Investment property for Lease Business

[Yakub02]

If a lessee uses the IAS 40: Investment property fair value model for its investment properties, that model must be used for right-of-use assets that meet the definition of investment property; and

 If a lessee applies the revaluation model in IAS 16: Property, plant and equipment to a class of property, plant and equipment it may elect to apply the same accounting treatment to all right-of-use assets that relate to that class

An asset is depreciated from the commencement date to the end of its useful life when:

 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. In other cases the asset is depreciated from the commencement date to the earlier of:  the end of its useful life; or  the end of the lease term.


The rules in IAS 36: Impairment of assets apply to right-of-use assets in the usual way.

The leased asset is included in the statement of financial position at its carrying amount (cost less accumulated depreciation) in the same way as similar assets.

During each year, the lessee makes one or more lease payments. The payment is recorded in the ledger account.

 

[Yakub02]

In effect, each lease payment consists of two elements:  a finance charge (interest charge) on the liability; and
 a partial repayment of the liability.

The finance charge is treated as a finance cost in profit or loss for the period. The partial repayment of the lease obligation reduces the amount of the liability that remains unpaid.

The total rental payments over the life of the lease will be more than the amount initially recognised as a liability.

The difference is finance charge. The total finance charge that arises over the life term is the difference between the amount initially recognised as the lease liability and the sum of the lease payments from the standpoint of the lessee.

 

[Yakub02]

The finance charge (interest) is recognised over the life of the lease by adding a periodic charge to the lease liability with the other side of the entry as an expense in profit or loss for the year.

The total finance charge for a leased asset is allocated “so as to provide a constant rate of charge on the outstanding obligation”.

This means that as the lease liability decreases at each year-end, the interest charge for the next year will be lower than it was for the previous year. The periodic rate of interest is the discount rate used in the initial measurement of the lease liability.

Using an interest rate to allocate the interest expense is called an actuarial method.

 

[Yakub02]

Discounting arithmetic is used to calculate the interest rate implicit in the lease and this is used to discount the lease payments to arrive at the lease liability at initial recognition.

If the interest rate that is implicit in the lease is not determinable the lessee’s incremental borrowing rate is used.

This interest rate used is then applied to the opening balance of the lease liability at the start of each period, in order to calculate the finance charge.

The total liability must be divided between:  the current liability (amount payable within the next 12 months); and  the non-current liability