(a) IFRS 16 Leases provides guidance for accounting of leases by both lessors and lessees. Explain how both lessors and lessees should account for leases in their financial statements.

On 1 January 2022, Kirin Ltd took out a lease for a machine from Matt Ltd. The terms of the lease agreement state that Kirin Ltd must make four lease payments, each of 25,000 beginning on 1 January 2022 and annually on the same date thereafter. The interest rate implicit in the lease is 10% per annum. Matt Ltd incurs initial direct costs of 450 for the arrangement of the lease. At the end of the lease term, ownership of the asset will remain with Matt Ltd and at this point, the asset is expected to have come to the end of its useful life and to have a residual value of 2,500.

Both Kirin Ltd and Matt Ltd prepare financial statements to 31 December each year.

(b) Explain, showing all your workings, how the lease would be accounted for in the financial statements of Kirin Ltd AND in the financial statements of Matt Ltd for the year ended 31 December 2022.

(c) Explain what a sale and leaseback arrangement is and the accounting for such an arrangement.