I have a question on IFRS accounting for leases. Paraphrasing the problem –
X leased equipment for its entire nine-year useful life, with equal payments due at the start of the lease term (12/31/x1) and annually at the end of each yearfor the next eight years. X paid initial direct costs at lease inception. The present value the inception date of the nine lease payments over the lease term and the applicable interest rate are given. X accounts for the finance lease under IFRS and uses straight-line depreciation. What amount should X report as finance lease asset on its December 31, Year 2 balance sheet?
My book indicates that the direct costs are added to the lease asset but not to the lease obligation. My confusion is in how the value of the lease asset and lease obligation will change over time. Does the lease obligation reduce by the amortization (ignoring direct costs) without regard to depreciation, and the does the lease asset (including the direct costs) reduce by only the depreciation amount, without regard to the lease amortization? They would both end up at the depreciation base (zero in this case) by the end of the lease.
Anyone who knows, please help??
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