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Accounting and Financial Statements Essay

   

Added on  2021-05-31

8 Pages1428 Words28 Views
Running head: CORPORATE ACCOUNTING AND FINANCIAL REPORTING Corporate Accounting and reportingName of the StudentName of the UniversityStudent ID

1CORPORATE ACCOUNTING AND FINANCIAL REPORTING Part AAccounting for finance leases by lesseesLease is the legal obligation through which owner of particular asset herebycalled as the lessor permits the 2nd party hereby called as lessee for using the assetfor particular period of time in exchange of lease rents. The leased asset is used bythe lessee and in exchange the lessee makes regular payment to the lessor knownas lease rental (Joubert, Garvie and Parle 2017). At the inception of lease the lesseeanalyses the associated liability and asset’s right-to use conditions. The analyses arebased on –Lease liability – present value of lease payments are discounted on applicablediscounting rate for lease. The applicable rate is the implicit rate under the lease ifthe rate can be determined readily. However, if the rate cannot be determined thelessee shall use the rate of incremental borrowing (Krautter and Thompson 2015).Right – to – use the asset – initial amount of lease liability in addition to the leasepayments that is payable to lessor before the inception of lease plus the initial directcost expensed, if any reduced by the amount received on account of the leaseincentive Further, when the lessee has identified the lease as finance lease, he shall identifythe few things over the lease term. The things are – (i) ongoing amortization onaccount of the asset’s right to use (ii) ongoing amortization on account of interestpayable on lease liability (iii) impairment of asset’s right to use, if any and (iv)variable payment for lease that are not taken into consideration under lease liability.

2CORPORATE ACCOUNTING AND FINANCIAL REPORTING As per Para 61 of AASB 16 on leases the lessor shall segregate the leases asthe finance lease or operating lease. The lease will be considered as the financelease if all the rewards and risks associated with the lease are transferred. On theother hand, where the substantial risks and rewards associated with the asset arenot transferred the lease is considered as operating asset. Whether the lease isoperating lease or finance lease depends on the essence of the transaction and noton the form of contract (Wong, Wong and Jeter 2016). The situations that incombination with any other situation or individually lead to the lease being classifiedas the finance lease are – (i) the lease is able to cancel the lease and the generatedlosses on account of cancellation shall be borne by lessee (ii) losses or gains fromfair value fluctuation with regard to the residual value is accrued to lessee and (iii)lessee is allowed to continue the lease term for secondary period in exchange of rentwhich is substantially lesser as compared to the market rent. The lease payment with regard to the underlying asset includes the paymentas – (i) fixed payment that includes the in-substance fixed payments reduced by anyamount payable as lease incentives (ii) any residual guarantee value that is providedas guarantee by the lessee to the lessor (iii) variable payment for lease that is basedon the rate or index and it is measured through the rate or index initially at the dateof commencement (iii) exercise price of the purchase option if it is certain that theoption will be exercised and (iv) payments as penalties for termination of lease (Ali etal. 2013). At the commencement of the lease the lessor must identify the asset that isheld under the finance lease under the financial statement of the company ispresented at the receivable amount that is equal to net investment in lease. Under

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