QUESTION THREE 

Eugex plc is a company that grows and sells vegetables with a financial year-end on 31st December. Recently, it has entered into two leasing agreements for two items of automated equipment for vegetable processing. 

On 1st January 2019, Eugex plc has entered a lease agreement with Stefil plc to lease a Vegetable Sizing for a period of five years. Eugex has the exclusive right to use the Vegetable Sizing and the right to direct how and for what purpose the Vegetable Sizing is used for the duration of the contract. At the end of the contract the Vegetable Sizing will be returned to Stefil plc. The Vegetable Sizing has an estimated economic life of nine years and it is expected to have a nil residual value at the end of its life. The Vegetable Sizing is depreciated using a straight-line depreciation applied on a strict time basis. Under the terms of the lease, Eugex plc has agreed to pay £24,000 on a yearly basis commencing on the 1st January 2019. The interest rate implicit in the lease is 4% per year. 

On 1st July 2019, Eugex plc has leased a box filler from Ernst Plc for sixteen months. It has a market value of £4,000 with an estimated useful life of five years. The lease agreement can be terminated by either party giving a one-month period of notice. Eugex plc will make payments of £120 at the end of each month.

Required:

(a) Prepare the extracts of Eugex plc’s Statement of Comprehensive Income and Statement of Financial Position for the years ended December 31, 2019 to 2021 in accordance with the extant accounting standards and practice. Assume that the company elects to adopt any exempted accounting treatments where possible.    

 Explain if and why these leases are within the scope of IFRS 16, Leases.

[The accounting policy notes and disclosure notes are not required. Clearly show your workings and state any assumptions you have made.]

(b) Discuss how IFRS 16 has affected firms’ Key Performance Indicators (KPI). Discuss the impact on three KPIs that have been significantly affected by IFRS 16.