IFRS 16: Example 1 Company A requires printing services for its - PDF document

IFRS 16: Example 1 Company A requires printing services for its day-to-day printing requirements. They enter into a printing supply agreement with Company B (a printing company) for 3 years. In terms of this agreement, Company B will set aside a high speed printer HP LaserJet Pro to meet the demands of the contract.  Company B has a right to use any other printer during the contract in the event that the specific printer is down for maintenance.  Company B will charge Company A fee of R5,000 (incl VAT) per month (which includes free printing up to 10 000 pages per month).  In addition, an extra R2 000 (incl VAT) will be payable if the number of pages printed exceeds 10 000 in a month, plus a price of R0.20 (incl VAT) per page printed (which is lower than the market rate for similar services).  Company A has always historically printed 15 000 pages per month.  Company B controls the access, maintenance etc of the printer and the printer remains on Company B’s premises. Required:  Discuss if Company A has a lease

IFRS 16: Example 2 A non-dealer bank leases an asset with a cash price of R115 000 on 1 January for a period of 4 years. The lease instalments are payable annually in arrears on 31 December. Other information in respect of the asset:  Fair value R115 000  Economic life 4 years  Residual value guarantee* R5 000  Annual instalment R40 111.26  Initial direct costs of the lessor Zero * The lessee has guaranteed that the value of the underlying asset will be at least R5 000 at the end of the lease term. The interest rate implicit in the lease: N 4 PV 115 000 FV 5 000 PMT 40 111.26 I/Y 16% ** The sum of the lease payments would represent the gross investment. Therefore, the gross investment amounts to R165 445.04. The lease payments for a lessor includes the residual value guarantee.

Calculation of the net investment: = Gross investment discounted at the interest rate implicit in the lease. I/YR = 16% FV = (5 000) PMT = (40 111.26) P/Yr = 1 N = 4 ∴ PV = 115 000 The following items will therefore be recognised for the lessor upon initial recognition:  Gross investment R165 445.04 (40 111.26*4)+5 000  Unearned finance income R50 445.04  Net investment R115 000.00 Dr: Gross Investment in the lease 165 445.04 Cr: Asset 115 000 Cr: Unearned finance income 50 445.04 Dr: Bank 40 111.26 Cr: Gross 40 111.26 Dr: Unearned finance income Cr: Interest Income (P/L) Students should take careful note here. The amount of the lease liability that would be recognised for the lessee upon initial recognition could be different. This is because the definition of lease payments for the lessee only includes amounts expected to be payable by the lessee under residual value guarantees. Therefore, assuming that the market value of the underlying asset at the end of the lease term is expected to be lower than R5 000, for example R4 000, the lessee would be expected to pay in R1 000 as part of the residual value guarantee. Therefore, R1 000 would be included in the lease payments. PMT 40 111.26 N 4 I/Y 16% FV 1 0000 PV 112 790.84 Dr: Right of use asset 97 790.84 Dr: Vat Input 15 000 Cr: Lease Liability 112 790.84

IFRS 16: Example 3 Illustrative example 24 adapted Selling Price R2 000 000 Carrying amount at date of sale R1 000 000 Lease period 18 years Lease payment at year end R120 000 Fair value of building R2 000 000 Interest rate implicit in the lease 4.5% 1. Calculate the right of use asset / lease liability using the normal principles N= 18 FV= 0 PMT= 120 000 I/Y= 4.5% PV= 1 459 200 2. Right of use asset will not be recognized at the normal amount but rather at the portion of the previous carrying amount that has been retained by the seller (you are deemed not to have sold this portion) 1 000 000* 1 459 200/2 000 000= 729 600 3. The profit on the disposal will be based on the rights that are actually transferred to the buyer; refer to the module for the working 1 00 000 * (2 000 000- 1459 200)/2 000 000= 270 400 4. Your journal that you had was incorrect, you have to do it in one big journal in order for it to balance Dr Cr Dr: Right of use asset 729 600 Dr: Bank 2 000 000 Cr: Lease Liability 1459 200 Cr: Asset 1 000 000 Cr: Profit on disposal 270 400

IAS 37: Example 1 Doors Limited The financial accountant requires your assistance with the following: There was an unexplainable and abnormal loss of raw materials of 60 000 kg during the 2018 financial year. Further investigation revealed that it was stolen by an illegal syndicate and management was of the belief that this was done with the help of somebody working for Doors Limited. In an attempt to catch and prosecute the offenders, Doors Limited widely advertised through the media that they will pay a R500 000 reward for any information that will result in the successful arrest and prosecution of the thieves. During September 2018 a member of the general public came up with information that resulted in the arrest of the thieves. A legal team was appointed early in October 2018 and on 25 October 2018 this team informed the management of Doors Limited that it is highly likely that the alleged offenders will be found guilty on the evidence provided by the informant. The new financial accountant of Doors Limited decided to disclose the R500 000 reward as a contingent liability on 30 September 2018. He also raised a provision of R100 000 in respect of the expected legal fees. Year end - 30 September 2018 . REQUIRED: (a) Discuss the appropriateness of the decision of the financial accountant to disclose the (11) proposed reward of R500 000 as a contingent liability and to recognise a provision for the legal fees on 30 September 2018.

IAS 37 Example 1 Solution: The definition of a provision is that it is a liability of which the timing or amount is uncertain. In this case the (1) timing of when the court case will be finalised is uncertain. A provision shall be recognised when an entity has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. (1) Past obligating event: The past event that gives rise to a present obligation is not only the announcement of the reward in the media but the payment of R500 000 is also contingent upon the following conditions having to be met: - Someone coming forward to provide the information - There needs to be a successful arrest. (1) - There needs to be a successful prosecution. Present obligation: The entity only has a present obligation to pay the R500 000 once all conditions (i.e. past obligating event exists) relating to the payment have been met. (1) By year end there has only been a person who has come forward with information and an arrest, however there has been no prosecution so therefore there is doubt as to whether there is a present (1) obligation. Not all conditions that will give rise to a past event have taken place before year end. In terms of par 16 of IAS 37, when there is uncertainty whether an entity has a present obligation at year end, the entity needs to take into account all information, including information after year end , to decide (1) whether is it more likely than not that the entity has a present obligation at year end. After year end the legal advisors indicate that is it highly likely that the perpetrators will be found guilty. Therefore, it is more likely than not that there will be a successful arrest and prosecution (specifically therefore a past obligating event) and therefore the entity does have a present obligation at year end . (1) The recognition criteria are satisfied because: - Probable that there will be an outflow of resources (although payment of the reward is contingent because it will only be paid out upon successful prosecution of the offenders, the payment is more (1) probable than not because the legal advisors are of the opinion that (1) the alleged offenders (1) will be F ound guilty on the evidence provided by the informant. This however only became known after Year-end when the legal team was appointed). - Amount can be reliably estimated because the reward was advertised to be R500 000. (1) The legal opinion after year end is an adjusting event after the reporting date as it provides additional (1) evidence of circumstances (legal proceedings against the perpetrators as a result of tip-off) that already existed at year-end. Conclusion: It is not appropriate to disclose the reward as a contingent liability . A provision for (1p) R500 000 should be raised on 30 September 2018. With reference to the same recognition criteria applied to the reward above, the provision of R100 000 for legal fees is not acceptable as there was no present obligation to pay the legal fees on 30/9/2018 . (1) The legal team was only appointed after year-end and as such this is a non-adjusting event after the (1) reporting date (circumstances arose after year-end). Therefore, this provision should be reversed in the financial statements of 30/9/2018 and only be recognised when it is incurred. This is reiterated in IAS 37.19 ('walk away test') which states that a provision may not be recognised if (1) the entity is able to avoid the outflow of resources due to its future actions. As at 30/09/2018, Doors Ltd still had the opportunity not to appoint legal advisors and could have avoided the outflow of cash in this way (i.e. it could have avoided legal fees by withdrawing the charges against the perpetrators, or by representing itself in court, amongst others). AVAILA MAXIM