DEPARTMENT ACCOUNTING UP

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1 1 FINANCIAL ACCOUNTING 300 IFRS 16 LEASES PRESCRIBED WORK K B Leith DEPARTMENT ACCOUNTING UP 1. IFRS 16(contained in A Guide through IFRS (July 2016) Read and study IFRS 16 but ignore the following paragraphs: para 3(a) (d) para 7 para 11 para 34 para 36: ONLY from or lease modifications. to the end of the paragraph para 37: ignore ONLY references to para 45(c) para 42(b) para para 48 para 53(f) and (i) para 59(b)(iv) and (d) para 68: ignore ONLY from 2 nd sentence to end of paragraph para para 87 para In Appendix A, ignore the following definitions: effective date of modification lease modification sublease In Appendix B, ignore the following paragraphs: B9 B31 B41 B43 B47 B52 B55 B58 2. IFRS 9 (Financial Instruments) Lease receivables are financial assets. IFRS 16 does not address impairment of lease receivables as this is addressed in IFRS 9 (refer to handouts for IFRS 9).

2 2 Make sure that you have revised impairments as far as they are applicable to lease receivables. 3. IFRS 16 handouts 3.1 Notes and class examples (comprises 2 handouts) Work through the notes and class examples carefully and in detail and make sure that you understand all of the principles and issues dealt with so that you can gain insight into this topic. This material will be dealt with in the lectures as follows: Part 1 of 2 Lecture 1: pages 1 38 (end of Class Example 10) Part 1 of 2 Lecture 2: pages (end of Class Example 17) Part 1 of 2 Lecture 3: pages (end of Class Example 23) Part 2 of 2 Lecture 4: pages 1 29 (end of Class Example 28) Part 2 of 2 Lecture 5: pages (end of Class Example 33) Part 2 of 2 Lecture 6: pages (end of Class Example 38) 3.2 Questions and suggested solutions (comprises 2 handouts) ALL of these questions must be worked through in detail. Do NOT do a sample from these questions. The suggested allocation of the questions is follows: Lecture 1 Question 1 BUT ignore part 3 until after lecture 2 Lecture 2 Question 1 complete; 14 Lecture 3 Questions 2; 3; 5 (Agreements 1 and 3); 15 Part A only Lecture 4 Question 6 (Part 3); 10 Lecture 5 Questions 4; 5 (Agreement 2); 6 (Part 1); 7; 9 Lecture 6 Questions 6 (Part 2); 8; 11; 12 and 13 NB: Question 15, Part B will be included in the homework questions with IAS 8 later on in the year. Homework question without a suggested solution The question without a solution (i.e. Question 15, PART A only) must be completed by you as a computer based assessment. You will first have to prepare your solution to the question on paper. Then you will be required to complete the computer based assessment which will comprise multiple choice questions related to your solution that you have documented on paper.

3 3 You will be required to complete this assessment by Thursday, 30 March 2017 by no later than 16h00. Access information to this assessment will be provided to you via an announcement on ClickUP. 4.Rhetorical questions Refer to the rhetorical questions on ClickUP for IFRS 16 after the lectures have been completed. 5. FRK201 knowledge You are required to know and understand the content of IFRS 16 dealt with on FRK201 level. NB: Refer specific outcome on pages 4-6 and ensure that you have achieved this specific outcome.

4 4 SPECIFIC OUTCOME IFRS 16 IFRS 16: IFRS 9: IAS 12: Leases Financial Instruments Income Taxes You should be able to account for, present and disclose all aspects relating to leases for the lessee and lessor on an integrated basis, including the income tax implications. The following specific matters are not addressed in FRK 300: Whether the contract contains a lease (in FRK 300 it will always be assumed that the contract does contain a lease); Lease modifications related to the lessee and the lessor; Sale and leaseback transactions; and VAT implications of leases; Sub-lease arrangements; and Leases of land AND buildings (i.e.:frk300 does deal with just the lease of a building). 1.1 Assessment criteria In order to reach the specific outcome, you should: 1. know and be able to apply the definitions, principles and concepts contained in the Conceptual Framework for Preparation of Financial Statements to leases from the perspective of both parties to the lease contract; 2. know and be able to apply the recognition exemptions to short-term leases and leases for underlying assets of low value, and know how to account for these; 3. know and be able to identify and account for the lease and non-lease components of a lease contract and know how to apply the practical expedient to such contracts in the books of the lessee; 4. know and be able to identify what the lease term of a lease contract is; 5. for the lessee, you should: know when to recognise the lease contract; know and be able to measure the right-of-use asset both initially and subsequently; know and be able to measure the lease liability both initially and subsequently;

5 5 know and be able to measure the adjustments required to the lease liability and the right-of-use asset for reassessments of the lease liability, and be able to prepare the disclosure, where applicable, required in terms of IAS 8, Changes in Accounting Policies, Changes in Estimates and Errors; be able to prepare the accounting entries to account for the lease contracts; know and be able to present all information for lease contracts in the financial statements; know be able to prepare the notes disclosing all information related to lease contracts in the financial statements; and know and be able to calculate the current income tax expense and deferred tax expense and be able to prepare the notes required in terms of IAS 12, Income Taxes, related to lease contracts. 6. For the lessor, you should: know when to recognise the lease contract; know and be able to classify a lease contract as either a finance lease or an operating lease; know and be able to measure the gross investment in the lease, the net investment in the lease and the unearned income both initially and subsequently for the financing lessor and the manufacturer / dealer lessor; know and be able to measure the effect of changes in interest rates where the lease contract contains a variable interest rate; know and be able to measure the effect of changes to the unguaranteed residual value and be able to prepare the disclosure required in terms of IAS 8, Changes in Accounting Policies, Changes in Estimates and Errors; know and be able to measure the revenue and cost of sales of the manufacturer / dealer lessor; know and be able to measure revenue when the interest rate in the lease contract of a manufacturer / dealer lessor is artificially low; be able to prepare the accounting entries to give effect to lease contracts; know and be able to present all information for lease contracts in the financial statements; know be able to prepare the notes disclosing all information related to lease contracts in the financial statements; and know and be able to calculate the current income tax expense and deferred tax expense and be able to prepare the notes required in terms of IAS 12, Income Taxes, related to lease contracts. 7. be able to apply the impairment criteria given in IFRS 9. Financial Instruments, to lease receivables as they are financial assets and IFRS 16 does not deal with impairment, and be able to account for impairments and reversals of impairments.

6 6 1.2 Sources 1. IFRS 16: Leases 2. IFRS 9: Financial Instruments 3. IAS 12: Income Taxes 5. IFRS 16 Notes and class examples (2 separate handouts) (available on ClickUP) 6. IFRS 16 Questions and suggested solutions (2 separate handouts) (available on ClickUP) 7. FRK201 study material 8. Rhetorical questions (available on ClickUP)