Question

Manning Co. (lessee) has the following current lease liabilities at the end of Year 7: Lease A – finance lease, 5 years, lease liability $125,000 Lease B – operating lease, 3 years, lease liability $65,000 How should Manning present the lease liabilities on its balance sheet?

A. The finance lease liability, not the operating lease liability, must be presented separately from other liabilities on the balance sheet.

B. Finance and operating lease liabilities may be presented with other liabilities on the balance sheet.

C. Finance and operating lease liabilities must be presented separately from each other and other liabilities on the balance sheet.

D. Finance and operating lease liabilities may be presented together in the same line item on the balance sheet.

Answer 1

Under IAS 17, Leases were classified as Finance lease and operating lease basis the transfer of ownership of asset, if asset's risk and rewards were transferred it resulted in Finance lease which was disclosed on the balance sheet, however for Operating lease it was treated as an expenditure and no assets or liabilities were recorded on the balance sheet.

IFRS 16 has replaced IAS 17 which does not differeniate between Finance lease and Operating lease. It requires the lessee to recognise ROU (right of use assets) and Lease liabilities Lease liabilities can be reported seperately from other liabilities, if not disclosed seperately then lessee should dislcose in which line items will these be included in the statement of finance position.

Therefore, Option B is the correct answer basis the above explanation. The other options are incorrect as they do not qualify the above requirements.