IFRS 16 Final Handout v2

Advanced Accounting and Financial Reporting
Topic = IFRS 16- Leases

Ahmed Raza Mir, FCA
Question 1
Jumani Limited leased an asset on the following terms
1. Lease term shall be 4 years
2. Interest rate applicable to the lessee is 9% p.a
3. Annual rentals Rs 140,000 at the end of every year
4. Down payment at the commencement of the lease is 80,000
5. After the lease term the asset shall be returned to the leasing company
Required
Accounting entries and disclosures in the book of lessee
Question 2
Jumaira Limited leased an asset on the following terms:

1. The company made a token as pre commencement payment on the date of agreement (31 Oct
2016) Rs 50,000
2. The Lease commenced on 1 Jan 2017 with a down payment made by Jumaira Limited Rs
120,000
3. Annual rentals at the end of every year will be Rs 200,000
4. Interest rate applicable to the lease is 12% per annuum
5. The lease term is a non-cancelable period of 4 years from the date of commencement
6. Residual value at the end of the lease term is expected to be Rs 100,000. The lessee has not
guaranteed any of it.
7. At the commencement of the lease the lessee has paid initial direct cost of Rs 40,000
8. The company is given a laptop having a fair value of Rs 30,000 as an incentive at the
commencement of the lease. Useful life of the laptop is 4 years with an estimated residual
value at the end of useful life Rs 4,800.
9. Installation cost incurred on the asset Rs 150,000 at the commencement date. Installation was
a very small process and the asset was ready to be used on 1 Jan 2017.
10. The asset will be needed to be dismantled at the end of the lease term at a cost expected to be
Rs 250,000.
Required
Question 3
Kolachi Limited purchased an equipment under lease mode from Khuram Limited on 1 Jan 2015. Lease
terms and conditions agreed were as under:
1. Lease term (non-Cancelable) is decided to be 5 years
Ahmed Raza Mir, FCA
2. Lease shall commence from 1 Jan 2015 (at agreement date)

3. Interest rate is not determinable from the contract so the lessee shall be using incremental
borrowing rate of 10% p.a.
4. Annual rental at the beginning of every year is Rs 250,000
5. Down payment made by the company to lessor amounted to Rs 40,500
6. Non of the guaranteed residual value is guaranteed by the lessee
7. Initial direct cost paid by Kolachi Limited amounted to Rs 16,000
8. The lessee has been given 200 ink cartages which will be consumed in 2 months. Fair value of
these cartages is Rs 5,000.
Required
Reassessment
Question 4 [increase / reduction in lease term – option to extend the lease term]
Following are the terms of a lease agreement commenced on 1 July 2015:
1. Lease term 5 years
2. Interest rate 16%
3. Annual rentals Rs 200,000
The lease- term can be extended to 7 years if the lessee agrees to it at the end of the lease
term. The rentals for the new term shall be 10% lower.
Required
Accounting entries if the lessee:
• Initially decides to keep the lease term to 5 years and at the end of the 2nd year reassess it to 7
years.
• Initially decides to keep the lease term to 7 years and at the end of the 2nd year reassess it to be 5
years.
Interest rate on the date of reassessment date was reported to be 15% p.a.
Question 5 [advanced – Increase in lease term]
Xalim Limited leased an asset from Musharaf Limited on the following terms.
Annual rentals Rs 160,000

Lease term 5 years (extendable for a further of two years)
Down Payment Rs 125,000
Other Information:
Ahmed Raza Mir, FCA
1. Interest rate implicit in the lease agreement was 12%.

2. Initial direct cost paid by lessee Rs 20,650.
3. The asset has a residual value of Rs 250,000 at the end of lease term, none of which is guaranteed
by the lessee.
4. If the term of the lease is extended the rentals for extended period would be Rs 130,000 p.a.
5. The asset is expected to be dismantle at the end of the lease term at an expected cost of Rs
140,000.
6. Appropriate discount rate for the dismantling liability is 12%.
Reassessment of lease term
1. Xalim Limited initially assessed the lease term to be 5 years but after two years in to the contract
the company reassessed the term and now wishes to utilize the full term.
2. Residual value at the end of revised lease term would be Rs 25,000 which is not guaranteed by the
lessee.
3. Interest rate on the date of reassessment was observed to be 11% which is same for the
dismantling liability.
4. Deferring the dismantling would cause the cost of dismantling to increase by Rs 20,000.
Required
Journal reassessment of lease liability and associated dismantling liability.
Question 6 [Reduction in lease term – reassessment]

On 1 July 2011, Sonu limited acquired an asset on the following terms from Titu Limited:
1. The lease term shall be a non-cancellable period of 6 years. The term can be extendable upto 9
years at the discretion of the lessee which he can decide at the end of the original lease term
2. Annual rentals are paid at the end of every year. For non cancellable period the rentals are Rs
125,000 p.a. and for the secondary term it shall be Rs 115,000 per anum.
3. Down payment at the time of commencement of lease was Rs 100,000
4. Initial direct cost paid by the lessee and lessor at the start of the lease
• Sonu Limited Rs 12,500
• Titu Limited Rs 40,000
5. Interest rate applicable in the lease is 15% p.a
6. Lessee if of the view that the asset shall be used for the whole term of 9 years as there is a strong
economic incentive in using the asset beyond 6 years.
7. The asset is expected to be dismantle at the end of the lease term (9 years) at an expected cost of
Rs 80,000
At 30 June 2013 Sonu Linited reassessed the lease term to be 6 years as the company thinks that much
better options are available in the market to replace the asset
Ahmed Raza Mir, FCA
1. The interest rate on the date of reassessment was 16% (incremental borrowing rate of lessee)
2. Disentailing cost is expected to increase by 15,000 if the term of the agreement is reduced.
Required
Journal entries for reassessment
Question 7 [rentals depending upon inflation index – reassessment]
On January 1, 2001, entity A leases a property for a lease term of 8 years. The lease payments for first
three years have been agreed at Rs 150 per year. The lease payment will be reset on 1 Jan 2004 and
after every three year thereafter. The lease payments will be adjusted on the basis of previous three
years RPI (retail price index).
At 1 January the RPI is 100 and the IRR is 5%.
RPI on the following dates are as under:
Date RPI Interest rate

Jan 2002 103 5%
Jan 2003 107 5.5%
Jan 2004 108 6%
Jan 2007 113 4%
Required
Journal entries for reassessment
Question 8 [option to acquire leased asset at the end of the term – Reassessment]
Ghalib Limited leased an asset from Meer Limited on the following terms:
1. Down payment at the commencement of the lease is Rs 250,000.

2. Annual rentals payable at the start of every year is Rs 400,000.
3. Lease term (non-cancellable period) is 5 years.
4. Applicable interest rates 10% to the lease agreement.
5. Total useful life of the asset is 8 years considering the workload of the lessee.
6. The lessee can acquire the asset at the end of lease term at Rs 500,000.
The company initially thought that the asset will be returned after 5 years. After the completion of 2nd
year the company is expecting to retain the asset purely on financial grounds. The revised rate is
12%.
Required
Journalize the reassessment of the lease
Ahmed Raza Mir, FCA
Question 9 [option to purchase the asset at the end of

lease term – reassessment]
Usman Limited leased an asset from Ali Limited on the following terms:
1. Annual lease rentals payable at the end of the year Rs 250,000
2. Applicable interest rate in the lease is 16%
3. Lease term is 5 years non-cancellable and non-extendable
Usman Limited is a Joint venture of two entities and is starting business in Zob. Government of
Pakistan has licensed the company to operate subject to a condition to operate for at least eight years.
If the company leaves the business before this then it has to pay penalties and has to dismantle the
asset. If the company operates for 8 years government will bear the dismantling cost of the asset.
Usman Limited is given an option to purchase the asset at the end of lease term for Rs 400,000. The
useful life of the asset is 8 years.
The company expects the purchase option to be exercised at the end of the lease term.
Two years later the company changed its business model and is not expected to reduce the business to
5 years. Estimate of dismantling liability Rs 65,000.
Required
Journalize the reassessment of the lease
Question 10 [changes in estimate of G. Residual Value for lessee – reassessment]
ABC Limited leased an asset from Jamal Leasing on the following terms:
1. Down payment at the commencement of the lease Rs 180,000
2. Annual lease rentals Rs 250,000 payable at the end of the lease term
3. Lease term is 5 years (not extendable)
4. Applicable interest rate in the lease is 16%
5. The asset shall be returned at the end of the lease term to the leasing company and the leasing
company has required the lessee to guarantee the residual value to be atleaset Rs 400,000.
The lessee guaranteed the entire residual value. At the inception of lease the lessee expected not to
pay anything under the lease residual value guarantee.
At the end of second year the lessee reassesses the residual value which is expected at the end of the
lease term to be Rs 340,000 (means that the lessee would have to pay the difference) Interest rate on
the date of reassessment was observed to be 15%.
Required
Journalize the reassessment of residual value
Ahmed Raza Mir, FCA
Question 11
The lease on Q Ltd’s factory building expired on 31 December 2010 and it had to find new premises
from 1 January 2011. Q Ltd will lease a new factory building from R Ltd for a period of ten years,
starting on 1 January 2011. The annual lease instalment, payable in arrears on 31 December of each
year, amounts to Rs 8 million.
At the end of the lease term, Q Ltd has guaranteed a residual value of Rs 75 million for the factory
building. On 1 January 2011, Q Ltd expects that it will have to make a payment of Rs 25 million under
the residual value guarantee (the expected fair value of the factory building at the end of the lease
term is thus Rs 50 million).
Q Ltd does not have sufficient information to determine the interest rate implicit in the lease and uses
its incremental borrowing rate of 12% per annum to discount the lease payments.
Based on the contract, the commencement date of the lease is 1 January 2011. The company
depreciates the right-of-use asset using the straight-line method of depreciation and the expected
economic life of the factory building was 25 years.
On 1 January 2012, Q Ltd reassesses its lease payments and determines that it now expects to pay the
lessor only Rs 20 million under the residual value guarantee, due to an increase in property prices
during the year.
Required
Journal entries for reassessment of the residual value.
Ahmed Raza Mir, FCA
Question 12 [modification of lease – increase in lease term]

Mustafeez Limited is leasing an asset from Jahlam Limited. Terms and conditions under the lease are as
under:
1. Lease term is 5 years and is non-cancellable
2. Interest rate applicable to the lessee at the time of entering lease is 16%
3. Annual rentals payable at the end of the year amount to Rs 100,000
4. Down Payment paid at the commencement of the contract is Rs 250,000.
The company, after using the asset for 2 years requested the lessor to extend the lease term to 6 years
in total (4 years from now). Interest rate on modification date was observed at 15%.
Required
Journalize the modification of the lease contract
Question 13 [modification of lease agreement – Increase in lease term]

Khan Limited leased an Assets on the following terms:
1. Lease term shall be non-cancellable period of 4 years from the date of commencement of the lease
(1 Jan 2012).
2. Annual rentals shall be Rs 300,000 per year. First rental due at the end of the year.
3. Interest rate applicable to Khan Limited is 9%.
4. The lease shall commence with a down payment of Rs 450,000.
On 1 Jan 2013 Khan Limited renegotiated the lease term to be 6 years. Rentals were reduced to Rs
200,000 per annum with a lumpsum payment of Rs 160,000 to be paid by the company at the end of
the lease term (new term).
On the date of modification, the interest has increased by 1% as compared commencement date of the
lease.
Required
Journalize the modification in the lease contract
Question 14 [Reduction in the lease term – lease modification]
On 1 July 2013 Musa Limited leased an asset on the following terms from Khan Limited:
1. Annual rentals at the end of the year are set to be Rs 80,000
2. Interest rate implicit in the lease is 10% whereas the incremental borrowing rate of the lessee is
9%
3. Lease term is set to be 6 years, thereafter the leased asset shall be returned to the lessor.
Ahmed Raza Mir, FCA
On 1 July 2014, the board of directors of lessee, decided to renegotiate the term with the lessor to
reduce it to four years (in total). The rentals are increased by 10% for the remainder term. Interest rate
of the date of modification was 9%.
Required
Journalise the modification of lease agreement
Question 15 [Reduction in lease term - Modification of lease]
Erum Limited is engaged in the manufacturing of empty cans for food processing industry. The
company leased an equipment on 1 July 2016 on the following terms.
1. Annual rentals to be paid at the end of each year (30 June) amounts to Rs 245,000
2. Lease term (non-cancellable period) is 6 years
3. Down payment of Rs 100,000 is paid at the beginning of the lease
4. The asset shall be returned to the lessor at the end of the lease term
5. Expected residual value at the end of the lease term is 300,000. None of it is guaranteed by the
lessee
6. Interest rate at the inception of the lease was 16%
On 1 July 2017, the board of directors of Erum Limited, the company renegotiated the term with the
lessor to reduce it to four years. The rentals are increased by 12% for the remainder term. Interest rate
of the date of modification was 14%.
Question 16 [Reduction in assets tally – Modification of lease]
Kamran Limited leased an asset from Lamosh Limited on 1 December 2012 (agreement date). The
terms of the contract are as under:
1. The lease will cover 4 Equipment but the contract will be one.
2. Combined annual rentals at the end of the year would be Rs 400,000
3. At commencement of the lease (1 Jan 2013) a down payment Rs 600,000 would be paid.
4. Interest rate implicit in the lease is 6%
Two years latter the company negotiated with the lessor to return one asset. The terms of the
remaining lease are now as under:
1. Annual rentals shall be reduced by 16%
2. Interest rate are raised to 7% in the market.
Required
Journal entries for modification
Question 17 [Increase in assets tally – Modification of lease]
Ahmed Raza Mir, FCA
Following terms were agreed on Novemebr 12, 2014 between Zahid Leasing and Muslim Limited:
Particulars Details
Commencement of lease 1 Jan 2015
Assets covered 5 floors of 20 story building
Annual rentals Rs 1.4 million for each floor
Interest rate 14% p.a.
Down payment Rs 250,000 per floor.
Lease term 5 years
Muslim Limited insisted Zahid leasing to add one more floor on Jan 1, 2016. The deal was agreed on
the following terms:
Particulars Details
Rental Rs 1.5 million
4 years from the date of commencement
Lease Term of lease of this asset
Interest rate 13% p.a
Down Payment Rs. 0
Required
Journalize the modification of lease under the following assumptions
1. The rental quoted in the new floor lease is equal to the fair market rentals.
2. The rental quoted in the new floor lease is less than the fair market rentals.
Question 18 [Reduction in lease term – Modification of lease]

Fawad limited leased 6 generators of 150 kva from Nasir Limited. Details of the agreement are as
under:
Annual rentals Rs 40,000 per generator (in arears)

Interest rates 10% p.a.
Lease Commencement 1 Jan 2015
Down Payment Rs 60,000 per generator
Lease Term 5 Years
On 1 Jan 2017 Fawad Limited and Nasir Limited mutualy agreed to reduce the asst tally to 4
assets with the following new terms:
Annual rentals Rs 46,000 per remaining generator
Interest rates 12% (Changed since the original lease agreement date)
Required
Journal entries for modification of lease agreement
Ahmed Raza Mir, FCA
Question 19 [reduction in asset base – Modification of lease]

Khalid Limited leased 5 generators from Nahid Leasing on a lease term of 5 years.
Particulars Details
Fair Value per generator Rs 5,000,000
Interest rate 16%
Lease commenced on 1 Jan 2015
Down Payment per asset Rs 600,000
Rentals per asset Rs 800,000
At the first year of its operation Nahid Limited assessed that the target activity level which it had
thought will be reached in near future, therefore, the company is considering to reduce the scope of
the lease and return one such generator. The companies agreed to reduce the scope on the condition
that the lease rentals will be increase by 12%. Interest rate on the date of modification is 15%.
Required
Journalize the modification of the lease agreement.
Question 20 [Modification of lease – Adjustments to rentals]
Baku Limited leased an asset from Budapest limited on the following terms:
1. Annual rentals at the end of every year Rs 100,000

2. Lease term is set to be 5 years
Two years later the company renegotiated the rentals considering the fact that better substitute of
the leased assets are available in the market at substantially low rentals. Lessor agreed to reduce the
rentals to Rs 80,000.
Interest rate at the date of modification was observed to be 5.5% p.a.
Required
Journalize the modification of lease agreement

Ahmed Raza Mir, FCA
Complex Modifications
Question 21 (Reduction of asset base in future)
ABC Limited leased 5 floors of a building on the following terms:

2. Commencement of the lease shall be from 1 Jan 2016
3. Lease Rentals for all five floors shall be Rs 100,000 in total
4. Interest rate appliable to the lessee is 5% p.a.
On 1 Jan 2018 the lease agreement was modified to include the following clauses:
1. Lease of one floor will be terminated on 31 December 2018.

2. Lease term of remaining floors shall be the same.
3. Rentals for 4 floors shall be Rs 84,000 per annum from now on.
4. Interest rate on 1 Jan 2018 is 6% for lessee.
Required
Journal entries for modification of lease contract
Question 22 (Reduction in Asset base in future and extension of lease term)


8. Interest rate appliable to the lessee is 5% p.a.

6. Lease of remaining floors shall be increased by 2 years.
7. Rentals for 4 floors shall be Rs 80,000 per annum
Required
Question 23 (reduction in LT and increase in asset base)


4. Interest rate applicable to the lessee is 5% p.a.
Ahmed Raza Mir, FCA
1. Lease term shall be reduced by 1 year.

2. One more floor is to be added to the lease agreement with a rental of Rs 15,000 which is not
equal to the market rental
3. Rentals for previous lease shall not be changed
Required
Question 24 (Reduction of asset base in future and Reduction of LT)


8. Interest rate applicable to the lessee is 5% p.a.

6. Lease of remaining floors shall be reduced to 2 years.
7. Rentals for previous lease shall not be changed
Required
Journal entries for modification of lease contract.
Ahmed Raza Mir, FCA
Lessor
Question 25 [Accounting for lessor]

Khuzaima Limited is leasing company, leasing industrial printers. The company undergone the
following lease agreement at the start of 2015 with the following terms:
1. Fair Value of the asset given on lease was Rs 600,000

2. Initial direct cost paid by lessor for the lease is Rs 20,000
3. Lease term is set to be 5 years. The term is not extendable and the asset will be returned at the
end of the lease term by the lessee.
4. Expected Residual value of the asset at the end of the lease term is Rs 80,000. 70% of the
residual value is guaranteed by the lessee and independent 3rd parties. 20% of the residual
value is guaranteed by the parent company of the lessor. Remaining residual value is
unguaranteed.
5. Interest rate to be recovered by the lessor from the lease is 6%
Required
Accounting entries and disclosures by lessor for the first year of lease.
Question 26 [Accounting by Manufacturer / Dealer Lessor]

Sumair Limited is a dealer of Honda Limited, dealing in cars. The company sells cars on cash and on
lease as well. One such asset was given on lease at the inception of 2016 on the following terms.
1. Interest rate applied to lease arrangement is 10%
2. Lease term is set to be 5 years. The term is non-cancellable and the asset will be returned to the
lessor at the end of the lease term.
3. Residual value of the asset at the end of the lease term is expected to be Rs 50,000 which is
100% guaranteed by the lessee.
4. Annual rental shall be received at the end of every year.
Other information
1. Cost of the asset (purchase price from manufacturer was Rs 800,000).
2. The company generally charge a gross profit mark up of 20% on cost.
3. Sumair Limited paid Rs 16,000 commission to a broker who helped the company strike the deal.
Required
Accounting for first year for lessor along with disclosures
Question 27 [Accounting by MDL – Treatment of Residual value – Guaranteed and Unguaranteed]

Following are the details of a lease entered into by ABC Limited:
1. Fair value of the asset is Rs 540,000
2. Interest rate applicable to the lease is 10%
3. Lease term is 5 years
4. Expected residual value of the asset at the end of the year is Rs 90,800.
5. Annual rentals are paid at the end of every year
Ahmed Raza Mir, FCA
Required
Accounting for lessor for the first year of lease assuming that
1. Lessor is a normal lessor and residual value is guaranteed
2. Lessor is a normal lessor and residual value is notguaranteed
3. Lessor is a Manufacturer / Dealer lessor and residual value is guaranteed
4. Lessor is a Manufacturer / Dealer lessor and residual value is notguaranteed
Question 28 [Accounting by MDL – GRV and UGRV]

Usman Limited is a furniture manufacturer. The company leased a furniture set on the following terms:
1. Annual rentals will be paid at the end of every year.
2. Interest rate applicable to the lease is 8% which is fair market rate considering the risk profile of
the lessee.
3. Lease term shall be 5 years which is not extendable or cancellable
4. Residual value expected from the asset at the end of the lease is Rs 60,000
Other information
1. Cost of manufacturing the asset is Rs 825,000
2. Gross profit is set to be 20% on cost
Required
Accounting for first year for lessor along with disclosures assuming:
1. Residual value of the asset at the end of the lease is guaranteed
2. Residual Value of the asset is not guaranteed
Question 29 [Artificially Low interest rates – Accounting by MDL]

Hussain Limited is a manufacturer of automatic washing machines. The company entered into a lease
on 1 Jan 2018 on the following terms:
1. Annual Rentals at the end of every year would be Rs 170,000
2. Interest rate quoted in the contract is 7% whereas the market rate that would have been
applicable to the lessee is 16% p.a.
3. Lease term is 6 years which neither extendable nor cancellable
4. The company keeps a margin of 10% of the fair value of the asset
Required
Journal entries for the first year of lease
Question 30 [Artificially low interest rates – Accounting by MDL]

ABC Limited is a manufacturer of industrial equipment. The company leased an asset at the start of the
current year. Details are as under:
1. Cost of the asset Rs 400,000
2. Annual Rentals Rs 167,190 to be paid at the end of every year
3. Interest rates quoted in the contract was 5% whereas the market rate for the same contact was
20% p.a.
Ahmed Raza Mir, FCA
4. Lease term is 5 years

5. The asset will have no residual value at the end of the lease term.
The company used the quoted in interest rates in the contract for the recognition of sales and interest
income.
Required
Journal entries for the correction of accounting done so far.
MODIFICATION OF LEASE AGREEMENT – Lessor
Question 31 [New asset added – Modification of lease]

Following are the details extracted from the lease agreement between Kojak and Lollipop Limited
executed on 1 July 2018:

2. Rentals are set to ensure recovery of fair value of Rs 600,000.
3. No residual value is expected at the end of the lease term
4. Asset will be returned to the lessor at the end of lease term
5. Internal rate of return to be recovered from the lease is 14%
On 1 July 2019 the lessee requested Kojak Limited to add one more asset to the leased assets tally for
the remainder of the lease term. Agreed terms are as under:
1. Fair Value of the asset added is Rs 180,000

2. Internal rate of return at modification date 12%
3. Residual value of the new asset added at the end of the lease term is Rs 16,500.
The rentals were increased by Rs 55,810 per alum for the old lease to incorporate the new asset.
Required
Journalize modification of lease by (lessor)
Question 32 [New asset added – Modification of lease]

Following are the details of an industrial cutting machine given on the lease to Mustang Limited:
Fair Value of Asset Rs 780,000

Internal rate of return 16.00%
Term 6 years
Residual Value Rs Nil
The lessor and lessee added one more asset to the lease tally after 2 year of the original lease
agreement. The terms were as under:
Ahmed Raza Mir, FCA
Fair Value of the asset Rs 250,000

Internal rate applicable at modif date 15.00%
Residual Value Rs 40,000
Term 4 years
The rentals were increased by Rs 68,000 per annum for the old lease to incorporate the new asset.
Required
Journalize modification
Question 33 [Reduction in Asset base – Modification of lease]

ABC Limited leased an asset costing Rs 400,000 on a 6 years lease to Sacha Limited. Useful and
economic life of the asset was also 6 years. Interest rate implicit in the lease is 15%.
Two years later, the lease agreement was modified to reduce the scope of the asset to 60%. The
rentals were reduced inline by 36%.
Required
Question 34 [Reduction in lease term – Modification of lease]

Details of a lease is as under:
Particulars Details
Rentals Rs 145,000
Term 6 years
The lease term was changed to 5 years (total) two years later. Lease rentals were increased by Rs
5,000. market rate at the date of modification is 13%. Revised residual value at the end of revised lease
term Rs 120,000
Required
Question 35 [increase in lease term – modification of lease]

ABC Limited leased an asset to M Limited:
Particulars Details
Rentals Rs 70,000
Term 4 years
Ahmed Raza Mir, FCA
The lease term was increased to 5 years (total) two years later. Lease rentals were reduced by Rs
2,000. market rate at the date of modification is 13%. Revised residual value at the end of revised lease
term Rs 10,000
Required
Question 36 [effects on classification]

Following details pertain to asset lease by Mushtaq Leasing Limited:
1. Fair Value of the asset Rs 800,000

2. Internal rate of return 12%
3. Term of the lease 8 Years
4. Economic Life of the asset 10 years
5. Residual Value (unguaranteed) Rs 50,000
A year later, both the parties to the lease agreed to reduce the lease term to five years in total without
adjusting the rentals and other aspects.
Required
Journal entries for the modification of lease
Ahmed Raza Mir, FCA
Question 37 [sale and lease back – sale at fair value]

Faisal Limited has an asset that the company is considering to use in a sale and leaseback transaction
to generate operating liquidity for the operations to run smoothly. Details of the asset and sale and
leaseback transaction is as under:
1. Carrying amount of the asset at 1 March 2016 (transaction date of sale and leaseback) reported
to Rs 500,000
2. Fair value of the said asset on 1 March 2016 was observed to be Rs 680,000
3. Sales proceeds from the transaction were equal to the fair value of the asset.
5. Interest rate implicit in the lease agreement was 10%
6. Annual rentals of lease term payable at the end of every year was determined to be Rs 100,000
Required
Journalize the sale and leaseback transaction
Question 38 [sale and lease back – sale at fair value]

A company sold a machine for Rs.1.5 million which is also fair value and leased it back under a five-year
lease. The asset has a carrying value of Rs.1 million. The lease payments made by the lessee is Rs.
200,000 p.apaid at the end of the year. The interest rate implicit in the lease is 5% p.a. Assume that the
transfer of machine by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a
sale
Required
Question 39 [Sale and Lease Back – at price above fair value – IFRS 9]
Johnny Limited sold an asset to Ghalib Limited on 1 Jan 2012. Details of the transaction are as under:
1. Carrying amount of the asset at the date of disposal was Rs 500,000

2. Fair value of the asset on disposal date was observed to be Rs 680,000
3. On the request of Johnny Limited Ghalib Limited acquired the asset at Rs 730,000 (paying Rs
50,000 more than the fair value)
Johnny Limited also entered into a lease agreement simultaneously with Ghalib Limited to leaseback
the same asset on the following terms:
1. Annual rentals payable at the end of every year are Rs 133,157

2. Lease term was agreed to be 5 years
3. Lease payments are worked out at a 12% rate of interest per annum
Ahmed Raza Mir, FCA
Required
On 1 January 20X4, Relia sells an Administrative Building to Finance Master for Rs 600,000 and at the
same time, Relia leases the same building back for 10 years against an annual payment of Rs 50,000
due at the end of every year.
Other relevant information is as under:
1. Fair value of the building at the time of sale is Rs 500,000

2. Carrying amount of the building in Relia’s books right now before sale is Rs 480,000
3. Transaction meets the definition of sales under IFRS 15
Required
Journalize the sale and lease back transaction
Bholu Limited sold and leased back the following asset:
1. Carrying amount of the asset Rs 800,000

2. Sales proceeds Rs 850,000
3. Fair Value of the asset Rs 700,000
4. Rentals per annuum in arears Rs 200,000
5. Applicable interest rates 20%
6. Lease term agreed 4 years
Required
Question 42 [Sale and leaseback – Sale at price less than fair value – Advance Rentals]
Atlas Limited sells its manufacturing equipment at a price of Rs 5.5 million to Hybrid Leasing Limited.
The fair value and carrying amount of the asset is Rs 6 million and Rs 3 million respectively. The seller
leased back the asset for a period of 10 years in exchange for an annual rental of Rs 400,000 payable at
the end of every year. The seller’s incremental borrowing rate is 6%. Assume that the conditions for
sale is completed as per IFRS 15.
Required
Ahmed Raza Mir, FCA
Question 43 [sales and lease back – transaction is not a sale – right to buy back]
A company sold a machine for Rs.1.5 million which is also fair value and leased it back under a five-year
lease. The asset has a carrying value of Rs.1 million. The lease payments made by the lessee is Rs.
337,844 p.a paid at the end of the year. The buyer-lessor interest rate implicit in the lease is 5% p.a. The
machine has a remaining economic life of 6 years.
The lessor determines that the machine is of such a specialize nature that only the lessee can use it
without major modification. Lessee has the right to purchase the machine at Rs. 50,000 at the end of
the lease term. Initial direct costs are ignored.
Required
journalize the transactions identified from above scenario
Question 44 [Sale and Lease back – exception]

A company sold the furniture for Rs. 200,000 and leased it back under a ten months lease at
Rs. 4,000 per month The asset had a carrying value of Rs. 160,000 and fair value of Rs.
200,000.
Required
journalize the above mentioned transactions
Sublease
Question 45
Abdali limited leased an asset from Mustafa Limited on the following terms:
Lease term shall be 12 months
Monthly rentals shall be
Rs 14,000 per month for first quarter
Rs 19,000 per month for second quarter
Rs 21,000 per month for Third quarter
Rs 25,000 per month for fourth quarter
The lease commences from 1 August 2016.
Abdali limited sub leased the asset with the consent of Mustafa Limited to Harmain Limited on
the following terms.
Monthly rentals 29,000
Term 8 months
Commencement of lease 1 October 2016
Abdali limited has classified the head lease as an operating lease by virtue of exception
available to short term lease.
Required
Extracts from Statement of Financial positions at 31 December 2016
Ahmed Raza Mir, FCA
Question 46
Malakand Limited leased an Asset from Kalam Limited on the following terms:
Lease term shall be 7 years from 1 Jan 2014 Interest rate applicable to the lease shall be 12%.
Lease rentals shall be Rs 200,000 per annum to be paid at the end of every year. There are no
options to
purchase or to extend the lease term available
One-year latter Malakand Limited entered into a sub-lease (1 Jan 2015). Following terms were
agreed:
Lease term was set to be 3 years
Interest rate applicable to the lease was 11%
Annual rentals Rs 240,000 per year payable in arrears.
Required
Journal entries of sub lease for 2015
Question 47
Assuming that in the above question the lease term for the sub lease was 6
years.
Required
Question 48
Head Sub
Lease rentals 24,000 30,000
Commencement date "Jan 2014 "Jan 2015
Lease term 6 Years 5 Years
The head lease was classified as operating lease due to the fact that the underlying asset was of
low value.
On the date of sub lease the interest rates applicable to
Head Lease 9.00%
Sub Lease 10.00%
Required
Ahmed Raza Mir, FCA
Question 49 Sublease with Reassessment

Ahmed Raza Mir, FCA
Question 50 (Q3, June 2016)
United Front (Private) Limited (UFPL) is a company engaged in manufacturing and marketing of
automotive components for auto assemblers in Pakistan. On 1 January 2015 the company
entered into two sale and leaseback agreements with Sun Leasing Limited. The details of
machines sold and leased back under the two agreements are as under:
Machine – A Machine – B
Date of purchase 1-Jan-10 1-Jan-13
Cost (Rs. in million) 150 48
Useful life (in years) 10 10
Sale price to the lessor (Rs. in million) 78 41
Fair market value (Rs. in million) 80 44
The terms of lease agreements are as follows:
Machine – A Machine – B
Lease term 5 years 3 years
Annual rentals (Rs. in million) 18.283 4
Instalment due In arrears In advance
Down payment 10% Nil
The market interest rate is 9.5% per annum while the market rates of rentals for machines
similar to Machine-A and Machine-B are Rs. 19 million and Rs. 7 million per annum respectively.
Required
Prepare the relevant extracts from the statements of financial position and comprehensive
income and the related notes to the UFPL’s financial statements for the year ended 31
December 2015, in accordance with the International Financial Reporting Standards. (18)
Ahmed Raza Mir, FCA
Question 51 (Q6a, December 2017)
Following are the details of lease related transactions of Patel Limited (PL):
(i) On 1 July 2015 PL acquired a plant for lease term of 5 years at Rs. 18 million per annum,
payable in arrears. Fair value and useful life of this plant as on 1 July 2015 were Rs. 60
million and 6 years respectively. Bargain purchase option at the end of lease term would
be exercisable at Rs. 1 million. On 1 July 2015 PL’s incremental borrowing rate was 9%
per annum.
After one year, PL sub-let this plant for Rs. 21 million per annum, payable in arrears for
lease term of 5 years. Implicit rate of this transaction was 11% per annum.
(ii) On 1 July 2014, PL acquired a building for its head office for lease term of 8 years at Rs.
50 million per annum, payable in arrears.
However, after the board’s decision of constructing own head office building, PL
negotiated with the lessor and the lease contract was amended on 1 July 2016 by
reducing the original lease term from 8 to 6 years with same annual payments.
Incremental borrowing rates on 1 July 2014 and 1 July 2016 were 12% and 10% per
annum respectively.
Required
Prepare the extracts relevant to the above transactions from PL’s statements of financial position
and profit or loss for the year ended 30 June 2017, in accordance with the International Financial
Reporting Standards. (Comparative figures and notes to the financial statements are not
required).
Ahmed Raza Mir, FCA
Question 52 (Q4, December 2018)
On 1 January 2015, Datsun Motors Limited (DML) acquired a machine on lease through Bolan
Leasing Company (BLC) to manufacture components of a new model of vehicle, on the following
terms:
(i) Non-cancellable lease period is 7 years.

(ii) The agreement contains an option for DML to extend the lease for further 3 years in which
case the legal title of the machine will be transferred to DML at the end of 10 years.
(iii) Lease installments are payable annually in advance as under:
 First seven instalments at Rs. 80 million each.
 Three instalments at Rs. 70 million each for the optional period.
DML also incurred initial direct cost of Rs. 15 million for the lease. DML’s incremental borrowing
rate on 1 January 2015 was 8% per annum. Useful life of the machine is 12 years.
On commencement of the lease, DML was reasonably certain that the option to extend the term
will be exercised.
However, after first year of production of the new model, DML assessed that the model is not
popular in the market. Therefore, in 2016, DML concluded that it is not reasonably certain that
DML would exercise the option to extend the lease for three years. DML’s incremental borrowing
rate on 1 January 2016 was 9% per annum.
After another disappointing year of the new model, DML negotiated with BLC and the lease
contract was amended on 1 January 2017 by reducing the original lease term from 7 years to 5
years with the same annual payments. DML’s incremental borrowing rate on 1 January 2017
was 10% per annum.
Required
Determine the amounts of “Right of use asset” and “Lease liability” as at 31 December 2015,
2016 and 2017 and reconcile the opening and closing balances of each year.
Ahmed Raza Mir, FCA
Question 53 (Q2(v), June 2019)
Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The following
transaction / event has been occurred during 2018:
On 1 January 2018, FL acquired a building on lease for a non-cancellable period of 6 years.

Lease contains rent free period of 2 years and 4 annual rentals of Rs. 60 million each are
payable starting from the end of 3rd year. Applicable discount rate is 12%. Nothing has been
recorded in the FL’s books in this respect.
Required:
Discuss how the above transaction / event should be dealt with in FL’s books for the year ended
31 December 2018. (Show all calculations wherever possible. Also mention any additional
information needed to account for the above transaction / event).
Question 54 (Q3, December 2020)
Health Pharma Limited (HPL) entered into the following arrangements during 2019:
(i) On 1 January 2019, HPL acquired a capsule manufacturing machine from Hi-Tech
Industries Limited for a lease term of 5 years with installments payable annually in
advance. The useful life of the machine was estimated at 6 years.
HPL paid the 1st instalment of Rs. 50 million on 1 January 2019. However, subsequent
lease payments are subject to increase/decrease in line with consumer price index (CPI).
At lease inception, HPL estimated that CPI will increase by 10% annually. However, CPI
increased by 14% in 2019 and consequently Rs. 57 million was paid on 1 January 2020
as 2nd instalment. At 31 December 2019, HPL estimated that the annual increase in CPI
will continue to be 14% in future years.
HPL is also required to pay a usage fee of Rs. 0.3 per capsule produced in excess of 30
million capsules per annum from the machine. At lease inception, HPL planned to
produce 40 million capsules each year during the lease term. During 2019, HPL produced
40 million capsules and accordingly an amount of Rs. 3 million was also paid along with
2nd instalment.
(ii) On 1 April 2019, HPL entered into a contract with Auto Limited (AL) for the use of 8
Refrigerated Trucks for a period of 3 years at semi-annual payment of Rs. 10 million
payables in arrears. AL is also required to provide two drivers along with each truck. The
amount of Rs. 10 million can be allocated to the trucks’ rental and drivers’ cost in the ratio
of 70:30 respectively.
All costs pertaining to running and maintenance of trucks, would be paid by AL. However,
HPL is required to reimburse 30% of the fuel cost to AL. Fuel cost for 2019 was Rs. 4
million. HPL paid its share of fuel cost in 2020.
HPL uses these trucks for transportation of inventory all over the country. In order to save
fuel and time, AL often replaces a similar truck at the required location from one of AL’s
nearby office. AL is also required to provide a substitute in case of accident and
maintenance work
Ahmed Raza Mir, FCA
(iii) On 1 July 2019, HPL sold its warehouse building to Macro Finance Limited (MFL) for cash
of Rs. 1,400 million. Immediately before the transaction, the building was carried at Rs.
900 million and had remaining useful life of 18 years. At the same time, HPL entered into
a contract with MFL for the right to use the warehouse building for 10 years, with annual
payment of Rs. 180 million payables in arrears. Fair value of the building at the date of
sale was Rs. 1,500 million. The rate of interest implicit in the lease is 11% per annum.
The terms and conditions of the transaction are such that the transfer of the building by
HPL satisfies the requirements for determining when a performance obligation is satisfied
in IFRS 15.
HPL’s incremental borrowing rate is 12% per annum.
Required
Prepare the extracts relevant to the above transactions from HPL’s statement of financial
position and statement of profit or loss for the year ended 31 December 2019 in accordance with
the IFRS. (Comparative figures and notes to the financial statements are not required).

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Advanced Accounting and Financial Reporting

Topic = IFRS 16- Leases

Jumaira Limited leased an asset on the following terms:

2. Lease shall commence from 1 Jan 2015 (at agreement date)

Annual rentals Rs 160,000

1. Interest rate implicit in the lease agreement was 12%.

Reassessment of lease term

Question 6 [Reduction in lease term – reassessment]

Date RPI Interest rate

1. Down payment at the commencement of the lease is Rs 250,000.

Question 9 [option to purchase the asset at the end of

Question 12 [modification of lease – increase in lease term]

Question 13 [modification of lease agreement – Increase in lease term]

Question 18 [Reduction in lease term – Modification of lease]

Annual rentals Rs 40,000 per generator (in arears)

Question 19 [reduction in asset base – Modification of lease]

Question 20 [Modification of lease – Adjustments to rentals]

1. Annual rentals at the end of every year Rs 100,000

Interest rate at the date of modification was observed to be 5.5% p.a.

Journalize the modification of lease agreement

1. Lease term shall be 5 years

1. Lease of one floor will be terminated on 31 December 2018.

Question 22 (Reduction in Asset base in future and extension of lease term)

5. Lease term shall be 5 years

5. Lease of one floor will be terminated on 31 December 2018.

Question 23 (reduction in LT and increase in asset base)

1. Lease term shall be 5 years

1. Lease term shall be reduced by 1 year.

Question 24 (Reduction of asset base in future and Reduction of LT)

5. Lease term shall be 5 years

5. Lease of one floor will be terminated on 31 December 2018.

Question 25 [Accounting for lessor]

1. Fair Value of the asset given on lease was Rs 600,000

Question 26 [Accounting by Manufacturer / Dealer Lessor]

Question 27 [Accounting by MDL – Treatment of Residual value – Guaranteed and Unguaranteed]

Question 28 [Accounting by MDL – GRV and UGRV]

Question 29 [Artificially Low interest rates – Accounting by MDL]

Question 30 [Artificially low interest rates – Accounting by MDL]

4. Lease term is 5 years

MODIFICATION OF LEASE AGREEMENT – Lessor

Question 31 [New asset added – Modification of lease]

1. Lease term is set to be 5 years

1. Fair Value of the asset added is Rs 180,000

Question 32 [New asset added – Modification of lease]

Fair Value of Asset Rs 780,000

Fair Value of the asset Rs 250,000

Question 33 [Reduction in Asset base – Modification of lease]

Question 34 [Reduction in lease term – Modification of lease]

Question 35 [increase in lease term – modification of lease]

Question 36 [effects on classification]

1. Fair Value of the asset Rs 800,000

Question 37 [sale and lease back – sale at fair value]

Question 38 [sale and lease back – sale at fair value]

1. Carrying amount of the asset at the date of disposal was Rs 500,000

1. Annual rentals payable at the end of every year are Rs 133,157

Other relevant information is as under:

1. Fair value of the building at the time of sale is Rs 500,000

1. Carrying amount of the asset Rs 800,000

Question 44 [Sale and Lease back – exception]