Accounting For Leases - ACCT2011 Financial Accounting

Name: Accounting For Leases - ACCT2011 Financial Accounting
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Author: Lily Green

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Accounting for Leases
Week 4 Lecture
ACCT2011
Financial Accounting A
Jap Efendi
1

2
Accounting for Leases
Learning objectives:
1. Introduction of present values in accounting
2. Understand the nature of leases (Ch 12 LO 1)
3. Distinguish between an operating lease and a finance lease (Ch 12 LO 2)
4. Understand the difference between the ‘expense’ and the ‘capitalisation’
methods of accounting for finance leases in the books of a lessee (Ch 12
LO 3)
5. Understand the implications of lease accounting for assessment of
operating performance and financial risk (Ch 12 LO 5)
6. Apply the requirements of AASB 117 to the classification of leases (Ch 12
LO 6)
7. Apply the requirements of AASB 117 to accounting for operating leases in
the books of the lessee (Ch 12 LO 7)
8. Apply the requirements of AASB 117 to accounting for finance leases in the
books of the lessee (Ch 12 LO 8)
9. Understand the proposed new approach to lease accounting (Ch 12 LO10)
2

3
Accounting for Leases
Textbook Readings:
› Chapter 12 Sections 12.1 (excluding Section 12.1.5 & 12.1.6),
12.2 to 12.2.3; 12.3 (pp353-370; 378-380)
› Handbook Readings:
- AASB117
› Additional Reading:
- IASB Investor Spotlight at: http://www.ifrs.org/Current-
Projects/IASB-Projects/Leases/Documents/Investor-
spotlight-leases.pdf
- “Leasing rules new liability for top 20” Australian Financial
Review (on Blackboard)
3

Present Value Concepts
› Most long-term debts are required to be measured at present value, but before
proceeding, we need to understand time value of money.
› Q. Would you rather receive $1,000 now or $1,000 in a year’s time?
- If now, you recognise that money received/paid in the future (FV) is worth less than the same
amount in present value (PV) dollars received/paid today. Why?
- The PV of $1,000 in a year’s time, is equivalent to the present amount you would need to invest at
the current interest rate, to give you $1,000 in a years time.
› PV of $1 formula/tables provides a discount factor to convert FV to PV.
The PV of $1 000 in a years time, if interest rate is 10%
PV = FV / (1 + r) n = $1,000/(1 + 0.1)1 = $909.09

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Present Value of a Single Sum
(PV of $1 Table)
› Example: You have won a lottery, and must choose to receive
$90,000 in 3 years time (current interest rate = 10%), or $70,000 now
- To answer, you need to calculate the PV of the $90,000 in 3 yrs by discounting it at the current
interest rate, so that you can compare PVs on an equivalent basis
› Present Value of a single sum of $1 table helps us to calculate this by providing the
relevant discount rate for each interest rate and period .
- Refer to the PV of $1 table and find the discount factor at 10% interest for 3 periods
- Calculate the PV by multiply the FV by the discount factor
- Compare to the amounts in present value terms
PV [i=10%, n=3] of $90,000  0.75131 (see Text book appendix, Table 1) = $67,618
Amount to be received immediately 70,000
Difference - 2,382
PV=? 90,000n=3 year, i=10%

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Present Value of an Annuity
(PV of an annuity of $1)
› Assume that you have also received an option to choose to receive $70,000 now or
$30,000 each year for 3 yrs (current interest rate = 10%)
› To answer this, you could calculate the PV of $30 000 in each period by discounting it at the
current interest rate and period, then sum the amounts
Future amount PV factor of 10% PV
$30,000 (1 year away) 0.90909 $ 27,276
$30,000 (2 years away) 0.82645 24,793
$30,000 (3 years away) 0.75131 22,539
2.48685 $74,605
PV=? 30,00030,00030,000
n=3 year, i=10%

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1010
Understand the nature of leases
› Leases are agreements which, in exchange for lease
payments, convey to one party (the lessee) the right
to possess and use an asset owned by another party
(the lessor) for a stated period of time.
› Parties to the lease:
• Lessor - the owner of property that conveys the
right to use the property for a specified period of time
in return for a series of payments
• Lessee - party entering into a lease agreement with
a lessor

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Curtin University

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Accounting

Accounting For Leases - ACCT2011 Financial Accounting

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