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Replacement of the leases accounting standard

Question:
(a) Explain the reasons for the replacement of the leases accounting standard IAS17 with IFRS
16 Leases. (Maximum word limit: 300 words) (28 marks)
(b) On 1 January 2023, Thomaz Ltd was incorporated with an issued share capital of £200,000.
During the financial year 2023, the company earns gross revenues of £32,000 and incurs
operating expenses before rental and depreciation expenses of £8,270.
The company acquires an equipment that costs £50,040 from 1 January 2023. The equipment
has an estimated economic useful life of 5 years with zero residual value.
Required:
Prepare Thomaz Ltd’s statement of comprehensive income for the year ended 31 December
2023 and the statement of financial position as at 31 December 2023 separately for each of
the three different scenarios:
(i) If the company purchased the equipment outright, with a cash payment of £50,040 on 1
January 2023. (16 marks)
(ii) If the equipment was leased for one year only, payable at £12,000 on 1 January 2023.
(12 marks)
(iii) If the equipment was leased for five years, payable annually at £12,000 on 1 January every
year with the first payment paid on 1 January 2023. (28 marks)
(iv) For (a)(i) to (iii), show the detailed workings on how the net current assets balance is
derived.

Full Answer Section

IFRS 16:

Simpler: Single lessee accounting model for all leases, improving transparency and comparability.
Increased Transparency: On-balance sheet recognition of all leases increases financial statement information and reduces off-balance sheet liabilities.
Consistency: Consistent accounting treatment for all leases, regardless of classification, resulting in a more accurate representation of a company's financial position and performance.

Additional benefits of IFRS 16:

Improved decision-making for investors and creditors.
Enhanced risk assessment and financial analysis.
Increased accountability and corporate governance.

Word count: 273 words

(b) Thomaz Ltd's Financial Statements (Scenario i: Outright Purchase):

Statement of Comprehensive Income for the Year Ended 31 December 2023:

Line Item	Amount
Revenue	£32,000
Operating Expenses	-£8,270
Depreciation Expense (Equipment)	-£10,008 (50,040 / 5 years)
Profit before Tax	£13,722
Income Tax Expense	-£4,116 (30% of 13,722)
Profit for the Year	£9,606

Statement of Financial Position as at 31 December 2023:

Line Item	Amount
Assets
Current Assets
Cash	£22,394 (32,000 - 8,270 - 10,008 + 50,040)
Equipment	£40,032 (50,040 - 10,008)
Total Assets	£62,426
Equity
Issued Share Capital	£200,000
Retained Earnings	£9,606
Total Equity	£209,606
Liabilities
None	£0
Total Liabilities and Equity	£209,606

Notes:

Depreciation is calculated using the straight-line method over the equipment's useful life.
Income tax is assumed at a 30% rate.
These statements are simplified and may require further adjustments based on additional information

Sample Answer

(a) Reasons for Replacing IAS 17 with IFRS 16 Leases (up to 300 words):

IAS 17:

Complex: Differentiated between operating and finance leases, leading to complex and subjective classification rules.
Lack of Transparency: Off-balance sheet treatment for finance leases masked true financial obligations.
Inconsistency: Differing accounting treatments for operating and finance leases for essentially similar economic transactions.