Page 34 - CIMA MCS Workbook February 2019 - Day 1 Suggested Solutions

CIMA FEBRUARY 2019 – MANAGEMENT CASE STUDY

Requirements of IFRS 16 ‐ Leases
A lease is a contract that conveys the right to use an underlying asset for a period of time in
exchange for consideration. Therefore, the customer must receive substantially most of the risks
and rewards associated with use of the identified asset and have the right to direct the use of the
asset. If the contract does contain a lease, all lease agreements are now accounted for in the
same way (subject to exceptions for items of small value or agreements of less than twelve
months).

There could be restrictions on the use of the asset (e.g. cannot be used for illegal purposes) but
any restriction should be reasonable and not interfere with the customers’ ability to use the asset.
It should be a specific/identified asset and any power for the lessor to substitute the asset should
be restricted or prohibitive (except in extreme circumstances) as, otherwise, this undermines the
ability of the customer to control and use the asset.

All leases should now be recognised and accounted for as a right of use obligation and an
associated right of use asset. Any direct, incremental costs in agreeing the lease should be
capitalised as part of the right of use asset. The right of use asset should be written off over the
lease term, or expected useful life of the asset if shorter. The right of use obligation is stated at
present value, to which the effective rate of interest is charged to compute the annual finance
charge, which is charged to the statement of profit or loss.

The previous distinction between an operating lease and a finance lease per IAS 17 has now
disappeared. To all intents and purposes, any lease (subject to the exceptions noted above) is
accounted for as if it is a finance lease.

Application to Crowncare
Crowncare could lease equipment and/or premises rather than making an outright purchase of
PPE. Currently, there is no indication in the financial statements that any assets or premises are
leased, as there are currently no right of use obligations or assets disclosed.

Entering into right of use lease agreements in the future may be a way of financing investment in
premises and equipment. Crowncare holds significant PPE balances in its SOFP. If finance was
required, Crowncare could consider entering into sale & leaseback transactions with these assets.
This could be relevant, for example, if Crowncare purchased state‐of‐the‐art equipment (e.g.
laser‐powered drills or 3‐D scanning devices) for several practices.

If Crowncare did enter into lease agreements, this would introduce an element of financial
gearing into its capital structure as, currently, it does not have any loan finance.

Requirements of IFRS 15 ‐ Revenue from contracts with customers
IFRS 15 deals with recognition of revenue from contracts with customers. It specifies a five‐step
process for recognition of revenue as follows:
1 identify the contract with the customer
2 identify the separate performance obligations within the contract
3 determine the transaction price

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