Naveed Logistics: lease accounting and its effect on the ratios

Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Lease liability at the start = 12,000 x 3.1699 = $38,039 (rounded).
• The right-of-use asset is the same, $38,039, because there are no payments before the start, initial direct costs or incentives.
• The asset is depreciated over the shorter of the lease term (4 years) and the useful life (6 years), because ownership does not pass to the entity.
• Depreciation = 38,039 / 4 = $9,510 (rounded).
• Finance cost for 20X5 = 10% x 38,039 = $3,804 (rounded).
• Closing liability at 31 December 20X5 = 38,039 + 3,804 - 12,000 = $29,843.

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Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• The liability is split into a current part and a non-current part.
• Interest for 20X6 = 10% x 29,843 = $2,984 (rounded).
• The current liability is the payment less the interest, which is 12,000 - 2,984 = $9,016.
• The non-current liability is 29,843 - 9,016 = $20,827, and the two parts add up to the total of $29,843.

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Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• The lease has a term of 12 months and no purchase option, so it is a short-term lease.
• A lessee may choose not to recognise a right-of-use asset and a lease liability for a short-term lease.
• If the exemption is used, the payments are expensed on a straight line basis over the lease term.
• The charge for 20X5 is $18,000 x 6/12 = $9,000, because the lease started on 1 July, and the rest relates to 20X6.

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Tick each point that your answer made clearly and only once. Points here are this site's own. A real examiner may accept other valid points.

• Under IFRS 16 the lessee recognises a lease liability for almost every lease, so liabilities and debt increase.
• Debt increases while equity is largely unchanged at the start, so gearing is higher than it was under the old treatment of operating leases.
• Leases that used to be off the statement of financial position are now visible, so lenders compare gearing and interest cover on a more complete basis.
• The lease expense is replaced by depreciation and a finance cost. Operating profit is higher than before, because the finance cost is below operating profit.
• Interest cover and return on capital employed are affected, because capital employed increases and the profit measure changes.
• Over the whole lease the total expense equals the total payments, but because interest is charged on the opening liability the expense is higher in the early years of the lease and lower later.

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