IFRS 16 Leases Quiz: Questions and Answers

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Questions and Answers

What is the main objective of IFRS 16?

To establish principles for reporting financial information about leases (correct)

To provide a framework for accounting for income taxes

To provide guidance on revenue recognition

To regulate financial institutions' reporting on credit losses

What is the scope of IFRS 16?

It applies only to finance leases

It applies to all contracts, including service contracts

It applies to all leases, except for those involving low-value assets (correct)

It applies to leases and service contracts involving significant finance components

What is the primary focus of the recognition section in IFRS 16?

Measuring the lease liability and right-of-use asset (correct)

Determining the lease term

Classifying leases as finance or operating leases

Assessing the transfer of risks and rewards

What is the main topic of the 'lessor' section in IFRS 16?

Classification of leases as finance or operating leases Signup and view all the answers

What is the purpose of the 'temporal exception' in IFRS 16?

To accommodate the transition to a new interest rate benchmark Signup and view all the answers

Where can the basis for conclusions on IFRS 16 be found?

Part C of this edition Signup and view all the answers

What is the primary basis for a lessor to classify a lease?

The substance of the transaction Signup and view all the answers

What is a characteristic of a finance lease?

It transfers substantially all the risks and rewards of ownership Signup and view all the answers

Which of the following is an example of a situation that would normally lead to a lease being classified as a finance lease?

The lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than its fair value Signup and view all the answers

What is a characteristic of an operating lease?

It does not transfer substantially all the risks and rewards of ownership Signup and view all the answers

Which of the following would normally lead to a lease being classified as a finance lease?

The lease term is for the major part of the economic life of the underlying asset Signup and view all the answers

What is required for a lease to be classified as a finance lease?

The lease must transfer substantially all the risks and rewards of ownership Signup and view all the answers

When applying this Standard, what can an entity do as a practical expedient?

Apply this Standard to a portfolio of leases with similar characteristics Signup and view all the answers

What should an entity use when accounting for a portfolio of leases?

Assumptions and estimates that reflect the size and composition of the portfolio Signup and view all the answers

When should an entity combine two or more contracts into a single contract?

When the contracts are negotiated at or near the same time with the same counterparty or related parties of the counterparty Signup and view all the answers

What is one criterion for combining contracts into a single contract?

The contracts are negotiated as a package with an overall commercial objective that cannot be understood without considering the contracts together Signup and view all the answers

What is another criterion for combining contracts into a single contract?

The amount of consideration to be paid in one contract depends on the price or performance of the other contract Signup and view all the answers

What is the third criterion for combining contracts into a single contract?

The rights to use underlying assets conveyed in the contracts (or some rights to use underlying assets conveyed in each of the contracts) form a single lease component Signup and view all the answers

When classifying a lease that includes both land and buildings elements, what should a lessor do?

Assess the classification of each element separately Signup and view all the answers

Why is it important to consider the economic life of land when classifying a lease?

Because land normally has an indefinite economic life Signup and view all the answers

How should a lessor allocate lease payments between the land and buildings elements?

In proportion to the relative fair values of the leasehold interests Signup and view all the answers

What happens if the lease payments cannot be allocated reliably between the land and buildings elements?

The entire lease is classified as a finance lease, unless it is clear that both elements are operating leases Signup and view all the answers

Under what condition can a lessor treat the land and buildings as a single unit for the purpose of lease classification?

When the amount for the land element is immaterial to the lease Signup and view all the answers

What is the implication of classifying a lease as a finance lease?

The lessor recognizes the lease as an asset on the balance sheet Signup and view all the answers

What is required for a customer to control the use of an identified asset?

The right to obtain substantially all of the economic benefits from use of the asset Signup and view all the answers

How can a customer obtain economic benefits from the use of an asset?

By using, holding or subleasing the asset Signup and view all the answers

What are included in the economic benefits from use of an asset?

The primary output and by-products of the asset, and other economic benefits Signup and view all the answers

When assessing the right to obtain substantially all of the economic benefits from use of an asset, what should an entity consider?

The economic benefits that result from use of the asset within the defined scope of a customer’s right to use the asset Signup and view all the answers

What is an example of limiting the use of a motor vehicle during the period of use?

Limiting the use of the motor vehicle to only one particular territory Signup and view all the answers

When should an entity consider the economic benefits from use of a motor vehicle in a particular territory?

When the contract limits the use of the motor vehicle to that particular territory Signup and view all the answers

Study Notes

IFRS 16: Leases

IFRS 16 is an International Financial Reporting Standard that sets out the principles for the recognition, measurement, presentation, and disclosure of leases.

Classification of Leases

A lessor shall classify each of its leases as either an operating lease or a finance lease.
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset.
A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership of an underlying asset.

Finance Lease

Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease:
- The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
- The lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable.
- The lease term is for the major part of the economic life of the underlying asset even if title is not transferred.
- At the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset.
- The underlying asset is of such a specialized nature that only the lessee can use it without major modifications.

Lessor: Lease Classification

When a lease includes both land and buildings elements, a lessor shall assess the classification of each element as a finance lease or an operating lease separately.
The allocation of lease payments between the land and buildings elements is in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception date.
If the lease payments cannot be allocated reliably between these two elements, the entire lease is classified as a finance lease, unless it is clear that both elements are operating leases, in which case the entire lease is classified as an operating lease.

Identifying a Lease

To control the use of an identified asset, a customer is required to have the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use.
The economic benefits from use of an asset include its primary output and by-products, and other economic benefits from using the asset that could be realized from a commercial transaction with a third party.
When assessing the right to obtain substantially all of the economic benefits from use of an asset, an entity shall consider the economic benefits that result from use of the asset within the defined scope of a customer’s right to use the asset.

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Description

Test your knowledge of IFRS 16, the International Financial Reporting Standard for Leases. This quiz covers the objective, scope, recognition, exemptions, and disclosure requirements of IFRS 16. Learn about lease term, lessor and lessee responsibilities, and sale and leaseback transactions.

IFRS 16: Leases Standard