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Accounting For Leases - ACCT2011 Financial Accounting - Document preview page 1

Accounting For Leases - ACCT2011 Financial Accounting - Page 1

Document preview content for Accounting For Leases - ACCT2011 Financial Accounting

Accounting For Leases - ACCT2011 Financial Accounting

Get the Project Presentation to understand the complexities of accounting for leases in financial accounting.

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Accounting For Leases - ACCT2011 Financial Accounting - Page 1 preview imageAccounting for LeasesWeek 4 LectureACCT2011Financial Accounting AJapEfendi1
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Accounting For Leases - ACCT2011 Financial Accounting - Page 2 preview image
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Accounting For Leases - ACCT2011 Financial Accounting - Page 3 preview image2Accounting for LeasesLearning objectives:1.Introduction of present values in accounting2.Understand the nature of leases (Ch 12 LO 1)3.Distinguish between an operating lease and a finance lease (Ch 12 LO 2)4.Understand the difference between the ‘expense’ and the ‘capitalisation’methods of accounting for finance leases in the books of a lessee (Ch 12LO 3)5.Understand the implications of lease accounting for assessment ofoperating performance and financial risk (Ch 12 LO 5)6.Apply the requirements of AASB 117 to the classification of leases (Ch 12LO 6)7.Apply the requirements of AASB 117 to accounting for operating leases inthe books of the lessee (Ch 12 LO 7)8.Apply the requirements of AASB 117 to accounting for finance leases in thebooks of the lessee (Ch 12 LO 8)9.Understand the proposed new approach to lease accounting (Ch 12 LO10)2
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Accounting For Leases - ACCT2011 Financial Accounting - Page 4 preview image3Accounting for LeasesTextbook Readings:›Chapter 12Sections 12.1 (excluding Section 12.1.5 & 12.1.6),12.2 to 12.2.3; 12.3 (pp353-370; 378-380)›Handbook Readings:-AASB117›Additional Reading:-IASB Investor Spotlight at:http://www.ifrs.org/Current-Projects/IASB-Projects/Leases/Documents/Investor-spotlight-leases.pdf-“Leasing rules new liability for top 20”Australian FinancialReview(on Blackboard)3
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Accounting For Leases - ACCT2011 Financial Accounting - Page 5 preview image44Objective 1Introduction of present values in accounting
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Accounting For Leases - ACCT2011 Financial Accounting - Page 6 preview imagePresent Value Concepts›Most long-term debts are required to be measured atpresent value,but beforeproceeding, we need to understandtime value of money.›Q. Would you rather receive $1,000 now or $1,000 in a year’s time?-If now, you recognise that money received/paid in the future (FV) is worth less than the sameamount in present value (PV) dollars received/paid today.Why?-The PV of $1,000 in a year’s time, is equivalent to the present amount you would need to invest atthe current interest rate, to give you $1,000 in a years time.›PV of $1 formula/tablesprovides a discount factor to convert FV to PV.The PV of $1 000 in a years time, if interest rate is 10%PV = FV / (1 + r)n= $1,000/(1 + 0.1)1= $909.09
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Accounting For Leases - ACCT2011 Financial Accounting - Page 7 preview imagePresent Value of a Single Sum(PV of $1 Table)›Example:You have won a lottery, and must choose to receive$90,000 in 3 years time(current interest rate = 10%),or$70,000 now-To answer, you need to calculate the PV of the $90,000 in 3 yrs by discounting it at the currentinterest rate, so that you can compare PVs on an equivalent basis›Present Value of a single sum of $1 tablehelps us to calculate this by providing therelevant discount rate for each interest rate and period .-Refer to thePV of $1 tableand find the discount factor at 10% interest for 3 periods-Calculate the PVby multiply the FV by the discount factor-Compare to the amounts in present value termsPV[i=10%, n=3]of$90,0000.75131(see Text book appendix, Table 1)= $67,618Amount to be received immediately70,000Difference-2,382PV=?90,000n=3 year,i=10%
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Accounting For Leases - ACCT2011 Financial Accounting - Page 8 preview imagePresent Value of an Annuity(PV of an annuity of $1)›Assume that you have also received an option to choose to receive $70,000 now or$30,000 each year for 3 yrs (current interest rate= 10%)›To answer this, you could calculate the PV of $30 000 in each period by discounting it at thecurrent interest rate and period, then sum the amountsFuture amountPV factor of 10%PV$30,000 (1 year away)0.90909$ 27,276$30,000 (2 years away)0.8264524,793$30,000 (3 years away)0.7513122,5392.48685$74,605PV=?30,00030,00030,000n=3 year,i=10%
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Accounting For Leases - ACCT2011 Financial Accounting - Page 9 preview imagePresent Value of an Annuity(PV of an annuity of $1)›Alternatively, you can look up discount factors for aPV of an annuity $1(see textbookAppendix, Table 2)PV of an annuity of $30,000 per yr for 3yrs[i=10%, n=3]= $30,000x2.4868(see Table 2)= $74,605roundedAmount to be received immediately70,000Difference+ 4,6058
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Accounting For Leases - ACCT2011 Financial Accounting - Page 10 preview image99Objective 2Understand the nature of leases
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Accounting For Leases - ACCT2011 Financial Accounting - Page 11 preview image1010Understand the nature of leases›Leases are agreements which, in exchange for leasepayments, convey to one party (the lessee) the rightto possess and use an asset owned by another party(thelessor) for a stated period of time.›Parties to the lease:•Lessor-the owner of property that conveys theright to use the property for a specified period of timein return for a series of payments•Lessee-party entering into a lease agreement withalessor
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Accounting For Leases - ACCT2011 Financial Accounting - Page 12 preview image11Key lease terms›Typical terms in lease agreements:-Period of the lease-Amount and timing of the lease payments-Whether the lease is cancellable by either party-What is to become of the asset at the end of the leaseterm-The asset’s residual value-Responsibility for payment of maintenance etc costs11
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Accounting For Leases - ACCT2011 Financial Accounting - Page 13 preview image1212Objective 3Distinguish between an operating lease and afinance lease
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Accounting For Leases - ACCT2011 Financial Accounting - Page 14 preview image13Types of leases›AASB 117 focuses on the asset aspect of the leaseagreement, and identifies two key types of leasesbased on the typical features in the lease agreement•operating leaseor•finance lease13
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Accounting For Leases - ACCT2011 Financial Accounting - Page 15 preview image1414AASB 117 & types of leases›Operating lease:-The risks and rewards of ownership remainsubstantially with thelessor(AASB 117para8)›Finance lease:-The risks and rewards of ownership aretransferred substantially to the lessee(AASB 117para8)
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Document Details

University
Curtin University
Course
ACCT 2011
Subject
Accounting

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