IFRS for SMEs) IFRS for SMEs Leases and Service Concessions 2 — Questions and Answers
Question 1: Under IFRS for SMEs, the minimum lease payments for a lessee include:
- Payments over the lease term and any guaranteed residual value (Correct answer)
- Only base rental payments
- All contingent rents
- Future maintenance costs
Correct answer: Payments over the lease term and any guaranteed residual value
Minimum lease payments comprise rentals over the lease term plus any residual value guaranteed by the lessee or a related party.
Question 2: Under IFRS for SMEs, how are contingent rents in an operating lease recognized by the lessee?
- As an expense in the period in which they are incurred (Correct answer)
- Spread evenly over the lease term
- Capitalized as part of the right-of-use asset
- Deferred until the lease expires
Correct answer: As an expense in the period in which they are incurred
Contingent rents (those that depend on a factor other than the passage of time) are recognized as expenses in the period they are incurred.
Question 3: Under IFRS for SMEs, a sale and leaseback transaction that results in a finance lease is accounted for by the seller-lessee by:
- Deferring any profit on sale and amortizing it over the lease term (Correct answer)
- Recognizing the full profit on sale immediately
- Recognizing a loss immediately but deferring the profit
- Recording no profit or loss on the transaction
Correct answer: Deferring any profit on sale and amortizing it over the lease term
For a sale and leaseback resulting in a finance lease, any apparent profit on the sale is deferred and amortized over the lease term because the asset is effectively retained.
Question 4: Under IFRS for SMEs, a sale and leaseback that results in an operating lease at fair value is accounted for by:
- Recognizing any gain or loss on sale immediately (Correct answer)
- Deferring the full sale proceeds over the lease term
- Reversing the original cost of the asset
- Spreading the proceeds equally over the leaseback term
Correct answer: Recognizing any gain or loss on sale immediately
If a sale and leaseback at fair value results in an operating lease, the transaction is a genuine sale and the gain or loss is recognized immediately.
Question 5: Under IFRS for SMEs, incentives received from a lessor to enter an operating lease (e.g., rent-free periods) should be:
- Recognized as a reduction of lease expense over the lease term on a straight-line basis (Correct answer)
- Recognized as income immediately on receipt
- Deferred and released when the lease expires
- Netted against the related leasehold improvement cost
Correct answer: Recognized as a reduction of lease expense over the lease term on a straight-line basis
Lease incentives reduce the total lease expense and are spread over the lease term on a straight-line basis along with the lease payments.
Question 6: Under IFRS for SMEs, which interest rate is used to calculate the present value of minimum lease payments when the rate implicit in the lease is not determinable?
- The lessee's incremental borrowing rate (Correct answer)
- The central bank prime rate
- The lessor's borrowing rate
- A risk-free government bond rate
Correct answer: The lessee's incremental borrowing rate
If the interest rate implicit in the lease cannot be determined, the lessee uses its incremental borrowing rate—the rate it would pay to borrow the funds needed to buy the asset.
IFRS for SMEs) IFRS for SMEs Leases and Service Concessions 2
Under IFRS for SMEs, the minimum lease payments for a lessee include: