The main aim of standard IFRS16 Leases is to ensure that a lessee's financial statements provide a faithful representation of the lessee's financial position.
(a) Outline the way in which IFRS16 requires lessees to account for leases and explain why this provides a faithful representation.
(b) Explain the recognition exemptions that are available in IFRS16. Must lessees take advantage of these exemptions?
On 1 April 2022, Triste Ltd (which prepares accounts to 31 March) enters into a three year lease of a motor lorry. The company is required to make an initial lease payment of £50,000 on 1 April 2022 and then three further lease payments of £42,500 each on 31 March 2023, 2024 and 2025. The company also incurs initial direct costs of £940. Legal title to the lorry will be transferred to Triste Ltd at the end of the lease term. The rate of interest implicit in the lease is 11% per annum.
(c) Explain (with calculations) how this lease should be accounted for in the financial statements of Triste Ltd for each of the three years to 31 March 2025.
(d) How should the lessor account for this lease? Assume that the lorry has a fair value at inception of £153,000 and that the lessor incurs initial direct costs of £870.