Leasing is important to Royal Docks Limited. The Directors feel that it is important that they provide users of financial statements with a complete and understandable picture of the entity’s leasing activities. Royal Docks has leased plant for a fixed term of six years and the useful life of the plant is 12 years. The lease is non-cancellable, and there are no rights to extend the lease term or purchase the machine at the end of the term. There are no guarantees of its value at that point. The lessor does not have the right of access to the plant until the end of the contract or unless permission is granted by Royal Docks.

Fixed lease payments are due annually over the lease term after delivery of the plant, which is maintained by Royal Docks. Currently, Royal Docks accounts for the lease as an operating lease but the directors are unsure as to whether the accounting treatment of an operating lease is conceptually correct.

In your report, you are required:

(i) Discuss the reasons why the current lease accounting standards (IFRS 16) may fail to meet the needs of users and could be said to be conceptually flawed. 

(ii) Discuss whether the plant operating lease in the financial statements of Royal Docks meets the definition of an asset and liability as set out in the Conceptual Framework of Financial Reporting.

Answer rating: 100% (QA)

i IFRS 16 which says about Leases that provides a recognized exemption where lessees dont capitalise ... View the full answer