IAS-17 Leases Flashcards
Definition of Finance and Operating leases
Finance:
- Transfers risks and rewards of ownership to lessee
Operational:
- Any lease that isn’t a finance lease/
Identifying Finance leases (4)
- Leased asset is likely to become property of lessee @ end of agreement.
- Lease runs for most of the assets useful life.
- PV of minimum lease payments is close to the FV of the asset at the commencement of the lease.
- Specialised asset specific to lessee.
Accounting for the lease (only actual lease)
- FV of the asset should be included as a NCA
- Same amount (i.e. the obligation to pay rentals) should be a Liability.
Accounting for lease payments
- Split between repayment of lease liability and finance charge (i.e. interest).
- e.g. Lease payment less yearly interest of asset’s value) = the actual repayment.
Sale and Leaseback definition (finance and operating)
Finance-Does not transfer the risk and rewards. Continue to recognise the asset and depreciate as normal.
Operating-Transfers risk and rewards. Remove the asset.
Disclosure of leases in FS (for both F and Op leases)
Finance:
- Carrying amount of asset
- Liability for finance lease (split CL and NCL)
- Depreciation charge in P/L
- Finance charge in P/L
Operating:
- Lease payments written off as expense when incurred.
Current issue: Criticisms (4)
1) Leasing is subjective due to varying ‘risk and rewards’ perception.
2) Operating leases do meet the criteria for a liability but aren’t recognised as a liability.
3) Users of FS suffer as they have to study disclosure notes to understand the commitments of the entity.
4) Long term finance can be disguised as an operating lease to “off balance sheet finance”.
Current issue: New proposals
1) No distinction between finance and operating lease
2) All leases over 12 months will be recognised as A/L
3) Leases will be split into type A (equipemtn) and type B (property).
