Prepaid Rent Impact On Lease

[Yakub02]

The guaranteed and unguaranteed residual values might influence the lessor’s classification of a lease and therefore how it is accounted for.

The impact of rentals paid in advance on the interest rate implicit in the lease If two leases are identical except that the rentals are in arrears for one (as above) and in advance for the other, the interest rates implicit in each will be different.

The lease for which the payments are in advance will be higher than the lease for which the payments are in arrears. This is because, although the total cash flows to and from the lessor will be the same, if payment is in advance they will be received by the lessor (paid by the lessee) over a shorter period.

Thus although the total interest is the same it is recognised more quickly in the lease for which the payments are in advance.

Initial direct costs The definition of interest rate implicit in the lease makes reference to incremental initial direct costs.

Incremental costs of obtaining a lease that would not have been incurred if the lease had not been obtained, except for such costs incurred by a manufacturer or dealer lessor in connection with a finance lease

Both the lessor and the lessee might incur initial direct costs. The calculation of the interest rate implicit in the lease is from the lessor’s viewpoint. Therefore, the initial direct costs that feature in this calculation are those of the lessor

 

[Yakub02]

When the lease payments are made at the start of each period instead of the end of the period and payments are discounted using the interest rate implicit in the lease, the total finance charge is the same but the interest rate used is different

The rules in IFRS 16 set out the accounting rules for individual leases.

However, the rules may be applied to a portfolio of leases similar characteristics. In other words, and entity can account for a number of separate leases as a single lease.

This is only allowed if there is a reasonable expectation that this would not cause the financial statements to differ materially from applying the rules to the individual leases within that portfolio.

 

[Yakub02]

Statement of financial position Right-of-use assets must either be presented separately in the statement of financial position or disclosed in the notes.

If not presented separately, right-of-use assets are included in the same line item as the corresponding underlying assets would be if they were owned and this must be disclosed.

This does not apply to right-of-use assets that meet the definition of investment property, which must be presented in the statement of financial position as investment property.

Lease liabilities must either be presented separately in the statement of financial position or disclosed in the notes. If not presented separately, the line item in which they are included must be disclosed