Question (Reckon Plc).

You are the Chief Accountant of Reckon Plc and are supposed to advise the board of Reckon Plc on the following.

(a)

Reckon Plc had decided to expand its business as a result of which, the company is in need of a new machinery that cost 700,000. While one of the option is to purchase the asset, some of the directors in a board meeting have suggested that it would be better to lease the asset. Assuming that Reckon decides to lease the machinery, it will have to do so for at least four years. Beckon Plc is willing to offer its unused machinery (fair market value 700,000) on lease for four years at a minimum lease rentals of 200,000 per year. Assume that the lease term will begin on 1 October 2019 and lease rentals are to be paid in advance. The board of Reckon has recommended that since four years is a short period of time, they could record the lease as an operating lease (reporting the lease rent as expenses) which will not only simplify the accounting, at the same time will not have an impact on the gearing to hinder its ability to borrow in the future. In any case, the board has expressed their disappointment over the complexity of reporting standards and claim that they are unable to understand the need for companies to report different option like operating and finance lease, differently. The cost of capital can be assumed to be 9%. (consider discount factors upto 3 decimal points)

1. Provide your comment to the concerns of the board of directors of Reckon with regards to the complexity of reporting standards and explain how IFRS 16 Leases has attempted to simplify the reporting. Advise the board whether their option of treating the lease as operating lease and expensing the lease instalment is correct.
2. Demonstrate how Reckon Plc will record the above lease in the financial statements in the next four years ending 30 September (2020, 2021, 2022 and 2023) based on your suggestions in (i). (19 marks)

(b) Reckon Plc obtained a government grant of 400,000 which represents 50% of the cost of the asset. The asset was acquired on 1 January 2018 with a useful life of 5 years and zero residual value. A straight line method is to be used to depreciate the asset.

Demonstrate with reference to IAS 20 Government Grants how the asset and the grant will be reported in the financial statements of Reckon Plc for the year ended 30 September 2019 using both the methods. (16 marks)

(Total 35 marks)