Skip to content

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

Parent plc leases a machine to its subsidiary Sub Ltd under a 4-year lease that Sub Ltd accounts for as a lessee under IFRS 16. Parent classifies it as an operating lease in its own books. How should the lease be treated in the consolidated financial statements?

In consolidated statements the intragroup lease is eliminated entirely, including the lease liability, receivable, rental income and expense and interest. The machine is shown as the group's property, plant and equipment at Parent's carrying amount, because the group has not leased from an external party.

  1. ARetain both the right-of-use asset and lease liability from Sub's books, and the lease receivable from Parent
  2. BEliminate the intragroup lease: no lease liability or receivable, and the machine shown as property, plant and equipment of the group at its carrying amount in Parent's booksCorrect
  3. CRetain Sub's right-of-use asset but eliminate only the lease liability
  4. DEliminate only the lease income and expense and keep the right-of-use asset

Explanation

From the group's perspective there is no lease with an external party. Intragroup lease balances and income/expense are eliminated, and the underlying asset is presented as the group's own PPE (Parent's carrying amount), with depreciation on that basis. Retaining the right-of-use asset would double count the asset.

Did you get it right without looking?

One question tells you little. A timed set on Leases shows your real accuracy, how long you take and where you lose marks.

Practise LeasesFree diagnostic mock

More Leases questions