T2 leases - Review Q 11.2 11.6 11.9 11.14 11.21 Chapter 11...

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Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan 11–1 Review Q. 11.2; 11.6; 11.9; 11.14; 11.21 Chapter 11 Accounting for leases 11.2 We should capitalise a lease transaction (meaning that the leased asset and lease liability will be placed on the balance sheet) when substantially all the risks and rewards of ownership pass to the lessee, and the lease payments are deemed to be material. AASB 117 describes the risks and rewards of ownership as follows: Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realisation of a residual value. AASB 117 dedicates a number of paragraphs (paragraphs 10 to 12) to assist in determining whether a lease is a finance lease or an operating lease. A finance lease is to be capitalised. These paragraphs state: 10. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred; (d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and (e) the leased assets are of such a specialised nature that only the lessee can use them without major modifications. 11. Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are: (a) if the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee; (b) gains or losses from the fluctuation in the fair value of the residual accrue to the lessee (for example, in the form of a rent rebate equalling most of the sales proceeds at the end of the lease); and (c) the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.
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Solutions Manual t/a Australian Financial Accounting 5/e by Craig Deegan 11–2 12. The examples and indicators in paragraphs 10 and 11 are not always conclusive. If it is clear from other features of the lease that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease. For example, this may be the case if ownership of the asset transfers at the end
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T2 leases - Review Q 11.2 11.6 11.9 11.14 11.21 Chapter 11...

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