Page 422 - SBR Integrated Workbook STUDENT S18-J19

Chapter 25

Example 7

Lessors – operating leases

IFRS 16 Leases says that a lessor must classify its leases as finance leases
or operating leases. A finance lease is a lease that transfers the asset’s
significant risks and rewards to the lessee. A key indication of a finance lease
is if the lease term is the majority of the asset’s remaining useful economic
life.

The lease is an operating lease. This is because Brick retains key risks
around maintenance and insurance and because the lease term of two years
is significantly less than the asset’s remaining useful life of 9.5 years.

Brick should continue to recognise the equipment and charge depreciation of
$100,000 ($1m/10 years) to profit or loss in the current period.

For operating leases, lease income is recognised in profit or loss on a straight
line basis. The lease income to be recognised in profit or loss in the current
financial year is $150,000 ($300,000 × 6/12). Accrued income (an asset) of
$150,000 should be recognised on the statement of financial position.

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