Finance lease: subsequent measurement

Learning objectives

• Calculate finance income at a constant periodic rate of return on the net investment and the allocation of the lease payments received.L2, L3
• Identify the application of IFRS 9 (impairment, derecognition) to the net investment and the review of unguaranteed residual values.L2, L3

Normative references

• IFRS 16 §75The lessor recognises finance income over the lease term, based on a pattern reflecting a constant periodic rate of return on its net investment in the lease.
• IFRS 16 §76The lessor aims to allocate finance income on a systematic and rational basis; it applies the lease payments relating to the period against the gross investment in the lease to reduce both the principal and the unearned finance income.
• IFRS 16 §77The lessor applies the derecognition and impairment requirements in IFRS 9 to the net investment. It regularly reviews estimated unguaranteed residual values; if there has been a reduction, it revises the income allocation over the lease term and immediately recognises any reduction in respect of amounts already accrued.
• IFRS 16 §78A lessor that classifies an asset under a finance lease as held for sale (or includes it in a disposal group that is classified as held for sale) applying IFRS 5 accounts for the asset in accordance with IFRS 5.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

11 questions

• The lessor Finaxa has entered into a finance lease. At what amount does it present its receivable at the commencement date, and what does the difference between the gross investment and the net investment in the lease represent?L2
• Orvane, a lessor, has classified a lease of medical equipment as a finance lease. On what pattern does it recognise finance income over the lease term?L2
• On 1 January 20X1, Talvio, a lessor, recognises a finance lease of a bottling line. The net investment in the lease amounts to {net_investment_start} at that date; the interest rate implicit in the lease is {implicit_rate}. The lessee pays an annual lease payment of {annual_receipt} on 31 December of each year (in arrears). Compute the finance income for 20X1 and the net investment at 31 December 20X1.L2
• Meridal, a company financing agricultural equipment, leased a combine harvester under a finance lease on 1 January 20X1. Its net investment in the lease at that date is {net_investment_start}, at an interest rate implicit in the lease of {implicit_rate}. The customer pays {annual_receipt} every 31 December, in arrears. Determine the finance income for 20X2 and the net investment at 31 December 20X2.L3
• Lanéo entered into a finance lease of a forklift truck as lessor. At 1 January 20X1, its net investment in the lease is {net_investment_start}; the interest rate implicit in the lease is {implicit_rate}. The lessee pays {annual_receipt} on 31 December 20X1 (in arrears). Record the lessor's entries at 31 December 20X1: finance income, then collection of the payment.L2
• Rubis Équipements leases scanners to a clinic under a finance lease that commenced on 1 January 20X1. At that date, the net investment was {net_investment_start} (implicit rate: {implicit_rate}). The clinic pays {annual_receipt} at the end of each calendar year. Record Rubis Équipements' entries at 31 December 20X2, the second year of the lease.L3
• After the commencement date of a finance lease, which statements about the lessor's accounting are correct? (several answers)L2
• Hexaline leases industrial presses under finance leases for six years. At the end of the second year, its annual review leads it to lower the estimate of the unguaranteed residual value of one of the presses, which was included in the gross investment. No other term of the contract changes. What treatment must Hexaline apply?L3
• On 1 January 20X1, Solvane, a lessor, entered into a three-year finance lease of a welding robot. The lessee makes three annual payments of {annual_receipt}, each on 31 December (in arrears). Solvane estimates the unguaranteed residual value of the robot at the end of the lease at {unguaranteed_rv}. At the interest rate implicit in the lease of {implicit_rate}, the net investment at the commencement date is {net_investment_start}. Compute the total finance income to be recognised over the lease term and the finance income for 20X2.L3
• The fleet lessor Quarzo provides a refrigerated truck to a carrier under a three-year finance lease. Payments of {annual_receipt} are made in arrears, at the end of each year. Quarzo uses an unguaranteed residual value of {unguaranteed_rv} at the end of the lease. The interest rate implicit in the lease is {implicit_rate} and the initial net investment is {net_investment_start}. What is the unearned finance income at the commencement date, and what finance income will Quarzo recognise for the third year?L3
• Grantec, a lessor, has decided to dispose of a portfolio of assets subject to finance leases. It is given that, at the reporting date, this portfolio meets the criteria for classification as held for sale under IFRS 5. Under which requirements does Grantec now account for these assets?L2