Page 37 - CIMA May 18 - MCS Day 1 Suggested Solution

SUGGESTED SOLUTIONS

Requirements of IAS 17 Leases
A lease is an agreement whereby the lessor conveys the right to use the asset for a specified
period of time to the lessee in return for a series of payments. The lessor is the legal owner of the
asset.

IAS 17 classifies leases as either finance or operating leases depending on the substance of the
agreement. In accordance with the substance concept, the substance of the lease agreement is
reflected in financial statements and not the legal form.

A finance lease is a lease where the risks and rewards of ownership transfer to the lessee at the
start of the agreement. A finance lease is where the commercial substance is that the lessee has
acquired an asset and financed the acquisition via a loan. Indicators that would suggest a lease
should be classified as a finance lease would be:

 Lease term is for majority of asset’s life
 Present value of minimum lease payments is substantially all of the fair value of the asset
 The lessee is responsible for maintenance costs
 The lease is non‐cancellable

For finance leases, IAS 17 requires an asset and lease obligation to be recognised. The asset is
subject to depreciation. The lease liability gives rise to finance costs within profit.

All other leases are operating leases.
Operating leases are accounted for by charging the lease rentals to profits on a straight line basis
over the lease term. No asset is recognised by the lessee.

Application to Menta
Menta could lease vehicles and/or premises rather than making an outright purchase of PPE.
Currently, there is no indication in the financial statements that any vehicles or premises are
leased. Although there are loan included within non‐current liabilities, they are not identified as
relating to finance lease obligations.

Finance lease obligations are not immediately visible on their SOFP currently, suggesting that any
leases that are currently held are classified as operating leases.

Entering into finance lease agreements in the future may be a way of financing investment in
premises and vehicles.

Menta holds significant PPE balances in its SOFP, If finance was required Menta could consider
entering into sale & leaseback transactions with these assets.

Requirements of IAS 18 Revenue
IAS 18 deals with revenue recognition. Revenue is the gross inflow of economic benefits during an
accounting period. It should be recognised when it is probable those future economic benefits will

KAPLAN PUBLISHING 81