QUESTION 4 (25 marks)

IFRS 16 - Leases sets out guidance for accounting for contracts that are classified as leases. It can be stated that the application of certain IFRS 16 principles is an example of substance over form.

On 1 April 2019, Katutush Ltd. entered into a contract to acquire a specialised piece of equipment. The agreement provided for 4 annual payments ofN$15.5 million, commencing on 31 March 2020. In addition, payment of a deposit ofN$30 million was required on 1 April 2019. The agreement also provided that Katutush Ltd. could buy the residual asset outright at the end of the term for a nominal sum of money. At 1 April 2019, the fair value of the equipment wasN$80 million. The present value of the agreed deposit & lease payments is alsoN$80 million. At 1 April 2019, the effective finance cost implicit in the contract is 9.2%. The equipment has a useful economic life of 5 years.

REQUIRED:

(a) Critically discuss the concept of substance over form and explain why applying the principles of IFRS 16 is a good example of the concept being applied. (8 marks)

(b) Demonstrate, with appropriate calculations, the accounting entries required to record the transaction above for year ended 31 March 2020. Present relevant extracts from the Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 March 2020 and the Statement of Financial Position as at that date. (17 marks)