This document contains all the relevant IFRS and IAS standards required to pass your SBR exam. All the important points have been written in a concise and precise manner which allows you to quickly glance through right before your exam! I passed with 60% on my first attempt using these notes.
Only if there is right to CONTROL an asset will a contract contain a lease.
Right to control arises when
-There is right to substantially all of the benefits associated with the asset
-There is right to direct the use of the asset
Lessee Accounting
The lessor will identify a lease liability and a right of use asset.
Lease Liability
Initially: Measured at the PV of future lease payments
Present Value
Year Cash Flow Discount rate PV
Subsequently: Amortized Cost Table Method.
Amortized Cost Table
Date Opening (PV of LL) Effective Rate of Interest (Payment) Closing
Interest Increases the liability and Lease payments decreases the liability.
Right of Use Asset
Initially:
• The amount of initial payment of lease liability
• Any direct costs
• Estimated costs of removing or dismantling the asset
• Lease payments made on or before the commencement date
Subsequently: Cost Model- Initial cost less any accumulated depreciation
If ownership transfer then depreciation is charged over useful life and if it does not transfer then it is
depreciated on shorter of the useful life of lease term.
It can also be valued using revaluation method or fair value method if it is an IP.
Lessor Accounting
First we have to identify if the lease is an:-
• Operating Lease (risks and rewards lie with the lessor)
, • Finance Lease (risks and rewards lies with lessee)
Indicators of Finance Lease:-
1. Ownership is transferred to the lessee at the end of the lease term
2. Lessee has option to purchase the asset at less than it’s FV
3. Lease term is for the major part of the asset’s useful life
4. PV of minimum lease value is almost equal to the FV of the leased asset
5. Leased asset is of specialized nature that only the lessee can use it
Accounting for Finance Lease
First we must derecognize the leased asset
The lease is then recognized as a receivable (CV is the net invst in the lease)
Receivable on SOFP is the PV of fixed payment + variable payment + residual payment.
Accounting for Operating Leases
Asset is retained and rental income is credited on a straight line basis over the lease term.
Sale & Lease Back
When one entity decides to sell an asset to another entity and then lease it back.
We must determine whether the transfer is a sale or not for accounting purposes.
NOT SALE SALE
Lessee Will continue to record the asset and recognize a Will identify ROU at proportion of
finance liability equal to the proceeds received. previous CV of the rights retained.
Lessor Will NOT record an asset and will recognize a finance Normal Lessor Requirements + Any
asset equal to the proceeds given. other applicable standard
NOTE
-If the lease is for less than 12 months then the lease payments can be recorded in the PNL (Lessee).
No liability or asset is recognized in this case.
-A contract may contain a lease and a non lease component, if this is the case then the entity has a
choice whether they want to record them together or separately. If it is recorded separately then
the consideration would be based on the stand-alone selling price.
-If any changes are there to the lease liability then the liability must be recalculated and
adjustments will be made to the CV of the liability and ROU.
Stakeholders- Leases impact financial ratios such as the asset, gearing and profit ratio.
IFRS 2: SHARE BASED PAYMENTS
Share based payments are basically transferring of equity shares in return for good/services.
, There are two types of share based payments:-
• Equity Settled Share Based Payments
• Cash Settled Share Based Payments (SAR’s)
Equity Settled Share Based Payments
Journal Entry- DR. Expense/ Cr. Equity shares to be issued
Measurement:-
• Direct Method – Using FV of goods and services
• Indirect Method- Used mostly for paying their own employees done (with ref to FV of their
Equity Instruments)
Conditions attached to SBP:-
• Service Conditions- Needs to be taken into account when valuing SBP. (Eg- Emp. Required to
work for 3 years)
• Performance Conditions- Market Based will not be taken into account separately since it’s
already included and Non- Market Based will be taken into account as it’s not included.
Formula→ No. Of Options*No employees retained*FV of option at grant date*Time elapsed
Cash Settled Share Based Payments
The good/services are exchanged for cash that is measured with reference to the entity’s share
price.
SAR’s is given to employees, this done to retain them as they will be granted the share option at a
fixed rate should they comply to the service conditions.
Now for eg- if the share option given is $10 and the market price goes up to $15 then the employee
gets an instant profit of $5. This can work vice-versa as well as they can also experience a loss.
Journal Entry: DR. Expense or Asset/ CR. Liability
Note→ Update the FV of each year and recognize the movement in PNL.
Liability→It is the estimate of remuneration given to the employees and taken into account the time
value of money. (FV of SAR’s at year end)
Cash is paid out based on the intrinsic value (cash payable based upon share price on that date).
Modifications, Cancellations and Settlements
Modifications: An entity may amend the terms of share option schemes during the vesting period
and so this may be in favour or not in favour of the employees.
But it is key to recognize the amount that would have been had there been no amendment.
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