Accounting recognition ! - Describes the accounting treatment of leases in both the
lessee’s financial statements and the lessor’s financial statements
- Frinta will have the rights to use … for a period of time
and in return for a consideration,
which means that the arrangement falls within the scope of the standard. It does not
meet any of the potential exemptions set out in the standard because it is a long-term
lease and the underlying asset is of high value.
- The lease liability will be capitalised in Frinta’s
statement of financial statements at the
present value of the payments that have been committed for the next … years.
This total should be divided between the amount of the principal value that will be
payable within one year, which will be shown as a current liability, and the
remainder, which will appear as a non-current liability.
The current liability will affect the liquidity ratios based
on the statement of financial
position. The non-current element will increase Frinta’s gearing ratio and will make
the group appear more risky.
- This arrangement will also increase the property, plant and equipment by the total of
the capitalised value of the lease, plus…(፡ unseenӾํဌํ᷐ٚक़୏ඪֵ஑ᩒԾکֵአᇫ
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) That will then have to be depreciated over the …-year life of the lease.
The interest on the lease liability and the depreciation will both reduce profit. Capital
employed will also be increased, so the profitability ratios may be adversely affected.
The overall impact on profitability really depends on the success of the cruise route
as a business venture. The net effect on operating profit will, hopefully, outweigh the
cost of interest and depreciation by enough to overcome the increased capital
employed.
- Frinta will be required to disclose the nature of the lease in the notes to the
financial statements. One potential issue is that
will not belong to Frinta and so it will be
necessary to clarify that it is not, for example, a legally-owned asset that might be
pledged as security.