Dolphin Company leased an office under a six-year contract, which has been accou

Question

Dolphin Company leased an office under a six-year contract, which has been accounted for as an operating lease. Faced with the downturn in the economy, the viable company decided to sub-lease the office. However, they have had no luck with this effort and the landlord will not allow the lease to be cancelled. The payments are $15,000 per year and there are five years left on the lease. The company's most recent interest rate for financing from a bank is 9%. The risk-free rate on government bonds is 5%. What is the provision for the lease under IFRS?

Explanation / Answer

As per IFRS, the interest rate implicit in the lease is defined as the discount rate causes the aggregate present value of the minimum lease payments. So the Implicit interest rate in the problem is the Bank financing rate of interest plus the risk- free rate 5%. Discounting rate for the five years lease payment is 9%+5% = 14%

So, PVIFA(14%,5) = 3.433 on the annual lease payment of $15,000.

PROVISION FOR THE LEASE = $15000 * 3.433 = $51495

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