Kennix plc is a company that produces and sells laminate flooring with a financial year-end on 31st December. In 2020 it has entered into two new leasing agreements for one lamination hot press machine and one piece of equipment.

The lease agreement for the lamination hot press machine has been signed on the 1st January 2020 for a period of six years. It gives Kennix plc the exclusive right to use the machine and the right to direct how and for what purpose the machine is used for the duration of the contract. The lamination hot press machine will be returned to the lessor at the end of the contract. The machine has an estimated economic life of ten years and it is expected to have a nil residual value at the end of its life. It is depreciated using a straight-line depreciation, applied on a strict time basis. Under the terms of the lease, Kennix plc has agreed to pay £15,000 on a half-year basis commencing on 30th June 2020. The half-year interest rate implicit in the lease is 3%.

On 1st September 2020, Kennix plc has entered on a lease agreement for a piece of equipment for a period of twenty-four months. Kennix plc makes payments for the lease at the beginning of each month for £100. The piece of equipment has a market value of £3,500 and an estimated useful life of ten years. The lease agreement can be terminated by either party giving a one-month period of notice.

Required:

(a) Prepare the extracts of Kennix plc’s Statement of Comprehensive Income and Statement of Financial Position for the years ended December 31, 2020 to 2022 in accordance with the extant accounting standards and practice. Assume that the company elects to adopt any exempted accounting treatments where possible.

Explain if and why these leases are within the scope of IFRS 16, Leases.

[The accounting policy notes and disclosure notes are not required. Clearly show your workings and state any assumptions you have made]

(b) Discuss the arguments for and against the capitalisation of all leases by lessees as currently.