Sample interview questions: How do you assess the accounting for leases (IFRS 16)?
Sample answer:
Assessing Accounting for Leases Under IFRS 16:
- Review Lease Agreements and Identify Lease Obligations:
- Determine whether a contract is a lease or a service arrangement, based on the definitions in IFRS 16.
- Identify all relevant lease agreements, including those with related parties or involving special-purpose entities.
- Analyze the terms of the lease agreements, including lease payments, purchase options, and renewal terms.
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Calculate the lease obligation, which is the present value of future lease payments.
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Classify Leases:
- Categorize leases as either finance leases (in substance, a purchase) or operating leases (in substance, a rental).
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Consider factors such as the transfer of ownership or control of the leased asset, the lease term compared to the asset’s useful life, and the lessee’s ability to exert control over the asset.
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Determine the Right-of-Use Asset and Lease Liability:
- Calculate the right-of-use asset, which is the initial cost of the lease, adjusted for lease incentives and initial direct costs.
- Recognize the lease liability at the commencement date of the lease, measuring it at the present value of future lease payments.
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Allocate the lease liability between current and non-current portions, considering the classification of the lease.
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Account for Lease Payments:
- Allocate lease payments between interest expense and reduction of the lease liability, reflecting the time value of money.
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Assess the variable lease payments, such as payments based on usage or indexation, and ensure they are accounted for appropriately as lease expenses.
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Evaluate Impairment of Right-of-Use Assets:
- Perform impairment tests on the right-of-use assets, considering potential decl… Read full answer