An oil company is planning a major expansion of its oil production capacity beginning in 2022. In order to ensure sufficient shipping capacity is available when production increases, the Company enters into a lease contract on 1 January 2021 for rail cars to ship the oil. The rail cars will be available to the Company from 1 July 2021. The Company does not expect to use the rail cars for its own shipping purposes until 2022, but it may consider renting out the cars to other producers in the second half of 2021. The sole reason for entering into the lease contract in 2021 is to ensure the rail cars will be available to the Company in 2022.

The commencement date of the lease is _____?

The lease term will be considered to extend beyond the non-cancellable period if the lesseee has an extension option that is considered to be reasonably certain to exercise, or a termination option that it is considered to be reasonably certain not to exercise. Therefore, lease payment include optional payments payable after the non-cancellable period if it is considered reasonably certain that the lease will extend beyond that period.

True or False?

Variable lease payments are defined as the portion of payments made by a lessee to a lessor for the right to use an underlying asset during the lease term that varies because of changes in facts or circumstances occurring after the commencement date, other than the passage of time. This may include a specified percentage of sales made from a lease of retail property.

True or False?

A lessee enters into a 10-year lease of property with annual lease payments of USD50,000 payable at the beginning of each year. The contract specifies that lease payments will increase every two years on the basis of the increase in the Consumer Price Index for the preceding 24 months. The Consumer Price Index at the commencement date is 125. The rate implicit in the lease is not readily determinable. Lessees incremental borrowing rate is 5% which reflects the fixed rate at which the lessee could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a 10-year term, and with similar collateral.

At what amount should the right-of-use asset be recognised in the books?

A lessee enters into a 10-year lease of property with annual lease payments of USD50,000 payable at the beginning of each year. The contract specifies that lease payments will increase every two years on the basis of the increase in the Consumer Price Index for the preceding 24 months. The Consumer Price Index at the commencement date is 125. The rate implicit in the lease is not readily determinable. Lessees incremental borrowing rate is 5% which reflects the fixed rate at which the lessee could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a 10-year term, and with similar collateral.

How much is the lease liability to be recorded at commencement date?

A lessee enters into a 10-year lease of property with annual lease payments of USD50,000 payable at the beginning of each year. The contract specifies that lease payments will increase every two years on the basis of the increase in the Consumer Price Index for the preceding 24 months. The Consumer Price Index at the commencement date is 125. The rate implicit in the lease is not readily determinable. Lessees incremental borrowing rate is 5% which reflects the fixed rate at which the lessee could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a 10-year term, and with similar collateral.

At how much will the minium lease payment be on the 3^rd year when the Consumer Price Index is at 135?

A hospital enters into a rental contract or a large number of hospital beds. Each bed within the contract constitutes an identified underlying asset and the other conditions for identification of a lease are met. The value of an individual hospital bed would be considered to be low, even though the contract for all the beds is not. The lessee will treat the lease as finance lease ignoring the low-value-asset exemption since the hospital can benefit from the use of the entire number of beds more than the individual use of the bed.

True or False?

Sometimes a lease contract stipulates that the underlying asset must be returned to the lessor in the same condition as when originally leased. An underlying asset may suffer general wear and tear that is merely a result of being used. In such circumstances, an estimate of the repairs and maintenance should be made and be included in the computation of the cost of the right-of-use asset.

True or False?

Company A leases a property to Company B for 10 years. The lease includes a renewal option under which Company B may extend the lease at the end of the lease. At the inception of the lease, exercise of the renewal option is not considered to be reasonably certain so the lease was classified as operating lease. Company B must give notice not later than 2 years before the end of the lease term if it intends to exercise the renewal option. Towards the end of the 8^th year of the lease, Company B serves notice that it will renew the lease contract, thereby extending the lease to another 10 years making the total lease term equal to the estimated useful life of the property. This constitute a valid reassessment of the classification of the lease to finance.

True or False?

Company A enters into a 5-year lease for 5,000 square meter office space with Company A. At the commencement of the lease, Company B sublease the 5,000 square meters of office space for 2 years to Company C. Company B classified the sublease as an operating lease. During the term of the sublease, Company B recognises a depreciation charge for the right-of-use asset and interest on the lease liability as well as recognise lease income from the sublease.

True or False?

Variable lease payments under operating lease, other than those that are dependent on an index or a rate, should not be estimated and included in the total lease payments to be recognised on a straight-line basis over the lease term.

True or False?