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IAS17 Leases

Lecture 21


the appropriate accounting policies and disclosure to apply in relation to leases. Leases Objective The objective of this standard is to prescribe. 2 .IAS 17. for lessees and lessors.

 Acquire the use of non-current assets without having to pay the full cost at the outset. 3 .IAS 17.  Ownership may never pass to the lessee. Leases Definitions  A lease: is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

 Title may or may not eventually be transferred.IAS 17.   Operating lease: is a lease other than a finance lease 4 . Leases Types of Arrangements Lease classification: two types  Finance lease: A finance lease transfers substantially all of the risks and rewards inherent in ownership of property to the lessee.

finance lease Criteria : Must meet just one condition to capitalize:  Ownership transfers at end of lease (upon final payment or required buyout)  Written option for bargain purchase (lower than FV)  Substantial percent of leased property FMV < PV of minimum lease payments (US GAAP – 90%)  Major of asset economic life is being committed in lease term (US GAAP – 75%).IAS 17.  The assets are of specialised nature 5 . Leases Types of Arrangements (cont’d)  Lessee.

 Gain from appreciation in value or realization of residual value 6 .  Variations in return due to changing economic conditions  Rewards may be represented by the expectation of:  Profitable operation over the asset’s economic life.Types of Arrangements (cont’d) Risks and rewards of ownership  Risks may be represented by the possibility of:  Losses from idle capacity or technological obsolescence.

 The lessee has the option to purchase the asset at a “bargain price” and it seems likely that. that this option will be exercised.  Lease covers substantially the whole of the useful life of an asset to generate revenue for long period of time 7 . at the inception of the lease.Types of Arrangements (cont’d) Indicators IAS 17 lists the following as examples of situations where a lease would normally be classified as a finance lease:  The lease transfers ownership of the asset to the lessee by the end of the lease term.

 A transference of risks and rewards is assumed if:  The lessee has the use of the asset for most of its economic life.  The lessee bears the cost normally associated with ownership.  The present value of the amounts guaranteed by the lessee is materially equivalent to the cost of purchase.  Any amounts accruing to the lessor at the end of the lease are relatively small 8 .Types of Arrangements (cont’d) Terms of the lease  The status of the lease may often be determined from an examination of the lease terms.

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