1.1. HUMPHREY Limited owns a property that is used as its head office in Pretoria. On 1st January 2024, its carrying value was R20 million and its remaining useful life was 20 years. On 1st July 2024, the business recognized cheaper premises found for use as the head office. It was therefore decided to lease the property under an operating lease. The property was valued by a qualified professional who assessed the property’s value as R21 million on 1st July and R21.6 million on 31st December 2024.

1. The main differences between operating and finance leases are as follows:

- Ownership: In an operating lease, the lessor retains ownership of the property and the lessee does not have the option to purchase the property at the end of the lease term. In a finance lease, the lessee essentially takes on the risks and rewards of ownership and is typically responsible for maintenance and insurance.

- Duration: Operating leases are usually shorter-term agreements, while finance leases tend to be longer-term arrangements that cover most of the economic life of the asset.

- Accounting Treatment: Operating leases are treated as rental expenses in the income statement, while finance leases are treated as an asset and liability on the balance sheet.

- Residual Value: In operating leases, the lessor bears the risk of the property's residual value. In finance leases, the lessee is responsible for the residual value.

- Transfer of Ownership: In a finance lease, ownership of the property may transfer to the lessee at the end of the lease term. This is not the case in an operating lease.

2. Conditions that need to be met for a lease to be recognized as a finance lease include:

- The lease transfers ownership of the property to the lessee by the end of the lease term.
- The lessee has the option to purchase the property at a bargain price at the end of the lease term.
- The lease term covers a major part of the economic life of the property.
- The present value of the lease payments amounts to substantially all of the fair value of the property.

3. Accounting treatment for the property in the financial statements for the year ended 31st December 2024:

Income Statement:
- Operating lease payments for the period from 1st July to 31st December 2024 will be recognized as rental expenses in the income statement.

Statement of Financial Position (SOFP) extract:
- As of 1st January 2024, the property will be recognized at its carrying value of R20 million.
- As of 1st July 2024, the property will be derecognized from the SOFP.
- The difference between the carrying value and the fair value of R21 million as of 1st July 2024 (R1 million) will be recognized as a gain in the income statement.
- As of 31st December 2024, the revaluation of the property to R21.6 million will be recorded, increasing the value of the property on the balance sheet.
- The operating lease liability will also be recognized on the balance sheet as a liability.