s remainin/ investment in the lease is assured, then the termination clause would normally be disre/arded in determinin/ the lease term. Kowever, the su//estions made by Maret do add substance to the conclusion that the lease is a finance lease, as the early termination clause re0uires a payment which recovers the lessor>s investment and it would appear that Maret is happy to allow the termination of the a/reement after '5 years which would imply that the lessor>s return would have been achieved after that period of time.
"'$b& 1air value, in M1RS "!# "nvest#ent Pro$erty, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marEet participants at the measurement date. 1air value should reflect marEet conditions at the end of the reportin/ period. Kowever, M1RS "3 Fair %alue Measure#ent acts as a common frameworE on how to measure the fair value when its determination is re0uired or permitted by another M1RS. The frameworE defines fair value and provides a sin/le source of /uidance for measurin/ fair value. M1RS "3 defines the fair value of an asset as an eit price>, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marEet participants at the measurement date. 1air value is a marEets assumptions. +ue to the nature of investment property, which is often uni0ue and not traded on a re/ular basis, and the subse0uent lacE of observable input data for identical assets, fair value measurements are liEely to be cate/orised as evel ' or evel 3 valuations. evel ' inputs are liEely to be sale prices per s0uare metre for similar properties in the same location, observable marEet rents and property yields from the latest transactions. evel 3 inputs may be yields based on mana/ement estimates, cash flow forecasts usin/ the entity>s own data, and assumptions about the future development of certain parameters such as
FRS for Malaysia 4th ed
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Lazar & Huang
Leases
rental income that are not derived from the marEet. Mana/ement should maimise the use of relevant observable inputs and minimise the use of unobservable inputs. The use of unobservable inputs is a comple and Iud/emental area where M1RS "3 provides certain /uidance. ccordin/ to M1RS "3, there are /enerally three approaches that can be used to derive fair value: the marEet approach, the income approach and the cost approach. To measure fair value, mana/ement should use valuation techni0ues consistent with one or more of these approaches. marEet or income approach will therefore usually be more appropriate in these circumstances. valuation based on new does not reflect the level ' inputs which are available, such as sale prices and marEet rent. Similarly, the new
"3 n entity may enter into an arran/ement that does not taEe the le/al form of a lease but conveys a ri/ht to use an asset. n entity should use the 7onceptual 1rameworE for 1inancial Reportin/ in conIunction with M1RS "") Leases to determine whether such arran/ements are, or contain, leases that should be accounted for in accordance with the standard. +eterminin/ whether an arran/ement is, or contains, a lease is based on the substance of the arran/ement and re0uires an assessment of: $i&
the risEs and rewards of the arran/ement and how best to reco/nise themJ
$ii& the ri/ht to use the asset or direct others to use the assetJ $iii& the ri/ht to control the use of the underlyin/ asset by operatin/ the asset or directin/ others to operate the assetJ $iv& who obtains much of the benefit from the asset. Bn this case, the private sector provider purchases the vehicles and uses them eclusively for the local /overnment or/anisation. The vehicles are ostensibly those of ClacEcutt as they are painted with the local /overnment name and colours. ClacEcutt can use the vehicles and the vehicles are used in this connection for nearly all of the asset>s life. Bn the event of the private sector provider>s business ceasin/, ClacEcutt can obtain le/al title to the vehicles and carry on the refuse collection service. Thus, the arran/ement fits the terms of a lease and ClacEcutt should account for the vehicles as a finance lease. The value as Statement of profit or loss stated with the lease can be obtained by considerin/ the fair value of ac0uirin/ the vehicle. This will also be the initial lease obli/ation. The payment made by ClacEcutt to the leasin/ company may be two< fold, representin/ the cost o f the lease obli/ation and the service element relatin/ to the cost of the collection of the waste.
FRS for Malaysia 4th ed
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Lazar & Huang
