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ACCA Strategic Professional · Strategic Business Reporting (International) · Leases

Cobalt Ltd leases machinery with a lease liability of 800,000 and a right-of-use asset carrying amount of 750,000. A modification partially terminates the lease, reducing the scope so that 25% of the right of use is removed. The liability is remeasured and falls to 560,000 using a revised discount rate. Which is the correct accounting for the lessee?

Reduce the asset and liability proportionately for the 25% scope decrease, recognising the difference of 12,500 as a gain in profit or loss, and adjust the right-of-use asset for the remaining remeasurement of 40,000.

  1. AReduce the right-of-use asset by 25% (187,500), recognise a gain or loss on the difference between the proportionate liability reduction (200,000) and asset reduction, and adjust the right-of-use asset for the remaining 40,000 remeasurementCorrect
  2. BReduce the right-of-use asset by 240,000 with no profit or loss
  3. CRecognise the whole 240,000 reduction in liability as a gain in profit or loss
  4. DLeave the asset unchanged and reduce the liability only

Explanation

For a decrease in scope, the asset is reduced proportionately: 25% x 750,000 = 187,500. The liability reduces proportionately by 25% x 800,000 = 200,000, giving a gain of 12,500 in profit or loss. The remaining liability change (240,000 - 200,000 = 40,000) adjusts the right-of-use asset. Taking the whole amount to profit or loss is wrong.

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