Alpha enters into a lease with Omega of an aircraft which had a fair value of $240,000 at the inception of the lease. The lease terms require Alpha to pay 10 annual rentals of $36,000 in arrears. Alpha is wholly responsible for the maintenance of the aircraft which has a useful life of approximately 15 years. The present value of the 10 annual rentals of $36,000 discounted at the interest rate implicit in the lease is $220,000.Applying the requirements of IFRS 16 Leases to this agreement what is the increase in Alpha’s non-current assets? A. $0 B. $220,000 C. $240,000 D. $360,000
Question
Alpha enters into a lease with Omega of an aircraft which had a fair value of 36,000 in arrears. Alpha is wholly responsible for the maintenance of the aircraft which has a useful life of approximately 15 years. The present value of the 10 annual rentals of 220,000.Applying the requirements of IFRS 16 Leases to this agreement what is the increase in Alpha’s non-current assets? A. 220,000 C. 360,000
Solution 1
Based on the information provided, we need to determine the increase in Alpha's non-current assets under the requirements of IFRS 16 Leases.
Step 1: Calculate the lease liability The lease liability is the present value of the lease payments discounted at the interest rate implicit in the lease. In this case, the present value of the 10 annual rentals of 220,000.
Step 2: Determine the right-of-use asset The right-of-use asset is initially measured at the lease liability amount, adjusted for any lease incentives received and any initial direct costs incurred. However, no lease incentives or initial direct costs are mentioned in the question. Therefore, the right-of-use asset will be equal to the lease liability, which is $220,000.
Step 3: Calculate the increase in non-current assets The increase in non-current assets is equal to the right-of-use asset. In this case, the increase in Alpha's non-current assets is $220,000.
Therefore, the correct answer is B. $220,000.
Solution 2
Under IFRS 16, a lessee is required to recognize a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability, any lease payments made at or before the commencement date, any initial direct costs incurred, and an estimate of costs to be incurred by the lessee in dismantling and removing the underlying asset.
In this case, the initial amount of the lease liability is the present value of lease payments that have not been paid at the commencement date. This is given as 220,000.
So, the correct answer is B. $220,000.
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