Week 6 ACC3100 Tute solutions

A lessee should capitalise a lease transaction (meaning that the leased asset and lease liability will be on the balance sheet) when the lease is for a period in excess of 12 months and the lease is not for a low-value items.

• For a lessee to be required to capitalise a lease, the contractual arrangement needs to satisfy the requirements in terms of being a ‘lease’.
• This requires that the lease obligation be non-cancellable and that the lessee ‘controls’ the asset for the duration of the lease, meaning that the supplier of the asset (the lessor) does not have a ‘substantive right’ to substitute the asset throughout the period of use.

• To the extent that a lease arrangement is non-cancellable and provides control of the asset to the lessee, there is an expectation that the lessee recognise a right-of-use asset representing its right to use the underlying leased asset and a lease liability representing its obligations to make lease payments.
• Lessees can elect to exempt themselves from this requirement when the lease is for a lease period of 12 months or less, or where the lease is for a low-value item.

• At the commencement date, a lessee shall measure the lease liability at the present value of the lease payments that are not paid at that date.
• The lease payments shall be discounted using the interest rate implicit in the lease, if that rate can be readily determined.
• If that rate cannot be readily determined, the lessee shall use the lessee’s incremental borrowing rate.

At the commencement date, the lease payments included in the measurement of the lease liability comprise the following payments for the right to use the underlying asset during the lease term that are not paid at the commencement date:

(a) fixed payments (including in-substance fixed payments as described in paragraph B42), less any lease incentives receivable;

(b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date (as described in paragraph 28);

(c) amounts expected to be payable by the lessee under residual value guarantees;

(d) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option (assessed considering the factors described in paragraphs B37–B40); and

(e) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an option to terminate the lease.