Corbel Group is a major player in the perfume sector. It has recently adopted IFRS 16 and prepares its financial statements to 31 March each year. On 1 October 2020, Corbel Group leased a piece of machinery from Bodoni Co on the following terms: A lease rental of £50,000 is payable half-yearly in arrears for five years. The rate of interest implicit in the lease is 4 percent half-yearly. The estimated useful economic life of the machinery at the inception of the lease was 12 years. The company’s depreciation policy for this type of machinery is on a straight-line basis over the life of the lease. The present value of an ordinary annuity of £1 per year for 10 periods at 4 percent interest is £8.111.

(a) Based on the information from above, advise directors of Corbel Group how IFRS 16 will impact accounting for this specific asset in future years and compute the carrying value of the ‘right of use asset’ in the statement of financial position of Corbel at 31 March 2021 and 31 March 2022. Show fully your workings.

(b) Prior to IFRS 16 becoming effective, the details of operating lease commitments were required to be disclosed in the notes to the accounts under IAS 17. Discuss why standard setters find it necessary to issue a new standard that requires lessees to recognize virtually all leasing obligations as liabilities, and critically evaluate the issues of current debate relating to the recognition and classification of leases in corporate financial statements.

Answer rating: 100% (QA)

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