Bahir Dar University

College of Business and Economics

Department of Accounting and Finance

Intermediate Financial Accounting II (AcFn 3022)

Group Assignment (20%)

Prepared by
NAME……………………………………………………………ID…………………………..
1. SURAFEL MEZIGEBU……………………………1407441
2. TADESSE TAYE…………………………………....1407888
3. SURAFEL CHANE…………………………………1409856
4. SOLOMEN MISGANAW………………………….
5. TENSAYE SISAY……………………………………1409556
6. SIMACHEW GEDAMU……………………………..
7. SISAY AYENE……………………………………….
8. SEMIRA MOUHAMMED………………………….
9. SETE GEDEF………………………………………...
10. SHAMBEL MULAW………………………………..

SUBMITTED TO; INSTRUCTOR ROBEL

SUBMISSION DATE;
BAHIR DAR, ETHIOPIA

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 TABLE OF CONTENT
I. INTRODUCTION…………………………………………………….|
1. Accounting for Leases (IFRS 16)
a) The leasing environment …………………………………………… 4
b) Classifications of lease……………………………………………... 4
c) Overview of Ethiopian lease business law …………………………….6
d) Accounting procedures by the lessee ………………………………….6
e) Accounting procedures by the lessor ………………………………….6
f) Special accounting problems………………………………………….7
2. About Agricultural accounting (IAS 41)
a) Basic terminologies in agricultural accounting……………………….9
b) Recognition of agricultural produces…………………………….....9
c) Measurement of agricultural produces………………………………10
REFERENCE……………………………………………………………………...12

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 INTRODUCTION
IFRS 16 defines Lease as a contract that conveys to the customer (‘lessee’) the right to use an
identified asset in exchange for consideration for agreed period of time.
Period of time can also be expressed in terms of use of the asset.
an entity might want to transport a specified cargo by ship from location A to location B, in
accordance with a stated timetable, for a period of five years. To achieve this, it could either
charter a ship over this period or it could contract to buy the transport service from a freight
carrier/operator (for example, through a contract of affreightment). In both cases, the goods will
arrive at location B — but the accounting might be quite different.
IFRS 16 provides more guidance for the identification of Leases
Criteria
I. There is an identifiable asset- can be portion of an asset
II. Lessee obtains economic benefits- including benefit from sub lease.
III. Lessee directs the use – how to use and for what purpose
The guidance helps to assesses whether the lease conveys the right to control the use of an
identified asset to the customer.
IAS 41 and IAS 16 Agriculture sets out accounting for agricultural activity – the transformation of
biological assets (living plants and animals) into agricultural produce (harvested product of the entity's
biological assets).

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 1. Accounting for Leases (IFRS 16)
a)The leasing environment
A lease is a contractual agreement between a lessor and a lessee, that gives the lessee the
right to use specific property, owned by the lessor, for a specified period of time.
Largest group of leased machinery involves:
 Information technology machinery
 Transportation (trucks, aircraft, rail)
 Construction
 Agriculture
 Advantages of Leasing—Lessees
 100% financing at fixed rates.
 Protection against obsolescence.
 Flexibility.
 Less costly financing.
Advantages of Leasing—Lessor
1. Often provides profitable interest margins.
2. It can stimulate sales of a lessor’s product.
3. It often provides tax benefits to various parties in the lease.
It can provide a high residual value to the lessor.

b)Classifications of lease
For accounting purposes, the lessee classifies as a

 Finance lease or an,

 Operating lease.

For a finance lease, it must be non-cancelable and meet at least one of five tests. To meet one of these
five tests, the lessor must transfer control of a substantial portion of the underlying asset to the lessee or
provide ownership of the underlying asset to the lessee.

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Transfer of Ownership Test

 If the lease transfers ownership of the asset to the lessee, it is a finance lease.

Purchase Option Test

 The lease purchase option allows the lessee to purchase the property for a price that is significantly
lower than the underlying asset’s expected fair value at the date the option becomes exercisable
(bargain purchase option).

Lease Term Test

 When the lease term is a major part of the remaining economic life of the leased asset, companies
should use the finance method.

 Guideline: If the lease term is 75 percent or greater of the economic life of the leased asset, the lease
meets the lease term test.

Present Value Test

 If the present value of the lease payments is reasonably close to the fair value of the asset, the lessee
should use the finance method.

 Guideline: if the present value of the lease payments equals or exceeds 90 percent of the fair value of
the asset, then a lessee should use the finance method.

Lease Payments generally include:

1. Fixed payments. 2. Variable payments. 3. Residual values (guaranteed or not). 4. Payments the
lessee is reasonably certain to exercise.

Discount Rate

 Implicit rate should be used to determine the present value of the payments.

 Defined as the discount rate that, at commencement of the lease, causes the present value of the
lease payments and unguaranteed residual value to be equal to the fair value of the leased asset.

Alternative Use Test

If at the end of the lease term the lessor does not have an alternative use for the asset, the lessee
classifies the lease as a finance lease. The assumption is that the lessee uses all the benefits from the
leased asset and therefore the lessee has essentially purchased the asset.

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 c) Overview of Ethiopian lease business law
Ethiopian lease business law
1. 99 years lease after purchase of government property
2. 50 years payment years
3. It include the lease term….
4. The term include the name of the lessee and the lessor

d)Accounting procedures by the lessee

The lessee
 recognizes interest expense on the lease liability using the effective-interest
method and
 Records depreciation expense on the right-of-use asset.
 Lease Liability = PV(Lease payments, RV guarantee, BPO)
 ROUA = Lease liability + Initial Direct Costs + PV(Estimated
Dismantling/Removing Costs)
 This accounting (finance lease) is applied whether the lease is effectively
 a purchase of the asset or When the lessee only controls the use of the asset

e) Accounting procedures by the lessor

 Direct-Financing Method (Lessor)

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In substance the financing of an asset purchase by the lessee. Lessor records:  A lease receivable
instead of a leased asset.  Receivable is the present value of the minimum lease payments plus the
present value of the unguaranteed residual value.
 Operating Method (Lessor)
1. Records each rental receipt as rental revenue.
2. Depreciates leased asset in the normal manner

f) Special accounting problems

1. Residual values.
Meaning of Residual Value - Estimated fair value of the leased asset at the end of the lease term.
Guaranteed versus Unguaranteed – A guaranteed residual value is when the lessee agrees to make up
any deficiency below a stated amount that the lessor realizes in residual value at the end of the lease
term.
2. Sales-type leases (lessor).
Primary difference between a direct-financing lease and a sales-type lease is the manufacturers or
dealer’s gross profit (or loss).
 Lessor records the sale price of the asset, the cost of goods sold and related inventory reduction, and
the lease receivable.
 There is a difference in accounting for guaranteed and unguaranteed residual values.
3. Bargain-purchase options.
Lessee must increase the present value of the minimum lease payments by the present value of the
option.
 Only difference between the accounting treatment for a bargain-purchase option and a guaranteed
residual value of identical amounts is in the computation of the annual depreciation.
4. Initial direct costs.
Accounting for initial direct costs:
 Operating leases, the lessor should defer initial direct costs.
 Sales-type leases, the lessor expenses the initial direct costs.
 Direct-financing lease, the lessor adds initial direct costs to the net investment.
5. Current versus non-current classification.
Both the annuity-due and the ordinary-annuity situations report the reduction of principal for the next
period as a current liability/current asset.

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6. Disclosure.
For lessees:
 A general description of material leasing arrangements.
 A reconciliation between the total of future minimum lease payments at the end of the reporting
period and their present value.
 The total of future minimum lease payments at the end of the reporting period, and their present
value for periods (1) not later than one year, (2) later than one year and not later than five years, and (3)
later than five years.
For lessors:
 A general description of material leasing arrangements.
 A reconciliation between the gross investment in the lease at the end of the reporting period, and the
present value of minimum lease payments receivable at the end of the reporting period.
 Unearned finance income.
 The gross investment in the lease and the present value of minimum lease payments receivable at the
end of the reporting period for periods (1) not later than one year, (2) later than one year and not later
than five years, and (3) later than five years.

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 2. About Agricultural accounting (IAS 41)

A.Basic terminologies in agricultural accounting

IAS 41 and IAS 16 Agriculture sets out accounting for agricultural activity – the
transformation of biological assets (living plants and animals) into agricultural
produce (harvested product of the entity's biological assets).
• Agricultural activity is the management by an enterprise of the biological
transformation of biological assets for sale, into agricultural produce or into
additional biological assets.
• Biological assets. Living plants and animals.
• Agricultural produce. The product of the entity’s biological assets, for example,
milk and coffee beans. • Biological transformation. Relates to the processes of
growth, degeneration, and production that can cause changes of quantitative or
qualitative nature in a biological asset.
⚫ Biological transformation leads to various different outcomes. ✓ Asset changes:
⚫ Growth: increase in quantity and/or quality ⚫ Degeneration: decrease in
quantity and/or quality ✓ Creation of new assets: ⚫ Production: producing
separable non-living products
⚫ Procreation: producing separable living animals

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 B. Recognition of agricultural produces
An entity should recognize a biological asset or agricultural
produce when:
(a) The enterprise controls the asset as a result of past events;
(b) It is probable that the future economic benefits will flow to the enterprise;
(c) The fair value or cost can be measured reliably.

C. Measurement of agricultural
produces

Measurement

• Any biological asset should be measured initially and at each balance

sheet date, at its fair value less estimated point-of-sale costs.
• The only exception to this is where the fair value cannot be measured
reliably.
• Agricultural produce should be measured at fair value less estimated
point-of-sale costs at the point of harvest.
• According to IAS 41, agricultural produce can always be measured
reliably.
• Point-of-sale costs include brokers’ and dealers’ commissions, any
levies by regulatory authorities and commodity exchanges, and any
transfer taxes and duties.

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• They exclude transport and other costs necessary to get the assets to
a market

Generally,

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REFERENCE
 Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield (2020) Intermediate
Accounting IFRS 4th Edition
 Kieso, D. E., Weygandt, J. J., & Warfield, T. W. (2016). Intermediate Accounting, IFRS
Edition, New York: John Willey & Sons.
 Commercial Code of Ethiopia
 IFRS Red Book (Latest edition)
 IFRS Blue Book (Latest edition)
 IFRS Green Book (Latest edition)

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