Question

On 1 March 2020, Pizza Attack, a pizza company enters into a contract with Goodman, a shopping mall operator to use a space in the mall to sell its food and beverages for a five- year period. The contract states the amount of space at the specific store, Unit 118, for the first three years. During the first three years period, Goodman will substitute the leased space with another available space at the discretion of Goodman’s management on the 1st of January each year due to a New Year’s event. Otherwise, the leased space can only be substituted for repairs and maintenance purposes.

During the last two years of the contract term i.e. the fourth and fifth years, the space may be located at any one of the several open areas within the mall. Goodman has the right to change the location of the space allocated to Pizza Attack at any time with minimal costs. Pizza attack will use a kiosk, which they own, to sell its goods that can be moved easily. There are many areas in the mall that are available and which would meet the specifications for the space in the contract. The contract also states that in addition to the monthly rent, Pizza Attack would need to pay a 20% cash arising from its sales revenue. Due to the current market trend, Domi-Yous, a competitor of Pizza Attack is considering to offer Goodman a 50% increase to the rent that Pizza Attack has agreed to pay Goodman.

Required:

a) Determine whether or not a lease exists, according to AASB16.
b) Identify the term of the lease (if any), according to AASB16.
c) Explain the difference between a residual value guarantee and a purchase option in

calculating lease liability.

Answer 1

a- As per AASB 16, a lease exists for the first 3 years due to the renting of an identified asset, unit 118 and Pizza attack receives substantially all of the capacity of the asset(usage for majority of the year). Due to the term being greater than 12 months a lease exists as per AASB 16.

B. The term is 3 years, it is not 5 years because the last two years do not involve a specific asset like a store.

C. In residual value guarantee, the present value of the amount expected to be payable under the guarantee at the end of the lease period is accounted for in the lease liability at the beginning of the lease. In a purchase option, if an entity expects to exercise the option it includes the present value of the purchase price in the lease payments therefore in the lease liability. But accounting for the purchase option is optional unlike residual value guarantee.