Accounting for Sub-Leases
Summary
TLDRIn this podcast, Tom Clendon explains the complexities of accounting for subleases under IFRS 16, introduced post-September 24 exams. He begins with a quick recap on IFRS 16, detailing the recognition of right-of-use assets and liabilities for lessees. Tom then delves into lessors' accounting, emphasizing the classification process and the distinction between finance and operating leases. Using a family tree analogy, he illustrates sublease accounting, where a lessee becomes a sublessor. He provides examples to clarify the accounting treatment when a sublease is short-term versus when it covers the entire lease period, affecting the recognition of assets and liabilities.
Takeaways
- 📚 The introduction of subleases into the SPR syllabus from the September 24 exam onwards is a significant update.
- 👤 Tom Clendon is a professional who helps students pass the exam and discusses accounting for subleases in this podcast.
- 🏢 IFRS16 requires recognizing both a right-of-use asset and an associated liability for lessees when entering into a lease.
- 💼 The right-of-use asset is initially recognized at the present value of minimum lease payments, including any initial direct costs.
- 🔄 The asset is depreciated, and the liability attracts a finance cost, which affects the P&L through its changes.
- 🏢 Lessors need to classify leases as either finance or operating based on the transfer of risks and rewards of ownership.
- 💼 For finance leases, lessors recognize a net investment in the lease and earn interest, without the physical asset on the balance sheet.
- 🚗 In operating leases, lessors keep the physical asset on their balance sheet and recognize rental income through the P&L.
- 🔄 Accounting for subleases involves recognizing the dual role of a lessee who has sublet an asset, becoming a lessor in the process.
- 🏢 The example of Alex subletting office space for 2 years out of a 5-year lease illustrates the accounting for a sublease without transferring risks and rewards.
- 💡 A more complex scenario is presented where Alex sublets for 4 years out of a 5-year lease, which could be classified as a finance lease, affecting asset recognition and P&L.
Q & A
What is the main topic discussed in the podcast by Tom Clendon?
-The main topic discussed in the podcast is accounting for subleases, which was introduced to the SPR syllabus from the September 24 exam onwards.
According to IFRS 16, what is recognized by a lessee when entering into a lease?
-A lessee will normally recognize both a right-of-use asset and an associated liability, even without legal title to the asset, due to control over the asset and the obligation to make lease payments.
How is the initial recognition of a right-of-use asset and liability determined under IFRS 16?
-The initial recognition is at the present value of the minimum lease payments, which may include capitalizing any transaction or dismantling costs.
What are the two main components of accounting for a lease from a lessor's perspective?
-From a lessor's perspective, accounting for a lease involves recognizing either a net investment in the lease (for finance leases) or the physical asset in the balance sheet (for operating leases).
What is the difference between a finance lease and an operating lease from a lessor's perspective?
-A finance lease is when the risks and rewards of ownership have passed to the lessee, and the lessor recognizes a net investment in the lease and income. An operating lease is when the lessor retains the risks and rewards of ownership, recognizing the physical asset in the balance sheet and rental income through the P&L.
What is the scenario presented by Tom Clendon involving Alex, the lessee, and Murray, the sublessee?
-The scenario involves Alex leasing an asset from Tom and then subletting it to Murray. Alex is both a lessee and a sublessor in this context.
How does Alex account for the sublease of office space for 2 years when he has a 5-year lease?
-Alex accounts for the sublease by recognizing a right-of-use asset and lease liability for the original 5-year lease. The sublease is considered an operating lease, and rental income flows through the P&L.
In the second scenario, why does Alex as a sublessor recognize a financial asset instead of a right-of-use asset?
-In the second scenario, Alex enters into a sublease for four years, representing the whole life of the asset. As a sublessor, Alex has entered into a finance lease, indicating that the risks and rewards of ownership have passed, and thus a financial asset is recognized instead.
What is the impact on Alex's financial statements when he enters into a finance lease as a sublessor?
-Alex derecognizes the right-of-use asset from the balance sheet and recognizes a new financial asset, an investment in the finance leasee. The difference between the two is recognized as an immediate profit or loss.
How does the duration of the sublease affect the accounting treatment for Alex as a sublessor?
-If the sublease duration is less than the original lease (e.g., 2 years out of 5), it is treated as an operating lease. If the sublease covers the entire life of the asset (e.g., 4 years out of 5), it is treated as a finance lease, affecting the recognition of assets and liabilities.
What additional services does Tom Clendon offer to help students pass the SPR exam?
-Tom Clendon offers assistance through WhatsApp, a website, and a YouTube channel where he provides further insights and explanations to help students understand and pass the SPR exam.
Outlines
📚 Introduction to Subleases and IFRS16 Basics
In this introductory paragraph, Tom Clendon sets the stage for a discussion on subleases by first recapping the fundamentals of IFRS16. He explains that when a lessee enters into a lease, they recognize both a right-of-use asset and a corresponding liability at the present value of the minimum lease payments. This includes any initial direct costs. The asset is then depreciated, and the liability accrues interest over time. Tom emphasizes the importance of understanding how a lessee and lessor account for their respective assets and liabilities under IFRS16, especially since the accounting for subleases builds upon these principles. He uses the family tree analogy to introduce the concept of a sublease, where Alex, acting as both a lessee and a lessor, sublets an asset to his son, Murray.
🏢 Accounting for Subleases: Scenarios and Implications
In the second paragraph, Tom delves into the specifics of accounting for subleases, using hypothetical scenarios to illustrate the process. He first presents a simple example where Alex, who has leased office space for five years, sublets it for two years. Tom explains that since the sublease term does not cover the entire lease term, Alex continues to recognize the right-of-use asset and lease liability, with depreciation and finance costs reflected in the profit and loss. In a more complex scenario, Tom describes a situation where Alex enters into a four-year sublease after one year of his original five-year lease. This sublease covers the majority of the asset's life, leading to a reclassification of the original lease for Alex as a lessor. As a result, the right-of-use asset is derecognized, and a new financial asset representing the investment in the finance lease is recognized, with any difference between the two treated as an immediate profit or loss. Tom concludes by wishing listeners well in their SPR exam preparation and inviting them to connect with him for further assistance.
Mindmap
Keywords
💡IFRS 16
💡Right-of-Use Asset
💡Lease Liability
💡Sublease
💡Lessee
💡Lessee Accounting
💡Lessee Classification
💡Finance Lease
💡Operating Lease
💡Depreciation
💡Net Investment in the Lease
Highlights
Introduction to accounting for subleases in the SPR syllabus from the September 24 exam onwards.
Recap on IFRS 16 and the recognition of a right of use asset and an associated liability for lessees.
Explanation of the initial recognition of lease assets and liabilities at the present value of minimum lease payments.
Depreciation of the right of use asset and finance cost associated with the liability.
Classification process for lessors to determine the type of lease: finance or operating.
Lessors' accounting for assets and lease agreements based on the transfer of risks and rewards of ownership.
Accounting for finance leases involves recognizing a net investment in the lease and earning interest.
In operating leases, the physical asset remains on the lessor's balance sheet with rental income recognized in the P&L.
Introduction to the concept of subleases and the dual role of a lessee as a sublessor.
Simple example of accounting for subleases when a lessee sublets an asset for a shorter period than the original lease.
Scenario where the sublease term represents the entire asset's life, leading to a finance lease for the sublessor.
Accounting implications for Alex as a lessee and sublessor, including the recognition of a new financial asset.
Difference between the original right of use asset and the new financial asset resulting in immediate profit or loss.
The simultaneous existence of finance cost on the liability and finance income from the investment in the finance lease.
Tom Clendon's offer to help students pass the SPR exam and invitation to connect via WhatsApp, website, or YouTube.
Emphasis on the importance of understanding the accounting treatment for subleases in the exam context.
Transcripts
accounting for
subleases this is something that was
introduced to the spr syllabus from the
September 24 exam
onwards my name is Tom clendon and I
help students pass the exam and what I
want to do in this podcast is to talk to
you about accounting for sub
leases now before before we get involved
in
sues I want first of all to do a very
quick
recap on
ifrs16 if I'm a l c when I enter into a
lease I will normally recognize both a
right of use asset and an Associated
liability even though I won't have legal
title to the asset I will control it and
I will have an obligation to make those
lease payments
now that's initially going to be
recognized at the present value of the
minimum lease payments the asset might
capitalize any transaction or
dismantling
costs a lesie has a right of use asset
and a liability the asset will be
depreciated and the liability will
attract a finance
cost that liability will go up with that
Finance cost charged the p&l and will go
down with the cash
repaid so far I probably haven't said
anything too
radical accounting for less
SS is a little bit more tricky because a
less s has to work out what type of
lease it has so there's a classification
process and a Lea is somebody who owns
the asset so they have the legal title
but they are effectively renting it out
to somebody else so somebody else has
got
possession now if the risks and rewards
of ownership are
passing to the less e the less or will
think of that as a finance lease and
will not have the the physical asset on
its statement of financial position
because the asset that the lessor will
have if it's a finance lease is
basically a deta a net investment in the
lease yeah it will be owed money and it
will be earning interest if it's a
finance lease if the risk and rewards of
ownership have
passed but if the business is oh I don't
know Avis or a Car Hire business the
less or isn't passing away the risk and
rewards of ownership at that under the
lease and therefore the physical asset
remains s in the balance sheet in the
statement of financial position of the L
saw and the actual money that is being
received well that's the income yeah
that's the revenue that's the that what
that's what goes through profit so I
think it's important first of all to
make sure that you understand how a
lessi accounts for an asset right of use
liability how a less or accounts for an
asset uh a lease agreement depends on
whether it's a Finance lease risk and
rewards have passed therefore you've got
a net investment in the lease and you're
recognizing income or if it's an
operating lease you've got the physical
asset in the balance sheet in the
statement of financial position and
you're recognizing through the p&l uh a
rental
income right now I can talk about
accounting for sub
leases but before we talk about
accounting for sub leases I need to tell
you a little bit about my family
tree I am a father and my son is
Alex Alex is also a father and his son
is Murray which therefore makes me a
grandfather I want you to be Alex I want
us to think about Alex who is in the
middle because Alex has a father and
Alex has a son now if Alex leases an an
asset from me in this context Alex is
the L C so he will recognize a right of
use
asset if Alex then leases that asset to
Murray then in addition to Alex being a
lesi Alex is now a lur in respect of the
same asset and that's what we're talking
about it is that is the accounting for
the sub lease all right which is when
Alex who has leased an asset from me is
now leasing it
onwards so let's make up a very simple
example so Alex is leasing some office
space for 5 years and at the same time
it sublets all the office space on a
2-year
lease so it will regain possession of
the premises in two years time
now from Alex's perspective Alex has got
two things to account for first of all
Alex is a
Lessie you've rented it for 5 years you
recognize a right of use asset and
therefore the depreciation through the
p&l and you recognize a lease liability
and therefore Finance cost through the
p&l as a l saw we're subletting the
asset for only 2 years
is and therefore in my judgment
substantially all the risk and rewards
of ownership have not
passed and therefore uh there's no D
recognition of the original uh lease
asset and a rental income will flow
through to the profit and loss account
yeah when Murray in effectively is
paying the
rent that's the relatively
straightforward example
I could complicate the example with a
second scenario where Alex still leases
the office space for 5 years but 12
months
later enters into a subase for four
years now in that situation the four
years one year after the 5year leas has
occurred that represents the whole of
the asset's life and then therefore Alex
as a lur has now entered into a finance
lease Alex as a lur no longer has the
risks and rewards of ownership of the
asset and therefore Alex as I Le saw
would D recognize the right of use
asset remove that right of use asset
from the balance sheet and recognize in
its place a new asset an investment in
the finance leasee a financial asset
and the difference between the two would
re would be an immediate profit or
loss now because Alex still has a a a a
a is still a l e there will still be a
finance cost on the
liability but Alex is also a l s so
we'll have a finance income going
through the profit and loss account on
the investment in the fin
lease I wish I could jump into your uh
brain and uh show you all of the
numbers but this is a podcast I've
explained the ideas and it may well be
that in the exam you're explaining the
ideas or it may be there will be some
simple numbers uh to
manipulate thank you very much for
listening my name is Tom clendon I help
students pass the spr exam reach out to
me on my WhatsApp
07725
35793 or connect with me through my
website ww. clendon
doc. find me on YouTube I'm out there
good luck
Посмотреть больше похожих видео
Leasing in 2 minutes. IFRS16!
The Fundamentals of IFRS 16
IAS 32 Financial Instruments Presentation | IFRS Lectures | ACCA Exam | International Accounting
Ekonomi Kelas XII Bab 2: Persamaan Dasar Akuntansi (Part 1)
Contract Assets and Contract Liabilities
LECTURE 4/4 : MFRS 141/ IAS 41 AGRICULTURE (BIOLOGICAL ASSETS) : FAR320 TOPIC 2-PART 4
5.0 / 5 (0 votes)