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The following are the provisions of the lease agreement: The fair value of the computerized point of sale system is $179,051 at 30 June 2017. The lease term is for 4 years. The annual lease payments are made in advance with $48,000 due immediately and annual payments of $48,000 on 30 June 2018, 2019, and 2020. The contract specifies that Organic Fashion Ltd specifies a bargain purchase option of $10,000 at the end of the lease term on 30 June 2021. The interest rate implicit in the lease is 8%. The asset’s residual value at the end of its 4-year effective useful life is nil. Pro forma schedules for your answers are provided below. i. Can this agreement be considered a lease under AASB16? Answer:
Expert Answer
| Yes this will be considered as lease under AASB 16 |
| As per AASB 16 if a contract conveys the right to control the asset for the span of time in exchange for consideration.Than a financial lease is a lease that transfers all the rewards and risk incidental to the ownership underlaying that asset |
| Conditions to be fulfilled for Financial lease individually or in combination: |
| 1) The lessee has option to purchase asset at a price which is lower than the fair value of asset at the date when option becomes exercisable. |
| 2) The lease term is for majopr part of the economic life of the asset |
| 3) At the date of inception the PV of lease payments amount to at least all the of the fair value of assets. |
| 4) The lease transfers the ownership of assets to the lessee by the end of lease term |
| So in the present scenerio lease is for 4 years which is also the effective life of the underlying asset |
| 2) The lease gives option to lessor to purchase the asset at the end of lease term. |
| 3) It involves lease payments for each of the four years. |
| Hence thes will be identified as financial lease under AASB 16 |
