Question

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.


Required:

Discuss the differences between operating and finance leases (5)
Discuss the conditions that need to be met for a lease to be recognised as a finance lease (5)
Explain the accounting treatment of the property in the financial statements for the year ended 31st December 2024. (Hint: Income statement and SOFP extract including calculations).