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© 2011 IFRS Foundation 1 The IFRS for SMEs Topic 3.1 Section 20 Leases Section 21 Provisions and Contingencies Section 28 Employee Benefits

Apr 01, 2015

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2011 IFRS Foundation 1 The IFRS for SMEs Topic 3.1 Section 20 Leases Section 21 Provisions and Contingencies Section 28 Employee Benefits Slide 2 2011 IFRS Foundation 2 This PowerPoint presentation was prepared by IFRS Foundation education staff as a convenience for others. It has not been approved by the IASB. The IFRS Foundation allows individuals and organisations to use this presentation to conduct training on the IFRS for SMEs. However, if you make any changes to the PowerPoint presentation, your changes should be clearly identifiable as not part of the presentation prepared by the IFRS Foundation education staff and the copyright notice must be removed from every amended page. This presentation may be modified from time to time. The latest version may be downloaded from: http://www.ifrs.org/IFRS+for+SMEs/SME+Workshops.htm The accounting requirements applicable to small and medium sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. Slide 3 2011 IFRS Foundation 3 The IFRS for SMEs Section 20 Leases Slide 4 2011 IFRS Foundation 4 Section 20 scope A lease is an agreement whereby the lessor conveys to the lessee in return for payment or a series of payments the right to use an asset for an agreed period of time Section 20 covers accounting and reporting for most leases (see paragraphs 20.120.3 for exceptions and inclusions) Slide 5 2011 IFRS Foundation 5 Section 20 classification of leases A lease is classified a finance lease if it transfers substantially all the risks & rewards incidental to ownership an operating lease if it does not transfer substantially all the risks & rewards incidental to ownership Use judgement considering all facts & circumstances to classify leases operating lease if lessor retains significant risks & rewards of ownership substance of finance lease is similar to the purchase of an asset on credit. Slide 6 2011 IFRS Foundation 6 Section 20 classification of leases continued Situations that individually or in combination normally indicate a finance lease: lease transfers ownership of the asset to lessee from inception lessee reasonably certain to exercise bargain purchase option lease term is for the major part of assets economic life at inception PV of MLPs = substantially all assets fair value specialised asset (only lessee can use without major modifications) Slide 7 2011 IFRS Foundation 7 Section 20 classification of leases continued Situations that individually or in combination could indicate a finance lease lessee can cancel the lease but compensates the lessors for associated losses gains or losses from the fluctuation in the residual value of the leased asset accrue to the lessee lessee can continue the lease for a secondary period at a rent that is substantially lower than market rent Slide 8 2011 IFRS Foundation Section 20 lease classification Ex Ex 1: On 1/1/20X1 enter into 5-yr non cancellable lease over a machine. Machines cash cost = 100,000, economic life = 10 yrs and residual value = 0. Annual lease payments on 31/12: 4 23,000 & 23,539 at end of yr 5 when ownership transfers to the lessee. The interest rate implicit in the lease is 5% p.a. which approximates lessees incremental borrowing rate. 8 Slide 9 2011 IFRS Foundation Section 20 lease classification Ex Ex 2: Same as Ex 1 except ownership of the machine does not automatically transfer to the lessee at the end of the lease. Instead, the lessee has an option to acquire the machine from the lessor on 1/1/20X6 for CU1. Ex 3: Same as Ex 1 except economic life of the machine is five years and ownership of the machine does not transfer to the lessee at the end of the lease. 9 Slide 10 2011 IFRS Foundation Section 20 lease classification Ex Ex 4: Same as Ex 1 except ownership does not transfers to lessee at the end of the lease. Instead lessee has an option to continue the lease asset for a further 5 years at a rent of CU1 per year. Ex 5: Same as Ex 1 except ownership transfers to the lessee at the end of the lease for a variable payment equal to the assets then fair value (instead of 23,539). 10 Slide 11 2011 IFRS Foundation Section 20 lease classification Ex Ex 6: Tripartite lease agreement. Lessor transfers substantially all risks & rewards to 2 unrelated parties: the lessee obtains the right of use of the leased asset for a period of time; and the other party contracts to acquire the leased asset from the lessor at the end of the lease term at a fixed price. 11 Slide 12 2011 IFRS Foundation Section 20 lease classification Ex Ex 6 continued: Lease classification: lessor = finance lease lessee = operating lease other party has firm commitment to acquire asset 12 Slide 13 2011 IFRS Foundation 13 The IFRS for SMEs Lessee (finance lease & operating lease) Slide 14 2011 IFRS Foundation 14 Section 20 lessee: finance lease Initial recognition & measurement: recognise assets (rights) & liabilities (obligations) at fair value of leased property or, if lower, the present value of the minimum lease payments add to asset the lessees incremental costs that are directly attributable to negotiating & arranging a lease Slide 15 2011 IFRS Foundation 15 Section 20 lessee: finance lease continued Subsequent measurement: apportion minimum lease payments between finance charge & liability using effective interest method depreciate asset in accordance with relevant section (eg Section 17 PP&E) Slide 16 2011 IFRS Foundation Section 20 lessee: finance lease Ex Ex 7: Same as Ex 1. Finance lease obligation amortisation table: 16 1 Jan Finance cost Payment31 Dec 20X1100,0005,000(23,000)82,000 20X282,0004,100(23,000)63,100 20X363,1003,155(23,000)43,255 20X443,2552,163(23,000)22,418 20X522,4181,121(23,539) Slide 17 2011 IFRS Foundation Section 20 lessee: finance lease Ex Ex 7 continued : 1/1/20X1 (initial recognition) recognise: asset (PP&E) 100,000; and liability (finance lease obligation) 100,000 For the year ended 31/12/20X1 recognise: allocate payment of 23,000 (5,000 finance cost in profit or loss & 18,000 repayment of finance lease obligation) CU10,000 depreciation expense in profit or loss and as a reduction to the asset 17 Slide 18 2011 IFRS Foundation 18 Section 20 lessee: finance lease continued Disclose: For each class of asset, the net carrying amount at reporting date Total FMLPs on reporting date, showing due (i) in 1 year but 5 years General description of significant leasing arrangements Also see Sections 17, 18, 27 and 34. Slide 19 2011 IFRS Foundation 19 Section 20 lessee: operating lease Recognition & measurement: expense lease payments on straight-line basis unless: another systematic basis is more representative of the users benefit; or payments are structured to increase in line with expected general inflation (based on published indexes or statistics). Slide 20 2011 IFRS Foundation Section 20 operating lease examples Ex 8: On 1/1/20X1 A entered into a 5-year non cancellable operating lease over a building. Rentals X1X4 = 0. Rental X5 = 5,000. Ex 9: Same as Ex 8 except lessor agrees to pay the lessees relocation costs (ie 500) as an incentive to the lessee for entering into the new lease Ex 10: Operating lease payments increase by expected CPI (10% p.a.) to compensate the lessor for expected inflation. X1 = 1,000; X2 = 1,100; X3 = 1,210; etc 20 Slide 21 2011 IFRS Foundation 21 Section 20 lessee: operating lease Disclose: Total FMLPs for non-cancellable operating leases, showing due (i) in < 1 year; (ii) > 1 year but 5 years lease payments recognised as an expense a general description of the lessees significant leasing arrangements including for example, information about contingent rent, renewal or purchase options and escalation clauses, subleases, and restrictions imposed by lease arrangements Slide 22 2011 IFRS Foundation 22 The IFRS for SMEs Lessor (finance lease & operating lease) Slide 23 2011 IFRS Foundation 23 Section 20 lessor: finance lease Initial recognition & measurement: recognise assets held under a finance lease (a receivable) at an amount equal to the net investment in the lease (ie gross investment in the lease discounted at the interest rate implicit in the lease). The gross investment in the lease is the aggregate of: (a) the minimum lease payments receivable by the lessor under a finance lease, and (b) any unguaranteed residual value accruing to the lessor. Slide 24 2011 IFRS Foundation 24 Section 20 lessor: finance lease Subsequent measurement recognise finance incomeconstant periodic rate of return on net investment in lease apply lease payments against gross investment in the lease to reduce both the principal & the unearned finance income. if indication that estimated unguaranteed residual value used in computing the lessors gross investment in lease has changed significantly, income allocation over lease term is revised, & reduction in respect of amounts accrued recognised immediately in profit/loss Slide 25 2011 IFRS Foundation 25 Section 20 lessor: finance lease Other issues: Manufacturer or dealer lessors have 2 types of income: profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts, and finance income over the lease term. Disclosures (see paragraph 20.23) Slide 26 2011 IFRS Foundation 26 Section 20 lessor: operating lease Recognition & measurement lease payments as income on straight- line basis unless: another sys