Company x enters into a finance lease contract for some machinery, whereby it has the right of use of the machinery for 3 years. At the end of this time the machinery will have no residual value. The contract provides for half-yearly payments in advance of $108,000, the first payment being made on 1 January 2022. The machinery is to be depreciated using straight line method. The machinery could have been purchased outright for $575,580, Company X has a December year end.

(a) Explain the concept of substance over form and discuss the application of the concept to accounting for leases.(6 marks)

(b) Show how the machinery will be accounted for in the financial statements of Company X for the year ended 31 December 2022 under IFRS 16.(11 marks)

(c) What is the definition of an operating lease? How would the machinery have been accounted for in the income statement and statement of financial position if it had been treated as an operating lease under the former accounting standard IAS 17?(3 marks)