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IFRS 16Case studies (Step 3 of 5)

Case study

Step 3 of 5
Professional fileIFRS 16L4 · Expert

Professional file: year-end closing of the lease portfolio of a retail group

20 documents19 tasks≈ 240 min
0 / 37 items completed
Standards
IFRS 16 — Leases
Assistance levelFree workspace · autonomous situation
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: withdrawn

Case brief

Situation

Groupe Valmorel (fictitious group) operates a chain of home furnishing stores. It reports at 31 December, applies IFRS 16 and leases almost all of its stores. You are in charge of the closing file of the lease portfolio at 31 December 20X5: inventory and analysis of the contracts, initial measurement of the new Tilleuls store, schedules for the year, amendments, sale and leaseback transaction of the logistics platform, subleases, entries, impact, note, responses to the reviewer's notes and conclusion. Under the group's policies (data of the file), right-of-use assets are depreciated on a straight-line basis over the lease term, with no residual value, no contract providing for a transfer of ownership or a purchase option, and operating sublease income is recognised on a straight-line basis. The IFRS 15 analysis of the transfer of the platform, the fair value of the platform (IFRS 13) and the restoration provision (IAS 37) are data of the file; deferred tax effects (IAS 12) are out of scope. The transactions of the year on the new contracts have not yet been recorded: the entries are presented with cash as the counterpart (teaching assumption).

Your assignment

The file contains documents of varying nature and reliability, two of which have no bearing, six proposals from management or departments to assess, a draft note to correct and two missing items of information, one of which is obtained during the engagement. Identify the contracts that are or contain a lease and the applicable exemptions, determine the term and the rate of the Tilleuls lease, measure the lease liability and the right-of-use asset, prepare the 20X5 schedules, deal with the amendments and the sale and leaseback, classify the subleases, record the entries, measure their impact and correct the note; document each judgement, respond to the reviewer's notes and conclude on the file.

You prepare a complete file: documents, work, entries and conclusion, then compare your work with the solution and the review points of the file.

Autonomous professional situation

As on a real engagement: no method, no checklist and no hints. You identify the issues yourself, organise the work and defend your conclusion.

  • Organise the work
  • Document each point
  • Argue the conclusion

Events

Chronology of the file

  1. October 15 20X4Inception date of the lease · Dated fact of the file

    Document 3

  2. January 1 20X5Start date of the services · Commencement date · Commencement date of the temporary unit · Transfer date and commencement date · Dated fact of the file

    Document 2 · Document 3 · Document 9 · Document 15

  3. November 20 20X5Date of conclusion of the amendment · Dated fact of the file

    Document 13

  4. December 1 20X5Inception date of the sublease · Dated fact of the file

    Document 17

  5. December 31 20X5Reporting date · Effective date of the amendment · Dated fact of the file

    Document 1 · Document 12

  6. January 1 20X6Commencement date of the storage room lease · Commencement date of the sublease · Dated fact of the file

    Document 13 · Document 17

  7. January 20 20X6Date of the bank letter · Dated fact of the file

    Document 7

Documents

File documents

20 documents: open each one to read it.

Document 1Memo

Planning memo of the file

Planning memo of the closing file at 31 December 20X5 (consolidated financial statements of Groupe Valmorel). Contracts to examine: Darnac logistics services, lease of the Tilleuls store and its amendment, temporary unit at the station and sublease of its corner, sales staff tablets, leases of the Saint-Clair and Galerie Nord stores, sale and leaseback of the Morvan logistics platform, sublease of the Galerie Nord store. Group policies: short-term lease exemption elected for the class of retail premises; low-value asset exemption elected lease by lease; right-of-use assets depreciated on a straight-line basis over the lease term, with no residual value; operating sublease income recognised on a straight-line basis. The routine 20X5 entries of the Saint-Clair and Galerie Nord leases are recorded; those of the new contracts are not. Deferred tax effects are dealt with in another file.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Reporting dateDecember 31 20X5
Start date of the servicesJanuary 1 20X5
Annual storage fee€180,000.00
Pallet spaces provided3,000 units
Provider's warehouses in the region4 units
Inception date of the leaseOctober 15 20X4
Commencement dateJanuary 1 20X5
Non-cancellable period2 years
Period covered by the extension option2 years
Fixed annual rent payable in advance€120,000.00
Variable rent as a percentage of sales2%
Lessor's contribution to the fit-out€20,000.00
Cost of the fit-out works€300,000.00
Useful life of the fit-out6 years
Discounted restoration cost (IAS 37)€15,000.00
Agent commission€6,000.00
Implicit rate estimated by the purchasing department4%
Date of the bank letterJanuary 20 20X6
Incremental borrowing rate at 1 January 20X55%
Incremental borrowing rate at 31 December 20X56%
20X5 sales of the Tilleuls store€4,000,000.00
Commencement date of the temporary unitJanuary 1 20X5
Monthly rent of the temporary unit€4,000.00
Term of the temporary unit lease (months)12 months
Monthly rent of the corner sublease€1,500.00
Term of the corner sublease1 year
Number of tablets150 units
Monthly rent per tablet€25.00
Term of the tablet contract (months)36 months
Value of a tablet when new€450.00
Saint-Clair lease liability before the amendment€86,538.46
Saint-Clair right-of-use asset before the amendment€78,632.07
Saint-Clair interest 20X5€6,789.94
Saint-Clair depreciation 20X5€78,632.05
Rent paid in 20X5, Saint-Clair€90,000.00
Galerie Nord lease liability€208,131.83
Galerie Nord right-of-use asset€196,580.13
Galerie Nord interest 20X5€10,889.69
Galerie Nord depreciation 20X5€65,526.71
Rent paid in 20X5, Galerie Nord€75,000.00
Effective date of the amendmentDecember 31 20X5
Extension of the term2 years
Revised annual rent€80,000.00
Date of conclusion of the amendmentNovember 20 20X5
Commencement date of the storage room leaseJanuary 1 20X6
Annual rent of the storage room€12,000.00
Term of the storage room lease3 years
Decline in market rents in 20X58%
Transfer date and commencement dateJanuary 1 20X5
Sale price€4,300,000.00
Annual leaseback rent€400,000.00
Leaseback term3 years
Carrying amount of the platform€2,800,000.00
Fair value of the platform€4,000,000.00
Inception date of the subleaseDecember 1 20X5
Commencement date of the subleaseJanuary 1 20X6
Term of the sublease3 years
Annual sublease rent€70,000.00
Remaining term of the head lease3 years
Economic life of the building40 years
Gain on sale presented in the draft€1,500,000.00
Net rental expenses presented in the draft€155,000.00
Annual insurance premium€32,000.00
Marketing budget 20X6€250,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort20

  • Planning memo of the file

  • Darnac logistics services contract

  • Lease of the Tilleuls store

  • Memo from the development director

  • Estate agent invoice

  • Memo from the purchasing department

  • Letter from the bank

  • Sales reporting 20X5

  • Temporary unit lease and corner sublease

  • Tablet lease contract

  • Ledger extract for the Saint-Clair and Galerie Nord leases

  • Amendment to the Saint-Clair lease

  • Storage room amendment

  • Memo from the real estate department

  • Sale deed and leaseback of the platform

  • Report of the property valuer

  • Galerie Nord sublease contract

  • Draft note

  • Store insurance contract

  • Marketing budget

Relevant to the treatment0

    No effect0

      Workspace

      Work programme

      Organise your work freely: deal with each point, then argue your conclusion.

      1. Task 1Analysis

        Analyse the file: which accounting questions arise, which documents are useful and which information is missing?

      2. Task 2Professional judgement

        Which contracts are or contain a lease?

      3. Task 3Calculation

        Apply the exemptions: calculate the monthly expense and the 20X5 expense of the temporary unit and the tablets.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Apply the exemptions: calculate the monthly expense and the 20X5 expense of the temporary unit and the tablets.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €

        Checks

        • 0 / 6 steps entered
        • Amounts readable

        Result: 20X5 expense of the tablets

      4. Task 4Professional judgement

        Which term and which rate do you use for the Tilleuls lease? Respond to the proposals.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Which term and which rate do you use for the Tilleuls lease? Respond to the proposals.

        1. years

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Calculation

        Calculate the Tilleuls lease liability at 1 January 20X5.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the Tilleuls lease liability at 1 January 20X5.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Tilleuls lease liability at 1 January 20X5

      6. Task 6Calculation

        Calculate the cost of the Tilleuls right-of-use asset.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the cost of the Tilleuls right-of-use asset.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Prepare the 20X5 Tilleuls schedule: interest, balance, depreciation and variable rent.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Prepare the 20X5 Tilleuls schedule: interest, balance, depreciation and variable rent.

        1. €
        2. €
        3. €
        4. €
        5. €

        Checks

        • 0 / 5 steps entered
        • Amounts readable

        Result: Tilleuls variable rent 20X5

      8. Task 8Professional judgement

        How do you treat the decline in market rents and the two amendments?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        How do you treat the decline in market rents and the two amendments?

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Adjustment to the existing Tilleuls lease

      9. Task 9Calculation

        Remeasure the Saint-Clair lease liability and calculate the adjustment to the right-of-use asset.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Remeasure the Saint-Clair lease liability and calculate the adjustment to the right-of-use asset.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €
        7. €

        Checks

        • 0 / 7 steps entered
        • Amounts readable

        Result: Saint-Clair annual depreciation from 20X6

      10. Task 10Professional judgement

        Analyse the sale and leaseback: off-market terms and total gain.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Analyse the sale and leaseback: off-market terms and total gain.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Total gain on disposal

      11. Task 11Calculation

        Calculate the lease liability, the right of use retained and the gain recognised.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the lease liability, the right of use retained and the gain recognised.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €
        7. €
        8. €
        9. €

        Checks

        • 0 / 9 steps entered
        • Amounts readable

        Result: Gain relating to the right retained, not recognised

      12. Task 12Calculation

        Prepare the 20X5 schedule of the leaseback.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Prepare the 20X5 schedule of the leaseback.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Platform right-of-use asset at 31 December 20X5

      13. Task 13Professional judgement

        How do you classify the corner and Galerie Nord subleases?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        How do you classify the corner and Galerie Nord subleases?

        1. %
        2. %

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Share of the life of the building covered

      14. Task 14Calculation

        Calculate the 20X5 income of the corner sublease.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the 20X5 income of the corner sublease.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Accrued income at 31 December 20X5

      15. Task 15Journal entries

        Which entries do you record for 20X5?

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        4. Line 4

        5. Line 5

        6. Line 6

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 3 · Journal entry · Journal entries

        Entry 3 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 4 · Journal entry · Journal entries

        Entry 4 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        4. Line 4

        5. Line 5

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 5 · Journal entry · Journal entries

        Entry 5 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 6 · Journal entry · Journal entries

        Entry 6 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 7 · Journal entry · Journal entries

        Entry 7 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 8 · Journal entry · Journal entries

        Entry 8 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 9 · Journal entry · Journal entries

        Entry 9 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 10 · Journal entry · Journal entries

        Entry 10 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 11 · Journal entry · Journal entries

        Entry 11 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 12 · Journal entry · Journal entries

        Entry 12 of 12

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        TotalsDebit0Credit0

      16. Task 16Effects on the financial statements

        What is the impact of the entries on the consolidated financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        5. Notes

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      17. Task 17Analysis

        Prepare the quantitative information of the note.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Prepare the quantitative information of the note.

        1. €
        2. €
        3. €
        4. €
        5. €
        6. €
        7. €
        8. €

        Checks

        • 0 / 8 steps entered
        • Amounts readable

        Result: Lease liabilities at 31 December 20X5

      18. Task 18Professional judgement

        Correct the draft note, complete the qualitative information and respond to the reviewer's notes.

      19. Task 19Conclusion

        Write the conclusion of the file.

      File review

      Points raised during the review of this file: read them as the preparer would.

      Review notes

      • BlockingResolvedBlocking note: Tilleuls term and rate not documented, rent of 1 January 20X5 discounted; to be corrected.
      • BlockingResolvedBlocking note: sale and leaseback gain recognised in full and additional financing ignored.
      • BlockingResolvedBlocking note: draft note offset, incomplete and maturity analysis merged; to be corrected.
      • Non-blockingOpenNon-blocking note: the IFRS 15 analysis of the transfer of the platform has not been reviewed in this file.

      Information requests

      • ObtainedRequest to the bank: incremental borrowing rate at 1 January and 31 December 20X5.
      • Assumption documentedRequest to the real estate department: fair value of the Galerie Nord right-of-use asset.

      Completion checklist

      • Workpapers completed and agreed to the documents.Done
      • Entries proposed, balanced and agreed to the workpapers.Done
      • Reviewer's blocking notes resolved.Done
      • Note corrected.Done
      • Normative references checked against the official text.To review
      • Residual value guarantees (no contract includes one).Not applicable

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 37).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 16 §5
      • IFRS 16 §6
      • IFRS 16 §8
      • IFRS 16 §B3
      • IFRS 16 §B4
      • IFRS 16 §B5
      • IFRS 16 §B7
      • IFRS 16 §9
      • IFRS 16 §11
      • IFRS 16 §B9
      • IFRS 16 §B13
      • IFRS 16 §B14
      • IFRS 16 §B15
      • IFRS 16 §B21
      • IFRS 16 §B23
      • IFRS 16 §B24
      • IFRS 16 §B30
      • IFRS 16 §18
      • IFRS 16 §19
      • IFRS 16 §20
      • IFRS 16 §B34
      • IFRS 16 §B37
      • IFRS 16 §B39
      • IFRS 16 §B41
      • IFRS 16 §26
      • IFRS 16 §27
      • IFRS 16 §28
      • IFRS 16 §23
      • IFRS 16 §24
      • IFRS 16 §25
      • IFRS 16 §36
      • IFRS 16 §37
      • IFRS 16 §38
      • IFRS 16 §44
      • IFRS 16 §45
      • IFRS 16 §46
      • IFRS 16 §100
      • IFRS 16 §101
      • IFRS 16 §102
      • IFRS 16 §102A
      • IFRS 16 §B58
      • IFRS 16 §B8
      • IFRS 16 §51
      • IFRS 16 §52
      • IFRS 16 §53
      • IFRS 16 §55
      • IFRS 16 §58
      • IFRS 16 §59
      • IFRS 16 §60
      • IFRS 16 §B48
      • IFRS 16 §B49
      • IFRS 16 §B52