Comprehensive Report on Finance Leases Accounting and Impairment Loss

This report provides a detailed analysis of corporate accounting for finance leases and impairment loss. It explains the accounting treatment for finance leases by lessees, focusing on the recognition of right-to-use assets (RUA) and lease liabilities under AASB 16. The report covers the initial and subsequent measurement of RUA and lease liabilities, including the impact of lease modifications and remeasurements. It also discusses the financial statement presentation and disclosure requirements for lessees. Furthermore, the report includes a section on impairment loss, demonstrating the allocation of impairment losses across various assets like goodwill, plant, brand, and fittings, with calculations and pro-rata allocation provided. This document, contributed by a student, is available on Desklib, a platform offering a wide range of study resources for students.

Running head: CORPORATE ACCOUNTING
Corporate accounting
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Part A
Accounting for finance leases by lessees
Lease is the arrangement where one party that is the lessor offers an asset
for the purpose of use by other party that is the lessee against periodic payment.
Accounting for any lease is made based on the type of lease. Finance lease is the
approach through which the finance is provided effectively by the leasing entity who
buys the asset for the purpose of providing it on lease for the agreed time period.
Lessee makes the rental payment that is sufficient to cover the asset’s original cost
during the primary period of the lease (Aasb.gov.au 2019). An obligation is there for
making such payment which sometime also includes the balloon payment while the
contract is over. Once all these payments are made, lessor is expected to recover
the investment made by lessor in the asset. The lessee is committed for paying the
rentals over the specified period and technically finance lease is considered as non-
cancellable though it can be terminated before the completion of lease term. Finance
lease leads to recognition of both the assets as well as liabilities by the lessee it its
books at commencement of lease. Further, it shall be reported at the value that is
equal to the PV of the MLP (minimum lease payments). It is likely that lease assets
as well as lease liabilities are reported by lessee and the lessor at different values
(Aasb.gov.au 2019).
Parties to the lease may go for negotiation of the lease before the assets
under the subject is available for the purpose of use by the lessee. The subjected
asset in some of the scenario required to be redesigned or reconstructed to make it
ready for the use by the lessee. Based on the conditions and the terms of contract
the lessee may require making payments associated with the design or construction

of the asset. If lessee incurs the cost with regard to design or construction of
subjected asset the lessee shall take into consideration those costs through
application of other associated standards (Barone, Birt and Moya 2014)
At the inception the lessee is required to recognise the lease liability and a
right-to-use asset (RUA) and the same shall be valued at cost. Cost of the RUA is
comprised of – (i) direct cost expensed by lessee initially (ii) lease payments made at
commencement of lease reduced by lease incentives received, if any (iii) amount
measured as lease liability initially (iv) cost estimates that is to be expensed by
lessee for dismantling as well as removing subjected asset, restoring the asset to the
condition which it is purported to be and restoring site where it is located. Lessee
must recognise all these costs as the integral part of while it expensed any obligation
for these costs (Wong and Joshi 2015)
For the contract that includes lease element and one or more than one
additional lease or the non lease component the lessee is required to allocate
consideration associated with the contract to each of the lease component and
aggregate stand alone price for the lease component. As the practical expedient, the
lessee has the option to select through the class of the underlying asset not for the
non-lease component and associated n on-lease component, if any (Aasb.gov.au
2019).
After the inception date lessee is required to value the RUA through
application of cost approach – (a) adjusting for measurement of lease liability and (b)
after deducting the amount of accumulated depreciation and accumulated
depreciation, if any. The lessee is required to apply AASB 16 – Property, plant and
equipment for the purpose of charging depreciation on RUA. If the subjected asset’s

ownership is reassigned to lessee at the time when the lease period is completed or
if the cost of RUA reveals that the lessee will opt for the purchase option, the RUA
shall be depreciated since the commencement of the lease to the end of life of the
asset (Aasb.gov.au 2019). Otherwise, lessee is required to depreciate RUA from
inception of lease to completion of lease term or completion of the life of RUA,
whichever is earlier. Further, lessee is required to comply with AASB 136 –
Impairment of assets for determining whether the RUA is impaired and accounting
for acknowledged impairment loss. However, if the RUA related to any class of PPE
to which the revaluation model is used by lessee in accordance with AASB 116,
lessee has the option of applying the revaluation model for all the RUA that is related
to that class of PPE (Aasb.gov.au 2019).
After the date of inception the lessee is required to measure lease liability
through reducing carrying value for reflecting the lease payment made, increasing
the carrying value for reflecting the interest for lease liability, re-measurement of
carrying amount for reflecting the reassessment or the lease modification. Re-
measurement shall be carried out for the lease liability through discounting revised
lease payments applying the revised rate of discount if any change is there in
assessing the purchase option for the subjected asset that is assets with the
consideration of circumstances for purchase option or any change is there in the
term of lease where the lessee is required to determine revised payment for lease
based on the revised term of lease (Aasb.gov.au 2019).
In case of lease modification the lessee is required to judge the lease
modification as the separate lease if (a) the consideration of lease goes up by the
value of amount that is commensurate with the stand-alone value for increase in
scope and any applicable and appropriate adjustments to the stand-alone price for

reflecting the contract’s circumstances and (b) modification enhances scope of lease
through adding the right to use one or more of the subjected assets. For lease
modification those are not taken into consideration for considering as the separate
lease on the date of lease modification the lessee is required to – (i) determine lease
term for modified lease (ii) assign consideration for modified contract (iii) re-measure
lease liability through discounting the revised payments for lease by applying the
revised rate of discount (Aasb.gov.au 2019). For the modification of lease that is not
taken into consideration as the distinct lease lessee is required to account for the re-
measurement of lease liability through – (i) making the corresponding adjustment to
RUA for all the modified lease and (ii) reducing carrying amount of RUA for reflecting
partial or the full termination of lease for the modified lease that reduce the scope of
lease. Further, the lessee is required to recognise the profit or loss for any gain or
loss associated to full or partial termination of lease (Spencer and Webb 2015)
A lease is placed in the financial statement or disclosed in the notes. When
the lessee is unable to provide RUA individually in the financial statement, the lessee
will incorporate RUA within similar category as that of the similar subjected assets
and will be reported if they were possessed and divulge which line unit in the
financial statement encompasses RUA (Müller, Riedl and Sellhorn 2015). When the
lessee does not present the liabilities of lease individually in the financial statement,
the lessee will divulge which line unit in the financial statement encompasses those
liabilities. The requirement in the above paragraph does not put in an application for
RUA that match the meaning of investment property that needs to be shown in the
financial report as investment property. Lessee needs to show current interest cost
towards lease liability individually from the depreciation charge for the RUA in the
profit or loss statement. Interest cost towards lease liability is a part of finance costs

that is needed to be shown in the income statement and profit and loss statement
(Aasb.gov.au 2019). A lessee shall show under cash flow report the payment in cash
for the major segment of the lease liability in the financing activities, payment in cash
for the interest part of the lease liability putting use the needs in AASB107cash flow
statement for interest paid and payments for lease of low-value asset, uneven lease
payments and lease payments over short term lease payments not a part of
measurement of lease liability within operating activities (International Accounting
Standards Board (IASB) 2013).
The major reason behind declaration in the notes in addition to the details
provided in the cash flow statement, profit or loss statement and financial statement
is that it provides foundation for the users of these annual statements to gauge the
effect that leases have on the cash flows of the lessee, financial performance and
the financial position. A lessee needs to divulge information regarding ithe leases for
which the person is considered as lessee in one note or various segment under the
annual statements. But a lessee should not replicate the information that is present
beforehand in the financial statement, subjected to the fact that the information is
consolidated by cross reference in separate section or in one note about leases
(Financial Accounting Standards Board (FASB) 2016).
A lessee shall divulge the depreciation charge for RUA by class of subjected
assets, interest expense on lease liabilities, the expense related to short-term leases
that should not be included in the expense relating to leases with a lease term of 30
days or less, the expense related to leases of low-value assets that should not be
included in the expenses pertaining to short-term leases of low-value assets, the
expense pertaining to variable lease payment not part of calculating lease liabilities,
income from subleasing RUA, total value of cash outflow towards leases, in additions

to RUA, gains or losses coming from leaseback and sale transaction and the
carrying amount of RUA at the end of the reporting period by class of underlying
assets amounts for the reporting period. A lessee needs to provide disclosures only
in tabular format, unless other format is more relevant and the amounts should have
cost included in carrying amount of any other asset during the period under concern.
A lessee is required to provide the value of lease commitments towards short-term
leases if the portfolio of short term leases under which it is included at the completion
of reporting period is not similar to that of the expense disclosed (Chambers, Dooley
and Finger 2015). When RUA matches the meaning of investment property, a lessee
should apply the disclosure requirement in AASB 140.
Apart from the disclosures requirement mentioned above, lessee is required
to disclose additional qualitative plus quantitative information regarding the leasing
activities required for meeting objectives associated with disclosures. The said
additional information may inclusive of but not limited to the information that may
assist the users for assessing the financial statements in assessing – (i) covenants
or restrictions that is imposed by the leases (ii) leaseback and sales transactions (iii)
nature of leasing activities of lessee (iv) future cash outflows to which the lessee is
exposed and which is not reflected while measuring the lease liabilities. The
exposures may include – (i) lease that has not yet been commenced however, the
lessee is committed to the same (ii) termination as well as extension options (iii)
guarantees for residual values (iv) variable lease payments. Further, the lessee who
accounts for the short term lease or leases for low value asset must disclose the fact
related to approaches applied for the same (Bohušová 2015.)

Part B
Impairment loss
Account Carrying amount
Plant $ 85,700
Brand $ 20,000.00
Fittings $ 13,000.00
Inventory $ 6,000.00
Goodwill $ 5,000.00
Total carrying amount $ 129,700.00
Value in use $ 114,700
Impairment loss $ 15,000
Allocation of impairment loss
Account
Carrying
amount (CA) Pro-rata Allocation Adjusted CA
Goodwill
$
5,000 $ 5,000 $ -
Plant
$
85,700 85700/118700 $ 7,220 $ 78,480
Brand
$
20,000 20000/118700 $ 1,685 $ 18,315
Fittings
$
13,000 13000/118700 $ 1,095 $ 11,905
$
118,700
$
15,000
Impairment loss on plant
Fair value less cost of disposal $ 340,700
Adjusted carrying amount of plant $ 78,480
Amount for reallocation $ 262,220
Reallocation of the impairment on equipment to the other CGU
Account Adjusted CA Pro-rata Allocation Total allocation
Goodwill $ 5,000
Plant $ 262,220
Brand $ 18,315 18315/30220 $ 158,921
$
160,606
Fittings $ 11,905 11905/30220 $ 103,299 $

104,394
$ 30,220
$
262,220
$
532,220
Journal entries for impairment loss
Particulars Debit Credit
Impairment loss account………Dr $ 532,220
Goodwill…………………………Cr $ 5,000
Plant……………………………..Cr $ 262,220
Brand……………………….Cr $ 160,606
Fittings………………………...Cr $ 104,394[impairment loss is taken place for specific CGU]
Profit and loss account………...Dr $ 532,220
To impairment loss……………..Cr $ 532,220[impairment loss charged to profit and loss account]
Note – inventories are not considered as it is values at cost or market value
whichever is lower.

Reference
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