In
March 2010, the IASB decided to look at two models for lessor accounting. One
model is the performance obligation model and one is called the derecognition
model. Both of these models are discussed in the document Discussion Paper
Preliminary Views: Leases, July 17, 2009. The discussion paper is available on
the IASB website at www.iasb.org.
Instructions
(a)
Describe the “performance obligation approach” for lessor accounting with
respect to its concept, impact on the statement of financial position, and its
impact on the statement of comprehensive income.
(b)
Describe the “derecognition approach” for lessor accounting with respect to its
concept, impact on the statement of financial position, and its impact on the
statement of comprehensive income.
(c)
Using the information below, determine what the statement of financial position
would look like at the inception of the lease under the two alternatives:
The
Lessor has entered into a six-year lease for a piece of machinery. The Lessor
carries the machinery on its books at $100,000. The present value of the lease
payments to be received for the lease is determined to be $92,900. Show the assets
and liabilities that would be shown on the statement of financial position under
the two different alternatives.
(a) The “performance
obligation approach” is the approach discussed in the text book. In this approach, the lessor is granting the
right to use the asset to the lessee over the term of the lease. The lessor does not lose control of the
asset, which continues to be recognized on the statement of financial
position. In this case, the lessor has
the right to receive the lease payments, and an unconditional obligation to permit
the use of the asset over the term of the lease. As a consequence, at the time the lease is
entered into, a lease receivable is recorded as an asset and a performance
obligation is recorded as the offsetting liability. The receivable and obligation are calculated
to be the present value of the lease payments.
As the lessor discharges the performance obligation, leasing income is
recognized into income. As payments are received from the lessee, interest income is recognized and the receivable
is reduced. Finally, the asset would
continue to be depreciated over its useful life, On the statement of financial position, the
asset, the lease receivable and the performance obligation are shown as a net
liability or asset. On the statement of
comprehensive income, the lessor would report leasing income, interest income
and depreciation expense.
(b) The “derecognition approach” assumes that a
portion of the leased asset is sold when the rights of use are transferred to
the lessee under the lease agreement.
This requires that the leased assets be derecognized. The lease contract is a promise to transfer
the asset to the lessee and so once delivery is completed, the performance
obligation has been met and no longer exists.
In derecognizing the leased asset, a receivable for the present value of
the lease payments and a residual value are recognized. The residual value is a non-financial asset
which represents the rights to economic benefits from the asset arising after
the lease term. These economic benefits
would arise from subsequent sale of the asset or re-leasing the asset under a
new contract. The company will recognize
revenue on the sale of the asset, and then interest income on the receivable as
the lease payments are received. The
impact on the statement of financial position will be a receivable and a
residual value as assets. The impact on
the statement of comprehensive income will show revenue from the sale of the
leased asset, and interest income over the term of the lease.
(c) Using the
information given, below is what would be shown on the statement of financial
position for assets and liabilities on initial recognition of the lease:
|
|
Performance obligation
|
Derecognition
|
Leased asset
|
$100,000
|
|
Lease receivable
|
$92,900
|
$92,900
|
Residual value
|
|
$7,100
|
Performance obligation
|
($92,900)
|
|
Net assets
|
$100,000
|
$100,000
|
