Principles for measurement, recognition, presentation and disclosures for finance leases AASB 16

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate accounting and reporting
Name of the student
Name of the university
Student ID
Author note

1CORPORATE ACCOUNTING AND REPORTING
Part A
Disclosures for the finance leases
AASB 16 sets out principles for measurement, recognition, presentation and
the disclosures for leases. This objective assures that lessor and lessees provide the
relevant information in a way that represents the lease related transactions faithfully.
The information provides the basis that can be used by the users of financial reports
for assessing the impact that the lease has on cash flow, financial position and
financial performance of the company (Aasb.gov.au 2019).
The lessor must classify each of the leases as finance lease or operating
lease. Finance lease is the lease where substantially all the rewards and risks
connected with the ownership of underlying asset are transferred (Aasb.gov.au
2019). Situation that leads the lease to be classified as the finance lease are – (i)
ownership of underlying lease asset is transferred to lessee by closing of the lease
term (ii) terms of lease is for maximum proportion of the asset’s economic life even if
title of the asset is not transferred (iii) lessee has option of buying the underlying
asset at the price that is likely to be significantly lower as compared to the fair value
on the date when the option is exercisable to make it reasonably certain (iv) at
inception date, present value of lease payment amount shall match substantially with
the entire fair value of underlying asset (v) underlying asset is of special nature and
the lessee can only use it without any major modifications. Indication of situation
that led to classification of a lease as financial lease are – (i) if lessee has the option
to cancel the lease, loss of the lessor related to cancellation of lease will be paid by
lessee (ii) lessee has ability for continuing the lease term for secondary period with
the rent that is considerable less as compared to the market value (iii) losses or

2CORPORATE ACCOUNTING AND REPORTING
gains from fluctuation in fair value of residual accrue to lessee (Caster, Scheraga
and Olynick 2018).
At commencement date, lessor must recognise the asset held under the
finance lease in financial position statement and record them as receivable at the
amount that is same to net investment in lease. Lessor must use implicit interest rate
for measuring net investment in lease. However, for sublease, if implicit interest rate
cannot be determined readily, intermediate lessor may utilise discount rate utilised
for head lease for measuring net in investment in sublease. Direct cost except the
cost expensed by the dealer or manufacturer lessor, is considered while measuring
the net investment of lease initially and shall reduce the income value recognised
over lease term. Implicit interest rate in lease is defined for including the direct initial
cost automatically in net lease investment and it is not required to add them
separately (Lowe and Campbell 2017).
At commencement date, lease payments included under measurement of net
lease investment comprise various payments attributable to right to use the
subjected asset during the term of lease that are not received on commencement
date. The payments are – (i) fixed payments reduced by lease incentives, if any (ii)
variable lease payments depended on index or rate and measured initially using the
rate or index at commencement date. (iii) Residual guarantee value, if any provided
by the lessee by the lessor, party associated with the lessee or 3rd party not
associated with the lessor that is capable financially to discharge the guarantee
obligations (iv) penalty payment due to lease termination, if lease term represents
lease exercising the option of terminating lease (v) exercise price of purchase option,
if lessee is certain regarding exercising of the option (Aasb.gov.au 2019). Lessor
must record the financial income over the term of lease on the basis of pattern that