IAS 17 Accounting for Leases In a leasing transaction there is a contract between the lessor and the lessee for the hire of an asset. The lessor retains legal ownership but conveys to the lessee the right to use the asset for an agreed period of time in return for specified rentals. 5-1

IAS 17 Accounting for Leases Types of lease Finance lease. A lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Operating lease. A lease other than a finance lease 5-2

IAS 17 Accounting for Leases Classification of Leases Situations that would normally lead to a lease being classified as finance lease includes: ownership transfers the lessee has the option to purchase the asset the lease term is for the major part of the economic life of the asset at the inception of the lease, the PV of the MLP amounts to at least 90% of all of the FV of the leased asset specialized nature

IAS 17 Accounting for Leases Classification of Leases Other situation that might also lead to classification as a finance lease are: If lessee is entitled to cancel the lease, the lessor's losses associated with the cancellation are borne by the lessee gains or losses from fluctuation in the FV of the redifual fall to the lessee the lessee has the ability to eontinue to lease for a secondary period at a rent that is substantially lower than market rent.

IAS 17 Accounting for Leases Key term Minimum lease payments. The payments over the lease term that the lessee is or can be required to make. 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, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.

IAS 17 Accounting for Leases Key term A finance lease can also be presumed if the leased assets are of such a specialised nature that only the lessee can use them without major modifications.

IAS 17 Accounting for Leases Accounting for operating lease The lease payments should be recognized as an expenses in the SOCI over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern of the user's benefit. Where the lessee is offered an incentive such as a rentfree period or cashback incentive, this is effectively a discount, which will be spread over the period of the operating lease in accordance with the accruals principle.

IAS 17 Accounting for Leases Example: rent-free period If a company entered into a four-year operating lease but was not required to make any payments until year 2, the total payments to be made over years 2–4 should be charged evenly over years 1–4.

IAS 17 Accounting for Leases Cashback incentive Where a cashback incentive is received, the total amount payable over the lease term, less the cashback, should be charged evenly over the term of the lease.

IAS 17 Accounting for Leases Finance leases Similarly, a lessee may use a finance lease to fund the 'acquisition' of a major asset which he will then use in his business perhaps for many years. The substance of the transaction is that he has acquired a noncurrent asset, and this is reflected in the accounting treatment prescribed by IAS 17, even though in law the lessee never becomes the owner of the asset.

IAS 17 Accounting for Leases Finance leases If a lessor leases out an asset on a finance lease, the asset will probably never be seen on his premises or used in his business again. It would be inappropriate for a lessor to record such an asset as a non-current asset. In reality, what he owns is a stream of cash flows receivable from the lessee. The asset is an amount receivable rather than a non-current asset

IAS 17 Accounting for Leases Finance leases at commencement of the lease term, fianance leases should be recorded as an asset and a liability at the lower of the FV of the asset and the PV of the minimum lease payments

IAS 17 Accounting for Leases Finance leases finance lease payments should be apportioned between the finance charge and the reduction of the outstanding liability (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the loability)

IAS 17 Accounting for Leases Finance leases The depreciation policy for assets held under finance leases should be consistent with that for owned assets. If there is no resonable certainty that the lessee will obtain ownership at the end of lease - the asset should be depreciated over the shorter of the lease term or the life of the asset

IAS 17 Accounting for Leases Example On 1 January 20X0 Bacchus Co, wine merchants, buys a small bottling and labelling machine from Silenus Co under a finance lease. The cash price of the machine was $7,710 while the amount to be paid was $10,000. The agreement required the immediate payment of a $2,000 deposit with the balance being settled in four equal annual instalments commencing on 31 December 20X0. The charge of $2,290 represents interest of 15% per annum, calculated on the remaining balance of the liability during each accounting period. Depreciation on the plant is to be provided for at the rate of 20% per annum on a straight line basis assuming a residual value of nil

IAS 17 Accounting for Leases Solution The outstanding capital balance at 1 January 20X0 is $5,710 ($7,710 fair value less $2,000 deposit). $ Balance1Jaanuary 20×0 5,710 Interest15% 856 Installment31December 20×0 (2,000) Balance outstanding 31 December 20×0 4,566 Interest15% 685 Installment31December 20×1 (2,000) Balance outstanding 31 December 20×1 3,251

IAS 17 Accounting for Leases Solution Balance outstanding 31 December 20×1 3,251 Interest 15% 488 Installment 31 December 20×2 (2,000) Balance outstanding 31 December 20×2 1,739 Interest 15% 261 Installment 31 December 20×3 (2,000) 0

IAS 17 Accounting for Leases Lessee disclosures These disclosure requirements will be illustrated for Bacchus Co (above example). We will assume that Bacchus Co makes up its accounts to 31 December and uses the actuarial method to apportion finance charges.

IAS 17 Accounting for Leases STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20×0(EXTRACTS) $ $ Non-current assets Assets held under finance leases Plant and machinery at cost 7,710 Less accumulated depreciation (1,542) 6,168 Non-current liabilities Obligations under finance leases (Balance at 31 December 20× 1） 3,251 Current liabilities Obligations under finance leases 1,315

IAS 17 Accounting for Leases STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20 0(EXTRACT) $ Interest payable and similar charges Interest on finance leases 856

IAS 17 Accounting for Leases Example: Six-monthly payments Now let us see what would change if Bacchus was not required to pay a deposit but had to pay $1,250 every six months for four years. We will use the same interest rate and calculate the amounts for the first year's financial statements.

IAS 17 Accounting for Leases Solution $ Balance 1 January 20X0 7,710 Interest to 30 June 20X0 (7,710 × 15% ×6/12) 578 Installment paid 30 June 20X0 (1,250) Balance 30 June 20X0 7,038 Interest to 31 December 20X0 (7,038× 15% × 6/12) 528 Installment paid 31 December 20X0 (1,250) Balance 31 December 20X0 6,316

IAS 17 Accounting for Leases Solution Balance 31 December 20X0 6,316 Interest to 30 June 20X1 (6,316 ×15% × 6/12) 474 Installment paid 30 June 20X1 (1,250) Balance 30 June 20X1 5,540 Interest to 31 December 20X0 (5,544 × 15% × 6/12) 416 Installment paid 31 December 20X1 (1,250) Balance 31 December 20X1 4,706

IAS 17 Accounting for Leases Solution Financial statement extracts at 31 December 20X0: $ Non-current assets (as above) 6,168 Non-current liabilities Obligations under finance leases 4,706 Current liabilities Obligations under finance leases (6,316 – 4,706) 1,610 Profit or loss: interest payable (578 + 528) 1,106

IAS 17 Accounting for Leases Payments in advance When payments under a finance lease are made in advance, the payment for the year will be made before any interest for the year has accrued on the capital balance. This affects the calculation of current and noncurrent liability

IAS 17 Accounting for Leases We can take the example of Bacchus again and the payments are $2,000 in advance, plus the $2,000 deposit. $ Balance 1 January 20X0 (deposit paid) 5,710 Installment 1 January 20X0 (2,000) 3,710 Interest to 31 December 20X0 (15%) 556 4,266

IAS 17 Accounting for Leases Solution If we were preparing accounts to 31 December 20X0, as in 2.5 above, the total capital balance is $4,266. Because a payment of $2,000 will be made literally the next day, that payment will not include any interest, it will be a pure capital repayment. So our liabilities will be: Current $2,000 Non-current $2,266

IAS 17 Accounting for Leases Exercise On 1 Oct 2013, Fresco acquired an item of plant under a five-year finance lease agreement. The plant had a cash purchase cost of $25m. The agreement had an implicit finance cost of 10% per annum and required and immediate deposit of $2m and annual rentals of $6m paid on 30 Sep each for five years. What would be the current liability for the leased plant in Fresco’s statement of financial position as at 30 Sep 2014? A $19,300,000 B $4,070,000 C $5,000,000 D $3,850,000

IAS 17 Accounting for Leases Exercise 9. The objective of IAS 17 Leases is to prescribe the appropriate accounting treatment and required disclosures in relation to leases. Which TWO of the following situations would normally lead to a lease being classified as a finance lease? i) The lease transfers ownership of the asset to the lessee by the end of the lease term ii) The lease term is for approximately half of the economic life of the asset iii) The lease assets are of a specialized nature such that only the lessee can use them without major modifications being made iv) At the inception of the lease, the present value of the minimum lease payment is 60% of what the leased asset would cost purchase A i and ii C ii and iii B i and iii D iii and iv

IAS 17 Accounting for Leases Exercise During the year ended 30 September 20X4 Hyper entered into two lease transactions: On 1 October 20X3 a payment of $90,000, being the first of five equal annual payments of a finance lease for an item of plant which has a five year useful life. The lease has an implicit interest rate of 10% and the fair value (cost to purchase) of the leased equipment on 1 October 20X3 was $340,000 On 1 January 20X4 a payment of $18,000 for a one-year lease of an item of excavation equipment. What amount in total would be charged to Hyper's statement of profit or loss for the year ended 30 September 20X4 in respect of the above transactions? $108,000 B. $111,000 C. $106,500 D. $115,500