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Summary class preparation questions lecture 3

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These are the class preparation questions from lecture 3 with answers.

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  • October 16, 2019
  • 3
  • 2019/2020
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Lecture 3
2.5.3 leased assets
Leased assets= assets the firm does not legally own, but leases from another firm

IFRS standards  recognize lease asset on balance sheet, reflecting the company’s right of using an
asset and its obligation to make the rental payments
IAS17  standard for lease assets ( see deloitte)
Since 2019: IFRS16: in the new standards there is no longer a difference between the differences in
lease contracts  they all have to be booked as a financial lease method

How to record a leased asset?
 Operating lease method ( operating lease)  similar to a rent contract
o Impact on balance sheet: no asset, no liability
o Impact on income statement: lease payment=period expense  you only record the
rent expense in the income statement
o Off-balance sheet balancing
 Finance lease method ( finance/capital lease)
o Impact on balance sheet: asset&liability on balance sheet
o As if you have purchased the asset and financed that with a long term loan
o This methods reflects best the true underlying behaviour of the company
o Impact on income statement:
 Depreciation expense
 Interest expense ( interest+repayment of loan)
 No rent expense ( rent expense only for operating expense)

Question 1: in your opinion, what method for recording leases do
companies prefer?
Operating lease method

 ROE= profit/TA  TA lower, so ROE higher  it seems like you perform better, you look
more profitable
 You don’t want to have a lot of liabilities on you B/S
o Ratio: liabilities/TA  lower liabilities, lower TA, so lower ratio  this ratio is an
indicator for risk, so if this ratio is lower you have lower risk
o You want to have a low risk profile, because creditors are more likely to give you a
loan

Question 2: under IFRS, what is the basic criterion to distinguish a finance
lease from an operating lease
 Finance lease method:
o it is a financial lease if you have all the risks of the asset ( such as obsolescence and
physical deterioration) , but also all the rewards
o Lease covers substantially all of the asset’s life
o Present value of lease payments is substantially equal to the asset’s fair value
 Otherwise it’s a operating lease

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