Reference no: EM132525917

Question 1: Determine for each of the following arrangements the manner in which the relevant lease should be classified by the lessor according to IFRS 16/AASB 16. Give reasons for your answers.

(i) Company A enters into a non-cancellable lease for machinery with a term of 8 years. The machinery has a useful economic life of 12 years. Company A as an option to renew the lease with the same rental for a further four years, even though market rentals are expected to increase with inflation over the next decade. The present value of the lease payments is 70% of the fair value of the machinery.

(ii) Company B enters into a non-cancellable lease with a 7 year term for an item of plant which has a useful life of 10 years. The present value of future lease payments is equal to 75% of the fair value of the asset at the date of inception of the lease. The residual value accounts for the remaining 25%. So confident is the lessor that the plant will retain its value that it is guaranteeing 50% of the residual value, with the lessee being responsible for guaranteeing the remaining 50% of the residual value.