Other AC Standards (1)

8/10/2019 Other AC Standards (1)

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3) Lease term is for the major part of the economic life of the asset even if the title is not

transferred.

4) Leased asset is of specialized nature and cannot be used by other without major

Modifications.

5) At the inception of Lease, Present Value of Minimum Lease Payments (PV of MLP) is

almost equal to Fair Value of the Leased Asset.

Guaranteed Residual Value is that part of residual value that is guaranteed by the lessee or by

a party related to the lessee.

ACCOUNTING BY LESSEE UNDER FINANCE LEASE

- Classification

- Minimum Lease Payment- PV of Minimum Lease Payments

- Initial Recognition

- Subsequent Measurement ( Lease amortization Schedule)

- Depreciation

Question- 1:

Lease Agreement 1stJan 2000

Lease Term is 5 years, starting from 1stJan 2000

Annual Rental (Payable at year End) = $ 250,000

Guaranteed Residual Value = $ 100,000

Assets Economic Life = 8 years

Depreciation Rate = Straight Line

Discount Rate = 10 %

Required:

a) Minimum Lease Payment

b) Present Value of Minimum lease Payment

c) Classify as Finance or Operating Lease if Fair Value at inception is $1,040,900

d) Make entries in the Lessees Books of Accounts.

Question- 2:


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Lease Agreement 1stJan 2005

Lease Term is 4 years, starting from 1stJan 2005

Annual Rental (Payable at Beginning of the year) = $ 600,000

Annual Service charges (payable at year end) = $ 80,000

Guaranteed Residual Value = $ 400,000

Assets Economic Life = 6 years

Depreciation Rate = Straight Line

Discount Rate implicit in the lease = 15 %

Lessees incremental borrowing rate = 16 %

Asset is to be returned to Lessor at the End of the Lease Term.

Required:

a) Present Value of Minimum Lease Payment

b) Classify the lease assuming Fair Value of Asset at inception of lease was $ 2.3 million

c) Make entries in Lessees books of Account

ACCOUNTING BY LESSEE UNDER OPERATING LEASE

- Allocation of Lease rentals to different accounting periods.

- Effect on Income statement if lease is wrongly classified as operating Lease.

Question-3:

A lessee enters into a leasing arrangement for a period of 3 years. Life of the asset is 10 years.

Lessee pays at the inception of the lease a total of $ 180,000 and will pay further rents of $

30,000 at the end of each year.

Required:

a) Charge to Income Statement

b) Extract from statement of financial position for each of year 1, 2 & 3


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IAS 11: CONSTRUCTION CONTRACTS

OBJECTIVE

The objective of this Standard is to prescribe the accounting treatment of revenue and costs

associated with construction contracts. Because of the nature of the activity undertaken in

construction contracts, the date at which the contract activity is entered into and the date when

the activity is completed usually fall into different accounting periods.

Therefore, the primary issue in accounting for construction contracts is the allocation of

contract revenue and contract costs to the accounting periods in which construction work is

performed.

This Standard shall be applied in accounting for construction contracts in the

financial statements of contractors.

DEFINITIONS

Contract revenueshall comprise:

(a) the initial amount of revenue agreed in the contract; and

(b) variations in contract work, claims and incentive payments:

(i) to the extent that it is probable that they will result in revenue; and

(ii) they are capable of being reliably measured

Contract costsshall comprise:

(a) costs that relate directly to the specific contract;

(b) costs that are attributable to contract activity in general and can be allocated to the contract;

and

(c) such other costs as are specifically chargeable to the customer under the terms of the

contract.

ACCOUNTING TREATMENT

When the outcome of a construction contract can be estimated reliably, contract revenue and

contract costs associated with the construction contract shall be recognised as revenue and

expenses respectively by reference to the stage of completion of the contract activity at the end

of the reporting period.


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When the outcome of a construction contract cannot be estimated reliably:

(a) revenue shall be recognised only to the extent of contract costs incurred that it is probable

will be recoverable; and

(b) contract costs shall be recognised as an expense in the period in which they are incurred.

When it is probable that total contract costs will exceed total contract revenue, the expected loss

shall be recognised as an expense immediately.


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IAS 18: REVENUE

OBJECTIVE

The primary issue in accounting for revenue is determining when to recognise revenue.

Revenue is recognized when it is probable that future economic benefits will flow to the entity

Tand these benefits can be measured reliably.

This Standard identifies the circumstances in which these criteria will be met and, therefore,

revenue will be recognised. It also provides practical guidance on the application of these

criteria.

Revenue is the gross inflow of economic benefits during the period arising in the course of the

ordinary activities of an entity when those inflows result in increases in equity, other than

increases relating to contributions from equity participants.

This Standard shall be applied in accounting for revenue arising from the following transactions

and events:

(a) the sale of goods;

(b) the rendering of services; and

(c) the use by others of entity assets yielding interest, royalties and dividends.

The recognition criteria in this Standard are usually applied separately to each transaction.

INITIAL MEASUREMENT

Revenue shall be measured at the fair value of the consideration received or receivable.

It is measured at the fair value of the consideration received or receivable taking into account

the amount of any trade discounts and volume rebates allowed by the entity.

Sale of goods

Revenue from the sale of goods shall be recognised when all the following conditions have

been satisfied:

(a) the entity has transferred to the buyer the significant risks and rewards of ownership of thegoods;

(b) the entity retains neither continuing managerial involvement to the degree usually associated

with ownership nor effective control over the goods sold;

(c) the amount of revenue can be measured reliably;

(d) it is probable that the economic benefits associated with the transaction will flow to the entity;

and


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(e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Rendering of services

When the outcome of a transaction involving the rendering of services can be estimated reliably,

revenue associated with the transaction shall be recognised by reference to the stage ofcompletion of the transaction at the end of the reporting period. The outcome of a transaction

can be estimated reliably when all the following conditions are satisfied:

(a) the amount of revenue can be measured reliably;

(b) it is probable that the economic benefits associated with the transaction will flow to the entity;

(c) the stage of completion of the transaction at the end of the reporting period can be measured

reliably; and

(d) the costs incurred for the transaction and the costs to complete the transaction can be

measured reliably.

The recognition of revenue by reference to the stage of completion of a transaction is often

referred to as the percentage of completion method. Under this method, revenue is recognised

in the accounting periods in which the services are rendered. The recognition of revenue on this

basis provides useful information on the extent of service activity and performance during a

period.

When the outcome of the transaction involving the rendering of services cannot be estimated

reliably, revenue shall be recognised only to the extent of the expenses recognised that are

recoverable.

Interest, royalties and dividends

Revenue shall be recognised on the following bases:

(a) interest shall be recognised using the effective interest method as set out in IAS 39,

(b) royalties shall be recognised on an accrual basis in accordance with the substance of the

relevant agreement; and

(c) dividends shall be recognised when the shareholders right to receive payment is

established.

Other AC Standards (1)

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