Chapter 5, Problem 39EP

On January 1, Year 1, Autonomous Systems Ltd. (ASL) signed a contract to lease computer equipment from Lenovo for three years. The lease agreement requires ASL to pay $30,000 at the end of each year of the lease. The company’s borrowing rate is 6 percent. Under U.S. GAAP, the lease would be classified as operating. However, ASL is based in Singapore and will account for the lease using IFRS 16.

Required:

1. a. Compute the value of the lease liability that ASL will record under IFRS 16 on January 1, Year 1.
2. b. In each year of the lease, ASL will record depreciation expense on the leasehold asset and interest expense on the lease obligation. Compute the amount of the two expenses in the lease’s first year.
3. c. ASL is partially backed by a U.S. venture capital fund that would like to know how the lease would be accounted for under U.S. GAAP. How much expense would ASL recognize for the lease if it were a U.S. company and how does this amount differ from the total lease expense recognized under IFRS?
4. d. How will the lease affect operating cash flow and how would it affect operating cash flow under U.S. GAAP? Assume that ASL classifies interest paid as a financing flow in its statement of cash flows.