Accounting specialist Emin Salamov answers readers questions on how income and expenses under a lease are shown in financial statements under international standards.
Suppose that on 1 January 2020 AA LLC leased equipment with a ten-year useful life and a carrying amount of 21,000 manats. Annual rent of 8,000 manats is payable at the end of each year, and at the end of the lease title to the asset remains with the lessor. The lessee spent a further 2,000 manats bringing the equipment into working order.
What amounts - right of use, carrying amount, interest expense and depreciation - will appear in the statements at 31 December 2022?
First discount the payments, then deduct the final-year discount and add the extra costs incurred in recognising the right of use.
(Discount here means a reduction; the formula 1/(1+r)n is used, where r is the annual rate and n the number of years.)
8.000/(1+0.1)1 = 7.272 - first year.
8.000/(1+0.1)2 = 6.611 - second year.
8.000-1.000/(1+0.1)3 = 5.259 - third year.
7.272+6.611+5.259 = 19.142 manats.
Right-of-use asset - 19.142+2.000 = 21.142 manats;
Lease liability - 19.142 manats;
Bank - 2.000 manats;
Payment - 8.000 manats:
Interest expense - 1.915 (first year);
Depreciation - 7.047 manats (21.142/3).
Because the lease runs for three years and the asset returns to the lessor at the end, depreciation is spread over the lease term only.
As shown in the financial statements at 31.12.2020.
Statement of financial position.
Asset - 14.095 manats (21.142-7.047);
Lease liability - 13.057.
Statement of financial performance.
Interest expense - 1.915 manats;
Depreciation - 7.047 manats.
Source: https://vergiler.az/news/taxes/20590.html.
