On 1 January 2021, ABC is planning to supply company vehicles for its senior managers and is comparing 3 choices:

Choice A The vehicles can be bought for RM75,274 with a 100% loan. The vehicles would be bought on 1 January 2021 and held for 4 years. The estimated disposal value is RM29,753. Monthly maintenance costs would be RM235 per month. The loan would be repayable in 4 yearly installments starting 1 January 2022. Assume that an average yearly percentage rate on a loan is 5%.

Choice B The vehicles can be leased with a 12-months contract on 1 January 2021 with no buy option. The cost would be RM1,900 per month in advance including the maintenance charge.

Choice C A final choice is the vehicles can be leased for a period of 4 years commencing on 1 January 2021. The vehicles have a total market value of RM75,274 on this date. The lease requires payment of RM1,403 monthly for the period of lease duration of which RM235 is a maintenance charge. ABC likes to show the maintenance charge as a separate line item in the profit or loss account.

At the end of the 4th year, there is no choice to renew the lease or buy the vehicle, and there is a disposal value guarantee. The interest to be charged for the year ended 31 December 2021 is estimated at RM2,274 based on the implicit interest rate in the lease. The net present value of the lease payments for four years is RM50,803 excluding the maintenance charge.

Additional information: The profit before tax and before accounting for any of the 3 choices for vehicles is likely to be RM100,000 for the year ended 31 December 2021. ABC depreciates vehicles over a 4 years period using straight line method.

You are required to: propose how to account for the above transactions in the ABC’s financial statement for the year ended 31 December 2021.

Submission format: Lessor? Lessee? Any exemption?

1. Brief relevant discussion on: Key definition, Recognition, Measurement & Disclosure/Presentation of IFRS16.

2. Propose how ABC can account for the above transactions in accordance with the above IFRS.

Answer rating: 100% (QA)

1 Important Definitions A lease is a contract or a portion of a contract that transfers the right to use an asset the underlying asset for a predetermined amount of time in exchange for payment accord... View the full answer