Financial Accounting, Appunti di Cost Accounting

Scarica Financial Accounting e più Appunti in PDF di Cost Accounting solo su Docsity! LECTURE 11 bis 21/02/2022 IFRS 16 is a standard that regulates LEASES or LEASE AGREEMENTS. What is a lease agreement? A lease agreement is an agreement that our company may enter with a counterpart. Normally, the counterpart is a leasing company (a financial company, a financial institution or a bank that performs lease services). The lease agreement implies that the lessee takes assets from the lessor where the lessor is the legal owner of the assets. So, the leasing company is the legal owner of these assets which are given to our company (the lessee) and the lessee uses these assets (usually, long term tangible assets) for its own productive or administrative purposes as if they were its own assets even though the legal ownership remains in the hands of the lessor. The lessee will pay periodic fees to the lessor. Lease agreements can also be rentals: the ownership of the car is of the person that gives me the car. However, in some cases, lease agreements may imply that the user (the LESSEE) can buy that asset at the end of the agreement. At the end of the lease agreement, after having used that asset as if it was its own asset, after having paid the amount of money to the lessor, the lessee buys that used asset and continue to use it. Formally, the price is low because we already paid it. IFRS 16 is a classic example of international standard where the substance over the juridical form prevails. The lease agreement must be accounted for, according to the substance over form and not the form over substance. If we follow the form over substance, which is typical of the Roman Germanic central European countries, the value of that lease asset must remain at the balance sheet of the company. According to IFRS 16, there are two families of leases: 1. Finance leases 2. Operating leases (leases which are not finance leases) The standard defines the finance leases because the operating leases are then defined as leases which are not finance leases. If it is not a finance lease it would be an operating lease. This distinction is important because the accounting treatment of the lease asset is different according to the family of leases to which the specific agreement belongs. And there is also a difference in the accounting treatment of the lessor and in the accounting treatment of the lessee in the sense that the two-accounting treatment are not always specular. 1 Signs that a specific agreement is a finance lease and not an operating lease. 1° Indicator Ownership may not transfer at the end of the lease. Normally, it happens when the length of the lease agreement corresponds more or less to the useful life of the asset. 2° Indicator If the lessee can buy the used asset at the end of the agreement at a bargain price, it is a finance lease. 3° Indicator If the duration of the lease corresponds to the majority of the economic life, it is a finance lease. In general, when the economic life of a long-term asset is longer than the useful life normally, we have the residual value of that asset. The presence of a 2 it to us. So, the asset goes away on the credit side and on the debit side we record a long-term receivable. So, the lessor does not depreciate that asset anymore because he does not have that asset any longer in its financial statement. ACCOUNTING FOR OPERATING LEASES Under the definition of operating leases, we have also rental agreements. What is the difference in juridical terms between a lease agreement and a rental? The difference is that in rental agreements you don’t have the purchase option in the end of the period. But the terminology used by IFRS 16 includes also rental agreements because rentals will be lease agreements without the purchase option. The lessee will have to account, among its assets, for an intangible asset which is called “Right Of Use (ROU)”. The ROU is an intangible asset which could be short or long term and the company should amortize it during the duration of the agreement: it is an operating lease, so the substance is to rent it. But there is an asymmetrical treatment because the leasing company (the lessor) will keep it in its the balance sheet, and it will be depreciated for the useful life of the asset that can be rented several times (the lessee will amortise the ROU up to the end of the period while the lessor may amortize it continuously). Before there was another standard called IAS 17 in which for financial and operating leases there were symmetrical treatment while in IFRS 16, since 2019, there is this asymmetrical treatment for operating leases. IFRS 16 IN THE ACCOUNTS OF THE LESSEE: EXEMPTIONS For the lessee there are two major optional exceptions make the standard easier to apply. The lessee can get these exemptions or not. 1. For short term leases (≤ 12 months), the lessee can avoid to account for PPE for the “Right of Use”. So, he can avoid the accounting of the assets and just record the regular payments: he will record for a rental expense as soon as he receives the regular invoice. 5 We rent a car for 6 months, we receive an invoice every month and we only record for the expenses (debit: rental expense, credit: account payable or cash). 2. For leases of low value items (≤ USD 5,000), we can just record the specific invoice. There exemptions don’t necessarily come together: we can have the first one or the second one or both and they are optional. 6