On 1 January 2021, Grabbit plc entered into an agreement to lease a widgeting machine for general use in the business. The agreement, which may not be terminated by either party to it, runs for seven years and provides for Grabbit to make an annual rental payment of £92,500 on 31 December each year. The cost of the machine to the lessor was £450,329 and it has no residual value. There is no presumption that the lease will be extended. The machine has a useful economic life of eight years and Grabbit depreciates its property, plant and equipment using the straight-line method.

Required: 

(a) Show how Grabbit plc will account for the above transaction in its statement of financial position at 31 December 2021, and in its statement of comprehensive income for the year then ended, as required by IFRS 16. The rate of interest implicit in the lease is 10% if there are payments for seven years. 

(b) Repeat the requirements in (a) above assuming the same lease will be extended for one year at the normal lease payment. 

(c) Explain why the standard setters considered accounting for leases to be an area in need of standardisation and discuss the rationale behind the approach adopted in the standard. 

(d) The lessor has suggested that the lease could be drawn up with a minimum payment period of one year and an option to renew or purchase. The lessor alleges that this would mean the lease could be kept ‘off balance sheet’. Discuss this suggestion.