Australia Finance Lease - Converting an existing Rent Free Lease to a Finance Lease.


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Hello,

Stuck on a recent problem around finance leases. The new leasing standard converts all operating leases (Excluding exceptions) onto the balance sheet where Interest and Depreciation is then charged to the P&L. This is quite simple for existing operating leases and new leases.

The problem I am having is converting an existing liability of a rent free lease to a finance lease. Prior I would amortise the total rental amount over the life of the lease evenly (Included in the rent free months). This would then be offset by monthly lease payment in the liability account (Which would have commenced after the rent free period was up.

There are 2 issues. The first is extinguishing the existing Rent Free Liability as it will have an Opening Balance in the account of misc. payments less amortisation. The second issue is whether to use the present value of the remaining amortisation over the life of the lease, or to use the present value of the remaining payments of the lease to determine a Right of Use Asset and a Lease Liability.

An example of the dilemma I am facing is attached (Excel File).

Any examples or discussion would be greatly appreciated.
 

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