1. 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

2. 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

3. 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

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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

12. 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

13. 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)

14. 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

15. 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

16. 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× ,710
Interest15%
Installment31December 20× (2,000)
Balance outstanding 31 December 20× ,566
Interest15%
Installment31December 20× (2,000)
Balance outstanding 31 December 20× ,251

17. IAS 17 Accounting for Leases
Solution
Balance outstanding 31 December 20× ,251
Interest 15%
Installment 31 December 20× (2,000)
Balance outstanding 31 December 20× ,739
Interest 15%
Installment 31 December 20× (2,000)

18. 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.

19. 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 ,710 Less accumulated depreciation (1,542) ,168
Non-current liabilities Obligations under finance leases (Balance at 31 December 20× 1） ,251 Current liabilities Obligations under finance leases ,315

20. 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

21. 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.

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

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

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

25. 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

26. 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) ,710
Installment 1 January 20X (2,000) ,710
Interest to 31 December 20X0 (15%) ,266

27. 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

28. 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

29. 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

30. 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, B. $111,000
C. $106, D. $115,500