Leases IAS 17 Flashcards
(25 cards)
Leases
Recognises a lease as an agreement conveying the right to use assets for an asset for an agreed period in exchange for a payment, or series of payments, by the lessee to the lessor. IAS 17 has two categories of leases, namely finance lease and operating lease.
Finance Lease
A finance lease is a lease in which, in effect, transfers substantially all the risks and rewards incidental to ownership of an asset from the lessor to the lessee. Title, or legal ownership, may or may not eventually be transferred.
Operating Lease
An operating lease is a lease other than a finance lease. The lessee of this type of lease does not take on the owner’s responsibility with respect to the asset. The lessee generally uses the asset over a shorter period than the economic life of the asset, so that there could be a number of lessees during the economic life of the asset.
The Inception of the lease
The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by parties to the principal provisions of the lease. At inception date, the lease is classified as being either finance or operating lease.
Commencement of the lease
The commencement of the lease term is the date from which the lessee is entitled to exercise its rights to use the asset and is also the date of initial recognition of the lease.
The Lease Period
The lease period is the period, which cannot be cancelled, during which the lessee agreed to lease the asset, as well as further periods for which the lessee has an option to continue to lease the asset, with or without further payments.
Economic Life
The economic life of the asset thus refers to either the period over which an asset is expected to be economically usable by one or more users, or the number of production or similar units expected to be obtained from the asset by one or more users. (How long until No ECONOMIC BENEFIT exists)
Useful life
Refers to the estimated period over which economic benefits will be consumed by the entity. This period is determined by the lessee’s use of the asset for the period of the lease, or longer, depending on the conditions of the lease agreement. (How long the entity WANT to hold it for)
Operating lease vs Finance Lease (Areas for difference)
- Payments
- Term
- Renewal
- Cancellation
- Ownership
- Maintenance
How does payments differ between operating and finance lease?
Operating lease:
—> Not directly related to cost
Finance Lease:
—> Recover cost and Interest
Term differences (operating and finance lease differences)
Operating lease
–>Usually shorter than economic life
Finance Lease
–> approximates economic life
Renewal (Operating and finance differences)
Operating Lease:
-Negotiable
Finance Lease:
-usually a nominal purchase option
Cancelation (Operating and finance differences)
Operating Lease:
-negotiable
Finance lease:
-usually not cancellable
Ownership (Operating and Finance differences)
Operating lease:
-Usually with the lessor
Finance lease:
- usually transferred to the lessee at the end of the lease period
Maintenance (Operating and Finance differences)
Operating lease:
-Usually carried by lessor
Finance lease:
-Usually carried by lessee
“Property”=
Accounting: Land & Buildings
- Land (operating lease) (thus take out/substract from “property”)
- Buildings (Finance lease)
Land & Buildings
Land normally= indefinite economic life (title would generally not pass to lessee)=Operating lease
Building= Not unlimited economic life- (title may pass to lessee)= Finance lease
*Unless title of both elements passes to the lessee, in which case both are treated as finance leases.
Finance lease in Financial Statement of lessees
DR Leased asset (e.g. Machinery)
CR Finance Lease Liability
-Application of “SUBSTANCE OVER FORM”
The leased item is treated for as if the asset were required on the signing of the finance lease agreement, and a corresponding liability is recognised for the amount that is being financed (irrespective of the legal form, i.e. ownership only transferred at the end of the lease term)
The amount at which the leased assets is capitalised:
- The fair value of the leased asset at the inception of the lease term; or if lower
- The present value of the minimum lease payments at that date.
Initial Direct Costs
Initial direct costs are the incremental costs that can be directly attributable to the arrangement and negotiations of a lease, and, if incurred directly by the lessee, are added to the cost of the capitalised amounts of the asset.
—-Initial direct costs incurred by the lessee to secure a lease agreement are added to the amount recognised as an asset in terms of the finance lease
Lease term
The non‐cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, which option at the inception at the inception of the lease it is reasonable certain that the lessee will exercise.
Minimum lease payments
Minimum lease payments are the payments that the lessee is required to make in terms of the finance lease, including any amounts guaranteed by the lessee or a related party to the lessor (guaranteed residual value)
Guaranteed residual value
The guaranteed residual value is a deferred lease payment which is payable together with the final “normal” payment, thus the accounting treatment is the same as for a lease payment.
Disclosure
> Net Carrying amount at the end of the Financial Period
Reconciliation between total minimum lease payments at the end of the reporting period and their present value
The total minimum lease payments at the end of the reporting period , & their present values for each of the following periods:
-not later than one year
-later than one year but not later than 5 years
-later than five years
A general description of the lessee’s significant leasing arrangement.
