Question

Answer the following questions

1. Explain effects of the new lessee accounting on the balance sheet, i.e., assets, liabilities and equity. Identify three exemptions to this new accounting. Discuss whether you agree with these exemptions. Also identify any potential loophole concerning these exemptions.

2. What are benefits and costs of the new lease accounting? Also discuss the effect on: (a) cost of borrowing, (b) debt covenant and (c) sales and leaseback transactions.

Answer 1

ANSWER:-

approach from current IFRS and will affect many entities across various industries.

   Lessees will have a single accounting model for all leases with two exemptions(low value assets and short term leases).

Lessor accounting is substantially unchanged.

There will be additional disclosure requirements.

The new standard will be effective from 1 January 2019 with limited early application permitted.

Point 1 : -

Lease Liability intially will be measured at present value of the lease payments to be made over the lease term.

Point 2 :-

Asset will be measured at the amount of the lease liability, adjusted for lease prepayments, lease incentives received, the lessee’s initial direct costs (e.g.,   commissions) and an estimate of restoration, removal and dismantling costs.

Point 3 :-

IFRS 16 eliminates the classification of leases as either operating leases or finance    leases for a lessee. Instead all leases are treated in a similar way to finance leases applying IAS 17.

EXEMPTIONS TO THIS ACCOUNTING :-

IFRS 16 does not require a company to recognise assets and liabilities for

(a) short-term leases (ie leases of 12 months or less)

(b) leases of low-value assets(for example, a lease of a personal computer).

• No i don't completely agree with the second exemption as it gives rise to lot of estimation , defination of low value asset might change from entity to entity.
• it gives management lot of option to tickle with the standard rather a uniform standard for measurement of low value item should be maintained within the standard.

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