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CA Final FR Ind AS 116 Leases Important Solved Questions

Ind AS 116, Leases, Important Questions with Solutions for CA Final Financial Reporting May & Nov 2021 Exams

Question 1 –

Entity W entered into a contract for lease of retail store with Entity J on January 01/01/2017. The initial term of the lease is 5 years with a renewal option of further 3 years. The annual payments for initial term and renewal term is Rs. 100,000 and Rs. 110,000 respectively. The annual lease payment will increase based on the annual increase in the CPI at the end of the preceding year. For example, the payment due on 01/01/18 will be based on the CPI available at 31/12/17.

Entity W’s incremental borrowing rate at the lease inception date and as at 01/01/2020 is 5% and 6% respectively and the CPI at lease commencement date and as at 01/01/2020 is 120 and 125 respectively.

At the lease commencement date, Entity W did not have a significant economic incentive to exercise the renewal option. In the first quarter of 2020, Entity W installed unique lease improvements into the retail store with an estimated five-year economic life. Entity W determined that it would only recover the cost of the improvements if it exercises the renewal option, creating   a significant economic incentive to extend.

Is Entity W required to remeasure the lease in the first quarter of 2020?

Solution –

Since Entity W is now reasonably certain that it will exercise its renewal option, it is required to remeasure the lease in the first quarter of 2020.

The following table summarizes information pertinent to the lease remeasurement.

Remeasured lease term 5 years; 2 years remaining in the initial term plus 3 years in the renewal period
Entity W’s incremental borrowing rate on the remeasurement date 6%
CPI available on the remeasurement date 125
Right-of-use asset immediately before the remeasurement Rs. 1,81,840 (Refer note 1)
Lease liability immediately before the remeasurement Rs. 1,85,947 (Refer note 1)

To remeasure the lease liability, Entity W would first calculate the present value of the future lease payments for the new lease term (using the updated discount rate of 6%). The following table shows the present value of the future lease payments based on an updated CPI of 125. Since the initial lease payments were based on a CPI of 120, the CPI has increased by 4% approx. As a result, Entity W would increase the future lease payments by 4%. As shown in the table, the revised lease liability is Rs. 490,589.

Year 4 5 6 7 8 Total
Lease payment 104,000 104,000 114,400 114,400 114,400 551,200
Discount 1 0.943 0.890 0.840 0.792
Present value 104,000 98,072 101,816 96,096 90,605 490,589

To calculate the adjustment to the lease liability, Entity W would compare the recalculated and original lease liability balances on the remeasurement date.

Revised lease liability 490,589
Original lease liability (1,85,947)
  3,04,642

Entity W would record the following journal entry to adjust the lease liability.

ROU Asset                       Dr. 3,04,642
To Lease liability 3,04,642
Being lease liability and ROU asset adjusted on account of remeasurement.

Working Notes:

1. Calculation of ROU asset before the date of remeasurement

Year beginning Lease Payment
(A)
Present value factor @ 5%
(B)
Present value of lease payments
(AxB=C)
1 1,00,000 1.000 1,00,000
2 1,00,000 0.952 95,200
3 1,00,000 0.907 90,700
4 1,00,000 0.864 86,400
5 1,00,000 0.823   82,300
Lease liability as at commencement date 4,54,600

2. Calculation of Lease Liability and ROU asset at each year end

Year Lease Liability ROU asset
Initial value Lease payments Interest expense Closing balance Initial Value Depreciation Closing balance
1 4,54,600 1,00,000 3,54,600 4,54,600 90,920 3,63,680
2 3,54,600 1,00,000 17,730 2,72,330 3,63,680 90,920 2,72,760
3 2,72,330 1,00,000 13,617 1,85,947 2,72,760 90,920 1,81,840
4 1,85,947 1,81,840

Question 2 –

Lessee enters into a 10-year lease for 2,000 square metres of office space. The annual lease  payments are Rs. 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at the commencement date is 6% p.a.

At the beginning of Year 6, Lessee and Lessor agree to amend the original lease to:

(a) include an additional 1,500 square metres of space in the same building starting from the beginning of Year 6 and

(b) reduce the lease term from 10 years to eight years. The annual fixed payment for the 3,500 square metres is Rs. 1,50,000 payable at the end of each year (from Year 6 to Year 8). Lessee’s incremental borrowing rate at the beginning of Year 6 is 7% p.a.

The consideration for the increase in scope of 1,500 square metres of space is not commensurate with the stand-alone price for that increase adjusted to reflect the circumstances of the contract. Consequently, Lessee does not account for the increase in scope that adds the right to use an additional 1,500 square metres of space as a separate lease.

How should the said modification be accounted for?

Solution –

The pre-modification ROU Asset and the pre-modification lease liability in relation to the lease are as follows:

 

Year

Lease liability ROU Asset
Opening balance Interest

expense @ 6%

Lease payment Closing balance Opening balance Depreciation charge Closing balance
1 7,35,900* 44,154 (1,00,000) 6,80,054 7,35,900 (73,590) 6,62,310
2 6,80,054 40,803 (1,00,000) 6,20,857 6,62,310 (73,590) 5,88,720
3 6,20,857 37,251 (1,00,000) 5,58,108 5,88,720 (73,590) 5,15,130
4 5,58,108 33,486 (1,00,000) 4,91,594 5,15,130 (73,590) 4,41,540
5 4,91,594 29,496 (1,00,000) 4,21,090 4,41,540 (73,590) 3,67,950
6 4,21,090 3,67,950

*Refer Note 4.

At the effective date of the modification (at the beginning of Year 6), Lessee remeasures the lease liability on the basis of:

(a) A three-year remaining lease term (ie. till 8th year),

(b) Annual payments of Rs. 150,000 and

(c) Lessee’s incremental borrowing rate of 7% p.a.

Year Lease Payments
(A)
Present value @ 7%
(B)
Present value of lease payments
(A x B = C)
1 1,50,000 0.935 1,40,250
2 1,50,000 0.873 1,30,950
3 1,50,000 0.816 1,22,400
Modified lease liability

3,93,600

The modified liability equals Rs. 3,93,600, of which (a) Rs. 1,31,200 relates to the increase of Rs. 50,000 in the annual lease payments from Year 6 to Year 8 and (refer note 1) (b)  Rs. 2,62,400 relates to   the remaining three annual lease payments of Rs. 1,00,000 from Year 6 to Year 8 with reduction of lease term (Refer Note 3)

Decrease in the lease term:

At the effective date of the modification (at the beginning of Year 6), the pre-modification ROU Asset is Rs. 3,67,950. Lessee determines the proportionate decrease in the carrying amount of the ROU Asset based on the remaining ROU Asset for the original 2,000 square metres of office space (i.e., a remaining three-year lease term rather than the original five-year lease term). The remaining ROU Asset  for  the  original  2,000  square  metres  of  office  space  is  Rs. 2,20,770 [i.e., Rs. (3,67,950 / 5) x 3 years].

At the effective date of the modification (at the beginning of Year 6), the pre-modification lease liability is Rs. 4,21,090. The remaining lease liability for the original 2,000 square metres of office space is Rs. 2,67,300 (i.e., present value of three annual lease payments of Rs. 1,00,000, discounted at the original discount rate of 6% p.a.) (refer note 2).

Consequently, Lessee reduces the   carrying   amount   of   the   ROU   Asset   by   Rs.  1,47,180 (Rs. 3,67,950 – Rs. 2,20,770), and the carrying amount of the lease liability by Rs. 1,53,790 (Rs. 4,21,090 – Rs. 2,67,300). Lessee recognises the  difference between the decrease in the lease liability and the decrease in the ROU Asset (Rs. 1,53,790 – Rs. 1,47,180 = Rs. 6,610) as a gain in profit or loss at the effective date of the modification (at the beginning of Year 6).

Lease Liability Dr. 1,53,790

To ROU Asset

1,47,180

To Gain

6,610

At the effective date of the modification (at the beginning of Year 6), Lessee recognises the effect of the remeasurement of the remaining lease liability reflecting the  revised discount rate of  7%  p.a., which is Rs. 4,900 (Rs. 2,67,300 – Rs. 2,62,400*), as an adjustment to the ROU Asset.

*(Refer note 3)

Lease Liability Dr. 4,900

To ROU Asset

4,900

Increase in the leased space:

At the commencement date of the lease for the additional 1,500 square metres of space (at the beginning of Year 6), Lessee  recognises the increase in the lease liability related to the increase in leased space of Rs. 1,31,200 (i.e., present value of three annual lease payments of Rs. 50,000, discounted at the revised interest rate of 7% p.a.) as an adjustment to the ROU Asset.

ROU Asset Dr. 1,31,200

To Lease Liability

1,31,200

The modified ROU Asset and the modified lease liability in relation to the modified lease are as follows:

 

Year

Lease liability ROU Asset
Opening

balance

Interest

expense @ 7%

Lease payment Closing

balance

Opening

balance

Depreciation charge Closing

balance

6 3,93,600 27,552 (1,50,000) 2,71,152 3,47,100** (1,15,700) 2,31,400
7 2,71,152 18,981 (1,50,000) 1,40,133 2,31,400 (1,15,700) 1,15,700
8 1,40,133 9,867* (1,50,000) 1,15,700 (1,15,700)

*Difference is due to approximation.

**Refer Note 5

Working Notes:

1. Calculation of lease liability on increased consideration:

Year Lease Payments
(A)
Present value @7%
(B)
Present value of lease payments
(A x B = C)
1 50,000 0.935 46,750
2 50,000 0.873 43,650
3 50,000 0.816 40,800
Modified lease liability

1,31,200

2. Calculation of remaining lease liability for the original contract of 2000 square meters at Original discount rate:

Year Lease Payments
(A)
Present value factor @ 6%
(B)
Present value of lease payments
(A x B = C)
1 1,00,000 0.943 94,300
2 1,00,000 0.890 89,000
3 1,00,000 0.840 84,000
Remaining lease liability

2,67,300

3. Calculation of remaining lease liability for the original contract of 2000 square meters at revised discount rate:

Year Lease Payments
(A)
Present value factor @ 7%
(B)
Present value of lease payments
(A x B = C)
1 1,00,000 0.935 93,500
2 1,00,000 0.873 87,300
3 1,00,000 0.816 81,600
Remaining lease liability

2,62,400

 4. Calculation of Initial value of ROU asset and lease liability:

Year Lease Payment
(A)
Present value factor @ 6%
(B)
Present value of lease payments
(A x B = C)
1 100,000 0.943 94,300
2 100,000 0.890 89,000
3 100,000 0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification date

7,35,900

 5. Calculation of opening balance of Modified ROU Asset at the beginning of 6th year:

The remaining ROU Asset for the original 2,000 square metres of office space after decrease in term 2,20,770
Less: Adjustment for increase in interest rate from 6% to 7% (4,870)
Add: Adjustment for increase in leased space 1,31,200
3,47,100

Question 3 –

A lessee enters into a lease of an equipment. The contract stipulates the lessor will perform maintenance of the leased equipment and receive consideration for that maintenance service. The contract includes the following fixed prices for the lease and non-lease component:

Lease Rs. 80,000
Maintenance Rs. 10,000
Total Rs. 90,000

Assume the stand-alone prices cannot be readily observed, so the lessee makes estimates, maximising the use of observable information, of the lease and non-lease components, as follows:

Lease Rs. 85,000
Maintenance Rs. 15,000
Total Rs. 100,000

In the given scenario, assuming lessee has not opted the practical expedient, how will the lessee allocate the consideration to lease and non-lease component?

Solution –

The stand-alone price for the lease component represents 85% (i.e., Rs. 85,000 / Rs. 1,00,000) of total estimated stand-alone prices.  The lessee allocates the consideration in the contract (i.e., Rs. 90,000), as follows:

Lease * Rs. 76,500
Maintenance ** Rs. 13,500
Total Rs. 90,000

* Rs. 90,000 x 85%

** Rs. 90,000 x 15%


Question 4 –

Lessee enters into a 10-year lease for 5,000 square metres of office space. The annual lease payments are Rs. 1,00,000 payable at the end of each year. The interest rate implicit in the lease cannot be readily determined. Lessee’s incremental borrowing rate at  the commencement date   is 6% p.a. At the beginning of Year 7, Lessee and Lessor agree to amend the original lease by extending the contractual lease term by four years. The  annual  lease  payments  are  unchanged (i.e., Rs. 1,00,000 payable at the end of each year from Year 7 to Year 14). Lessee’s incremental borrowing rate at the beginning of Year 7 is 7% p.a.

How should  the  said modification be accounted for?

Solution –

At the effective date of the modification (at the beginning of Year 7), Lessee remeasures the lease liability based on:

(a) An eight-year remaining lease term

(b) Annual payments of Rs. 1,00,000 and

(c) Lessee’s incremental borrowing rate of 7% p.a.

The modified lease liability equals Rs. 5,97,100 (W.N.1). The lease liability immediately before the modification (including the recognition of the interest expense until the end of Year 6) is

Rs. 3,46,355 (W.N.3). Lessee recognises the difference between the carrying amount of  the modified lease liability and the carrying amount of the lease liability immediately before the modification (i.e., Rs. 2,50,745) (W.N. 4) as an adjustment to the ROU Asset.

Working Notes:

1. Calculation of modified lease liability:

Year Lease Payment
(A)
Present value factor @ 7%
(B)
Present value of lease payments
(A*B=C)
7 100,000 0.935 93,500
8 100,000 0.873 87,300
9 100,000 0.816 81,600
10 100,000 0.763 76,300
11 100,000 0.713 71,300
12 100,000 0.666 66,600
13 100,000 0.623 62,300
14 100,000 0.582 58,200
Modified lease liability

5,97,100

2. Calculation of Lease liability as at commencement date:

Year Lease Payment
(A)
Present value factor @ 6%
(B)
Present value of lease payments
(A x B = C)
1 100,000         0.943 94,300
2 100,000         0.890 89,000
3 100,000         0.840 84,000
4 100,000 0.792 79,200
5 100,000 0.747 74,700
6 100,000 0.705 70,500
7 100,000 0.665 66,500
8 100,000 0.627 62,700
9 100,000 0.592 59,200
10 100,000 0.558 55,800
Lease liability as at modification date

7,35,900

 3. Calculation of Lease liability immediately before modification date:

Year Opening lease liability
(A)
Interest @ 6%
(B) =  [A x 6%]
Lease payments
(C)
Closing liability
(D) = [A+B-C]
1 7,35,900 44,154 100,000 6,80,054
2 6,80,054 40,803 100,000 6,20,857
3 6,20,857 37,251 100,000 5,58,108
4 5,58,108 33,486 100,000 4,91,594
5 4,91,594 29,496 100,000 4,21,090
6 4,21,090 25,265 100,000 3,46,355
Lease liability as at modification date

3,46,355

4. Adjustment to ROU asset:

Modified Lease liability 5,97,100
Original Lease liability as at modification date (3,46,355)
Adjustment to ROU asset   2,50,745

The ROU asset will be increased by Rs. 2,50,745 on the date of modification.


 

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