IAS 17 Leases

This is a post of my own detailed and thorough explanation on the standards of the subject I'm taking, P2 Corporate Reporting (ACCA)

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IAS 17 Leases

When classifying a lease arrangement, an entity will have to consider issues of substance over form. A finance lease is a lease that transfer substantially all the risks and rewards of an asset to the lessee. Meanwhile an operating lease is a lease other than a finance lease.

The substance over form

• Ownership transferred at the end of the lease term.
• Bargain purchase option buy at lower than market price.
• The lease term is for major part of assets economic life.
• Present value of minimum lease payment equal to assets fair value. (PV of MLP = FV)
• The lease asset is specialized in nature.

Finance Lease

Lessee point of view (Company)

• Lease interest (expenses) using the actuarial method.
• Financial liability lease obligation (liability) will be divided into current and non-current.
• Depreciation.

Lessor point of view (Bank)

• Lease interest. (income)
• Investment in financial liability (asset) will be divided into current and non-current.

Operating Lease

Lessee

• Lease rental (expenses)

Lessor

• Lease rental (income)
• Property, plant and equipment & Depreciation

Sales & Leaseback

This is when a company sell the asset to the bank and then leaseback from the bank.

If it's a finance lease, there will be no disposal thus all the gain on disposal will be deferred and amortized over the lease term.

Current Issues

• Operating lease underestimates the assets and liabilities of the lessee.
• Similar transaction accounted for differently.

Proposal

Lessee

DR Rights of use assets 

     CR Liability for lease rental

Lessor

1. Derecognition Approach (Risk & reward transferred)
2. Performance Obligation Approach (Risk & reward not transferred)

Ends,