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 six with a total value of RM5.4 million.

Payment Opening Interest Outstanding Payment Closing balance
balance 9.3% balance
RM RM RM RM RM
1 4,850,000 (900,000) 3,950,000
2 3,950,000 183,675 4,133,675 (900,000) 3,233,675
3 3,233,675 150,365 3,384,040 (900,000) 2,484,040
4 2,484,040 115,508 2,599,548 (900,000) 1,699,548
5 1,699,548 79,029 1,778,577 (900,000) 878,577
6 878,577 *21,423 900,000 (900,000) 0
* rounded up

3.Q:
Solution:
(a)
Sandman
Statement of profit or loss for the year ended 30 June X4
RM
Depreciation on Plant (20% x 800,000) 160,000
Lease rental (mobile lifting equipment) 45,000
Finance charge see workings 71,764

Sandman
Statement of financial position as at 30 June X4
RM
Non-current Assets
Plant and machinery (leased plant) 480,000

L.Payables : Amounts falling due in less than one year

Obligations under finance leases (including interest) 208,000

L.Payables : amounts failing due in more than one year

Obligations under finance leases 337,452

Notes to the Accounts of Sandman

(i) Operating lease payment commitments:
Expiring: Next year 45,000
Two to five years 135,000

(ii) Assets held under finance leases:

Cost Accumulated Net
Depreciation
RM RM RM
Plant 800,000 320,000 480,000

(iii) Obligations under Finance Lease (see workings)

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Payable next year 208,000

Payable in two to five years 416,000
624,000
Less : Finance charges allocated to future periods
(51,124 + 27,424) (78,548)
(156,876 + 388,576) 545,452

Workings :

Year ended Opening Rental Outstanding Finance Closing

30 June Obligation paid Obligation charge Obligation
(15.15%)

RM RM RM RM RM
X3 800,000 208,000 592,000 89,688 681,688
X4 681,688 208,000 473,688 71,764 545,452
X5 545,452 208,000 337,452 51,124 388,576
X6 388,576 208,000 180,576 27,424 (balance) 208,000
X7 208,000 208,000 - - -
1,040,000 240,000

3(b)
Easylease
Statement of Profit or Loss for the year ended 30 June X4

RM
Depreciation on Equipment (300000/12) 25,000
Lease rental income 45,000
Finance income see workings 71,764

Easylease
Statement of financial position
as at 30 June x4
RM
Non-current Assets
Equipment 250,000

Lease Receivables:
Amounts falling due in less than one year 208,000

Lease Receivables:
Amount falling due in more than one year 337,452

Notes to the Accounts of Sandman

(i) Operating lease receivable:
Next year 45,000
Two to five years 135,000

(ii) Equipment
Cost Accumulated Net
Depreciation
RM RM RM
Plant 300,000 50,000 250,000

(iii) Finance Lease Receivable:

Receivable next year 208,000
Receivable in two to five years 416,000
624,000

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Less : Finance income to future periods (51,124 + 27,424) (78,548)

(156,876 + 388,576) 545,452

3(c)
Sandman
Statement of Profit or Loss
for the year ended 30 June x4
RM
Depreciation on Plant (20% x 800,000) 160,000
Lease rental (mobile lifting equipment) 45,000
Finance charge see workings 72,000

Sandman
Statement of financial position
as at 30 June x4
RM
Non-current Assets
Plant and machinery (leased plant) 480,000

Lease Payables : Amounts falling due in less than one year

Obligations under finance leases 208,000

Lease Payables : amounts failing due in more than one year

Obligations under finance leases 344,000

Notes to the Accounts of Sandman

(i) Operating lease payment commitments
Expiring: Next year 45,000
Two to five years 135,000

(ii) Assets held under finance leases

Cost Acc. Dep. Net
RM RM RM
Plant 800,000 320,000 480,000

(iii) Obligations under Finance Lease (see workings)

Payable next year 208,000

Payable in two to five years 416,000
624,000
Less : Finance charges allocated to future periods
(48,000+24,000) (72,000)
(160,000+392,000) 552,000

Workings:

Year ended Opening Rental Outstanding Finance Closing

30 June Obligation paid Obligation charge Obligation

RM RM RM RM RM
x3 800,000 208,000 592,000 96,000 688,000
x4 688,000 208,000 480,000 72,000 552,000
x5 552,000 208,000 344,000 48,000 392,000
x6 392,000 208,000 184,000 24,000 208,000
x7 208,000 208,000 - - -
1,040,000 240,000

3(d)
Depreciation charge per annum to be charged in Sandmans accounts will be RM133,333 (800,000/6).

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4.Q.

Borrowing Payment Interest Payment Interest Balance

RM RM RM RM RM RM
1.1.x2 810,000 (100,000) 35,500 (100,000) 32,275 677,775
1.1.x3 677,775 (100,000) 28,889 (100,000) 25,333 531,997
1.1.x4 531,997 (100,000) 21,600 (100,000) 17,680 371,277

Statement of profit or loss extract

x2 x3
RM RM
Depreciation (820,000/6) 136,667 136,667
Finance cost 67,775 54,222

Statement of financial position extract

X2 X3
RM RM
Plant on finance lease 820,000 820,000
Less accumulated depreciation (136,667) (273,334)
683,333 546,666

Non-current liability
Payable on finance lease 506,664 353,597
Current liability
Payable on finance lease 171,111 178,400

7(a)
Present Value of Minimum Lease Payments
= 30,000 + 30,000 (0.8197) + 30,000 (0.6719)
= 30,000 + 24,591 + 20,157
= 74,748

90% of fair value (74,746) = 67,271

Since PV of MLP > 90% of fair value, it is a finance lease. 74,748 > 67,271

7(b)
In the books of Sycamore Sdn Bhd (Lessee):

Year x4 Year x5 Year x6

Dr Machinery 74,746 - -
Cr Lease Payable 74,746

Dr Depreciation 24,915 24,915 24,915

Cr Acc Dep. 24,915 24,915 24,915

Dr Interest Exp. 9,844 5,410 -

Cr Lease Payable 9,844 5,410 -

Workings:
Open Bal. Payments Int. 22% Closing Bal.
Year x4 74,746 30,000 9,844 54,590
Year x5 54,590 30,000 5,410 30,000
Year x6 30,000 30,000 - -
15,254

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Statement of profit or loss for year ended 30 June

x4 Depreciation 24,915
Interest 9,844
x5 Depreciation 24,915
Interest 5,410
x6 Depreciation 24,915

Statement of financial position as at 30 June

Lease Payable : x4 x5 x6
Current 24,590 30,000 -
Non-Current 30,000 - -
54,590 30,000

In the books of Oak Sdn Bhd (Lessor):

Statement of profit or loss for the year ended 30 June

x4 Finance Income 9,844

x5 Finance Income 5,410

Statement of financial position as at 30 June

Lease Receivable : x4 x5 x6
Current 24,590 30,000 -
Non-Current 30,000 - -
54,590 30,000
7(c)
Present Value of Minimum Lease Payments
= 30,000 (0.8197) + 30,000 (0.6719) + 30,000 (0.5507)
= 24,591 + 20,157 + 16,521
= 61,269

Total Interest = (30,000 X3) 61,269 = 28,731

Sum-of-digits method:
Sum-of-digits = 1 + 2 + 3 = 6

Yr x4 3/6 x 28,731 = 14,366

x5 2/6 x 28,731 = 9,577
x6 1/6 x 28,731 = 4,788
28,731

Statement of profit or loss of Oak for the year ended 30 June

x4 Finance Income 14,366
x5 Finance Income 9,577
x6 Finance Income 4,788

Year Op. Bal. Interest Payment Cl. Bal.

RM RM RM RM
x4 61,269 14,366 30,000 45,635
x5 45,635 9,577 30,000 25,212
x6 25,212 4,788 30,000 -

Statement of financial position of Oak as at 30 June

Lease Receivable: x4 x5
Current 20,423 25,212
Non Current 25,212 _____
45,635 25,212

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8(a)
Statement of financial position as at 31.12.x15
Non-current Assets RM000 RM000
Property 4,400
Acc. Dep. (3.2m/50 X 10 years) 640 3,760

8(b)
Debit Credit
RM000 RM000
Bank 4,800
Property 3,760
Statement of profit or loss : gain 1,040

Lease rental 320

Bank 320

9(a) (i)
statement of profit or loss of Printshop Bhd for the year 31.12.x6
Lease Expense (4,200/3) 1,400

Interest Income (9,427)

(80,374 28000) x 18%

9(a)(ii)
Statement of financial position (Extract) as at

Lease Receivable: 31.12.x6 31.12.x7

Current 28,000 28,000
Non Current 33,801 11,885
Prepaid Expense 2,800 1,400

Working :

Year Opening Payment Interest Closing

Balance 18% Balance
RM RM RM RM
X6 80,374 (28,000) 9,427 61,801
X7 61,801 (28,000) 6,084 39,885
X8 39,885 (28,000) 2,115 14,000 (RV)

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9(b)(i)
Goodest Bhd had borrowed RM62,288 from Printshop. The risk and rewards were not transferred to Printshop. It is
a finance Lease. In substance, the asset is still that of Goodest Bhd.

9(b)(ii)
Dr Bank 62,288
Dr Deferred loss 7,712
Cr Machine (nbv) 70,000

Dr Machine 62,288
Cr Lease Payable 62,288

Dr Lease Payable 18,750

Cr Bank 18,750

Dr P/L : Interest 6,095

Cr Lease Payable 6,095
(62,288 18,750) x 14%

Dr Depreciation 15,572
Cr Acc. Dep. 15,572
(62,288/4)

Dr P/l 1,928
Cr Deferred Loss 1,928
(7,712/4)

10
As land normally has indefinite economic life, the lease of land is an operating lease. But, if the lease of land transfers
substantially all the risks and rewards incidental to ownership to the lessee, then it is a finance lease. A lease of land with a
long term may be classified as a finance lease even if the title does not pass to the lessee.

The option to extend the lease at substantially less than a market rent or purchase it at a discount of 90% on the market value
implies that Syakira expects to achieve its return on investment mainly through 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 market value.
This is an indicator of a finance lease. It is reasonable to assume that the Asha will extend the lease or purchase the land in
these circumstances.

In addition, it appears that the MLP would equate to the fair value of the asset, given the fact that the lease premium is 70%
of the current fair value and the rent is 4% of the fair value for 30 years. If land values rise, there is a revision of the rental
every five years to ensure that Syakira achieves the return on the investment. As a result of the above, it would appear that
the lease is a finance lease.

At the inception of the lease, premium plus PV of annual payments would be debited to property, plant and equipment with a
corresponding liability. The interest would be recognized over the lease term so as to produce a constant periodic rate of
interest on the remaining balance of liability.

11(a)
The alterations to the leased property do not affect the lease itself and this should continue to be treated as an operating lease
and charging profit or loss with the annual rental of RM23 million.

The initial cost of the alterations should be capitalised and depreciated over the remaining life of the lease. In addition to
this, MFRS 137 Provisions, Contingent Assets and Contingent Liabilities requires that the cost of restoring the property to
its original condition should be provided for on 1 October x12 as this is when the obligation to incur the restoration cost
arises (as the time taken to do the alterations is negligible). The present value of the restoration costs, given as RM5 million,
should be added to the initial cost of the alterations and depreciated over the remaining life of the lease. A corresponding

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provision should be created and a finance cost of 8% per annum should be charged to profit or loss and accrued on this
provision.

11(b)
Extracts from the financial statements of Fundo
RM000
Statement of profit or loss for the year ended 30 September 2013
Operating lease rental 2,300
Depreciation of alterations to leased property (12,000/8 years) 1,500
Finance cost (5,000 x 8%) 400
Statement of financial position as at 30 September 2013
Non-current assets
Alterations to leased property (7,000 + 5,000) 12,000
Accumulated depreciation (above) (1,500)

Carrying amount 10,500

Non-current liabilities
Provision for property restoration costs (5,000 + 400 above) 5,400

12(a)
The lease of the land is subject to the general lease classification criteria of MFRS 17 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 risks
and rewards incidental to ownership to the lessee, then the lease is a finance lease, otherwise it is an operating lease. A lease
of land with a long term may be classified as a finance lease even if the title does not pass to the lessee. Situations set out in
MFRS 17 that would normally lead to a lease being classified as a finance lease include the following:
(1) the lease transfers ownership of the asset to the lessee by the end of the lease term;
(2) the lease term is for the major part of the economic life of the asset, even if title is not transferred;
(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 asset;
(4) the lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than market rent.
A contingent rent is an amount that is paid as part of the lease payments but is not fixed or agreed in advance at the inception
of the lease, rather the amount to be paid is dependent on some future event. However, it is not an interest payment, as it is
not connected with the passage of time, therefore time value of money is not an issue. Under MFRS 17, contingent rents are
excluded from minimum lease payments and are accounted as expense/income in the period in which they are
incurred/earned. Contingent rents may indicate that a lease is an operating lease if the nature of the contingency provides
evidence that the lessor has not transferred substantially all of the risks and rewards of ownership of the land. However,
other
factors have to be taken into account besides the contingent rental.
The presence of an option to extend the lease at substantially less than a market rent or purchase it at a discount of 90% on
the market value implies that the lessor expects to achieve its return on investment mainly through 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 market value. This is an indicator of a finance lease. It is reasonable to assume that the lessee will extend the lease or
purchase the land in these circumstances. However, an option to extend it at a market rental without the purchase provision
may indicate that the lessor has not achieved its return on investment through the lease rentals and therefore is relying on a
subsequent lease or sale to do so. This is an indicator of an operating lease as there will be no compelling commercial reason

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why the lessee should extend the agreement. In this case, the lease term is not for the major part of the economic life of the
asset as the asset is land. However, it would appear that the minimum lease payments would equate to the fair value of the
asset, given the fact that the lease premium is 70% of the current fair value and the rent is 4% of the fair value for 30 years.
Additionally, 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. As 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
equipment and the annual lease payments would be shown as a liability. The interest expense would be recognised over the
lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
Additionally, Janne plans to use the land in its business but may hold the land for capital gain. Thus the lease may meet the
definition of an investment property if it is to be held for capital gain. In the latter case, MFRS 140 Investment Property
should be used to account for the land with the lessees chosen model used to account for it.
If a lease contains a clean break clause, where the lessee is free to walk away from the lease agreement after a certain time
without penalty, then the lease term for accounting purposes will normally be the period between the commencement of the
lease and the earliest point at which the break option is exercisable by the lessee. If a lease contains an early termination
clause that requires the lessee to make a termination payment to compensate the lessor such that the recovery of the lessors
remaining investment in the lease is assured, then the termination clause would normally be disregarded in determining the
lease term. However, the suggestions made by Maret do add substance to the conclusion that the lease is a finance lease, as
the early termination clause requires a payment which recovers the lessors investment and it would appear that Maret is
happy to allow the termination of the agreement after 25 years which would imply that the lessors return would have been
achieved after that period of time.

12(b)
Fair value, in MFRS 140 Investment Property, is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. Fair value should reflect market
conditions at the end of the reporting period. However, MFRS 13 Fair Value Measurement acts as a common framework on
how to measure the fair value when its determination is required or permitted by another MFRS. The framework defines fair
value and provides a single source of guidance for measuring fair value. MFRS 13 defines the fair value of an asset as an
exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Fair value is a market-based measurement, not an entity-specific
measurement, and fair value reflects current market conditions.
In MFRS 13, fair value measurements are categorised into a three-level hierarchy based on the type of inputs and are not
based on a valuation method. The new hierarchy is defined as follows:
(1) Level 1 inputs are unadjusted quoted prices in active markets for items identical to the asset being measured.
(2) Level 2 inputs are inputs other than quoted prices in active markets included within Level 1 that are directly or
indirectly observable.
(3) Level 3 inputs are unobservable inputs that are usually determined based on managements assumptions.
Due to the nature of investment property, which is often unique and not traded on a regular basis, and the subsequent lack of
observable input data for identical assets, fair value measurements are likely to be categorised as Level 2 or Level 3
valuations. Level 2 inputs are likely to be sale prices per square metre for similar properties in the same location, observable
market rents and property yields from the latest transactions. Level 3 inputs may be yields based on management estimates,
cash flow forecasts using the entitys own data, and assumptions about the future development of certain parameters such as

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rental income that are not derived from the market. Management should maximise the use of relevant observable inputs and
minimise the use of unobservable inputs. The use of unobservable inputs is a complex and judgemental area where MFRS
13 provides certain guidance. According to MFRS 13, there are generally three approaches that can be used to derive fair
value: the market approach, the income approach and the cost approach. To measure fair value, management should use
valuation techniques consistent with one or more of these approaches. A market or income approach will therefore usually
be more appropriate in these circumstances. A valuation based on new-build value less obsolescence takes no account of this
consideration. A valuation based on new-build value less obsolescence does not reflect the level 2 inputs which are
available, such as sale prices and market rent.
Similarly, the new-build value less obsolescence does not reflect any discounted cash flows based on reliable estimates of
future cash flows, or recent prices of similar properties on less active markets and does not take account of any income
measures. As level 2 data is available, the entity should use this data in valuing the industrial property.

13
An entity may enter into an arrangement that does not take the legal form of a lease but conveys a right to use an asset. An
entity should use the Conceptual Framework for Financial Reporting in conjunction with MFRS 117 Leases to determine
whether such arrangements are, or contain, leases that should be accounted for in accordance with the standard. Determining
whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of:
(i) the risks and rewards of the arrangement and how best to recognise them;
(ii) the right to use the asset or direct others to use the asset;
(iii) the right to control the use of the underlying asset by operating the asset or directing others to operate the asset;
(iv) who obtains much of the benefit from the asset.
In this case, the private sector provider purchases the vehicles and uses them exclusively for the local government
organisation. The vehicles are ostensibly those of Blackcutt as they are painted with the local government name and colours.
Blackcutt can use the vehicles and the vehicles are used in this connection for nearly all of the assets life. In the event of the
private sector providers business ceasing, Blackcutt can obtain legal title to the vehicles and carry on the refuse collection
service. Thus, the arrangement fits the terms of a lease and Blackcutt 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 considering the fair value of acquiring the
vehicle. This will also be the initial lease obligation. The payment made by Blackcutt to the leasing company may be two-
fold, representing the cost of the lease obligation and the service element relating to the cost of the collection of the waste.

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