Operating leases: lessor accounting

Learning objectives

• Calculate straight-line lease income (or income on another systematic basis that is more representative), including where there are rent-free periods or stepped rents.L1, L2, L3
• Identify the treatment of initial direct costs (added to the carrying amount of the asset and recognised over the lease term), of depreciation in accordance with the lessor's policy for similar assets and of impairment under IAS 36; no selling profit for a manufacturer.L2, L3

Normative references

• IFRS 16 §81The lessor recognises operating lease payments as income on a straight-line basis, or on another systematic basis if that basis is more representative of the pattern in which benefit from the use of the underlying asset is diminished.
• IFRS 16 §82The lessor recognises as an expense costs incurred in earning the lease income, including depreciation.
• IFRS 16 §83The lessor adds initial direct costs incurred in obtaining an operating lease to the carrying amount of the underlying asset and recognises them as an expense over the lease term on the same basis as the lease income.
• IFRS 16 §84The depreciation policy for depreciable underlying assets subject to operating leases is consistent with the lessor's normal depreciation policy for similar assets; depreciation is calculated in accordance with IAS 16 and IAS 38.
• IFRS 16 §85The lessor applies IAS 36 to determine whether an underlying asset subject to an operating lease is impaired and to account for any impairment loss identified.
• IFRS 16 §86A manufacturer or dealer lessor does not recognise any selling profit on entering into an operating lease, because it is not the equivalent of a sale.

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

12 questions

• True or false? A lessor recognises operating lease payments as income on a straight-line basis, unless another systematic basis better reflects how the benefit from using the underlying asset is consumed.L1
• True or false? During the rent-free period granted at the beginning of an operating lease, the lessor recognises no lease income, since it collects nothing.L1
• Varenne Logistique leases out part of its refrigerated trucks under operating leases and uses identical trucks itself. How does it determine the depreciation of the leased trucks?L2
• The property company Belcour leases out an office floor under an operating lease with a lease term of {lease_term} years from 1 January 20X1. It grants a rent-free period of {rent_free_period} year; thereafter, the lessee pays {annual_rent} a year, at the beginning of each year. Belcour applies the straight-line basis. Compute the annual lease income and the accrued income asset balance at 31 December 20X2.L2
• A logistics warehouse is leased out by Ombrelle under a five-year operating lease. The lease payments, payable on 1 January of each year, are stepped: {rent_y1} in the first year, {rent_y2} in the second, {rent_y3} in the third, {rent_y4} in the fourth and {rent_y5} in the fifth. No other systematic basis is more representative than the straight-line basis. Determine Ombrelle's annual lease income and the accrued income asset at the end of the second year.L3
• On 1 January 20X1, Pradelle leases out a shop under an operating lease with a lease term of {lease_term} months. The first {rent_free_period} months are free; thereafter, the lessee pays {monthly_rent} a month, at the beginning of each month. Pradelle applies the straight-line basis. Record the summary entry for lease income for 20X1.L2
• On 1 January 20X1, Kerlan Matériaux leased a tower crane to a builder under a four-year operating lease. Each year's payment is made on 1 January: {rent_y1} in 20X1, {rent_y2} in 20X2, {rent_y3} in 20X3 and {rent_y4} in 20X4. The straight-line basis is used. Record Kerlan Matériaux's summary lease income entry for 20X3.L3
• On 1 January 20X1, Lisandre leases out business premises under an operating lease with a lease term of {lease_term} years, at a constant payment of {annual_rent} a year payable in advance. It incurs initial direct costs of {initial_direct_costs} to obtain it. Lease income is recognised on a straight-line basis. Compute the 20X1 expense for the initial direct costs and the amount of these costs still included in the carrying amount of the premises at 31 December 20X1.L2
• On 1 January 20X1, the Asteral group leases out under an operating lease an office building acquired for {building_cost}, depreciated on a straight-line basis over {useful_life} years with no residual value, in line with its policy for similar buildings. The lease term is {lease_term} years, at a constant payment of {annual_rent} a year, payable in advance. Asteral incurred initial direct costs of {initial_direct_costs}. Compute total 20X1 expenses relating to this lease (depreciation of the building and initial direct costs) and the net result of this lease in 20X1.L3
• For an asset subject to an operating lease, which statements about the lessor's accounting are correct? (several answers)L2
• The manufacturer Kelso produces industrial compressors, which it sells or leases. It provides a compressor, with a production cost of 60,000 and a normal selling price of 80,000, to a customer under a three-year lease classified (given in the case) as an operating lease. What treatment does Kelso apply at the commencement date?L3
• Monteval leases out a cinema complex under an operating lease. Attendance in the sector collapses and the building may have lost value. Under which standard does Monteval determine whether the building itself is impaired and account for any impairment loss?L2