IAS 17 Lea ses

The definition of the standard includes Hire purc hase contracts and conditional sale agreements. However it excludes the following: 1. Lease agreements to explore for or use minerals , oil, natural gas and similar nonregenerative resources. (IFRS 6) 1. Licensing agreements for such items as motion pictures,

Scope of the IAS 17

films, video recordings, plays, manuscripts, p atents and copyrights. (IAS 38) Contracts under finance leases are financial instruments but only for impairment and der ecognition, principles of IAS 39 are applied. Though there are some disclosures required as per IFRS 7 F.I. Disclosures

 Lease: An agreement which conveys to the lesse e the right payment(s) to the lessor. (Substance over for m)

to use an asset, for a specified period an time, and rewards incident and can have of asset. (finance or Operating)to ownership ofsignifica i n return for Title may nt impact on

Definitions

Accounting for leases based on the lease classific ation the financial statements of both lessees and le ssors

 Finance lease: a lease which transfers substantial ly all risks or may not eventually be transferred. Operating lease: a lease other than a finance lease.

Classification of l eases
Normal Indicators

Could be Indicator s

Lease and its Classification

Lease Term

TAG LINE

and it seemst likely that, at the inception of the le of the lease option will be exerwould normally lead to a lease bein or in that this ase, combination erm; cised; g classified as IAS 17 lists the following as examples of situations that i ndividually a finance lease are: the lease transfers ownership of the asset to the lessee by the end the lessee has the option to purchase the asset at a ba rgain price the lease term is for the major part of the useful life of t

Classification of leases

fair an value of the leased asset (net of grants and tax d hecredits to the asset; at the inception of the lease, the present value of the lease payments is greater than, or equal to substanti ally all of, the lessor at that time. Lease asset are of specialized nature

Classification of leases
IAS 17 lists the following as examples of situations that individ ually or in combination could also lead to a finance lease: if the lessee can cancel the lease any losses associated with th e cancellation are borne by the lessee; gains or losses from the fluctuation in the fair value of the resi dual fall to the lessee (e.g. in the form of a rent rebate equaling most o f the sales proceeds at the end of the lease); the lessee has the ability to continue the lease for a secondary

period at a rent which is substantially lower than market rent; and IFRIC 4: Determining whether an arrangement contains a lea se. SIC 27: Substance of transactions with the legal form of a le ase. The list is not conclusive

Classification of lease
The lease term is the key to classifying a lease and is defined as noncancellable period for which lessee has contracted to lease asset, together with any further terms (Brea k clauses, renewal clauses, penalties ) for which the lessee has the option to lease the asset with or without further p ayment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option. {Tag line}

The prime rule is whether the lease transfers substantially all risks (losses from idle capacity or technological obsolescence; variations in return d ue to changing economic conditions) and rewards (profi table operation over the assets economic life; gain fro m appreciation in value or realization of residual val ue) .

Lessee Accounting: Financ e Lease

Inception of the Lease

Commencement of the lease

Recognition of Assets and subsequent treatment

Recognition of Liabilities and subsequent treatment

Lessee Finance L

INCEPTION OF THE LEASE

Lease classification and measurement i s made at the inception of the lease. Inception of the lease is the earlier of th e date of the lease agreement and the date of parties

commitment to the leases principal p rovisions. The assets and liabilities to be recogniz ed at the commencement of lease term are determined at the date of inception

Lessee Finance L

INCEPTION OF THE LEASE

Measure the non current asset and the finance lease liability (at similar amounts) at the lower of: the present value of amounts guarantee d by the lessee (Minimum lease payments); Or

 the fair value of asset (as an approximati on, usually the cash price of asset).

Minimum lease pa yments:

essee or the payments over the lease te ee rm

Initial Lessee Direct cost of l essor + amounts guaranteed by the l by a party related to the less

+ lessee,

residual value guaranteed by Or any party related to the le

ssee Or a third party (manufacture r)

Unguaranteed Residual Value (E.g. Scrap Proceeds)

Fair value of the leased asset

= PV of Minimum lease payments

Lessee Finance L

COMMENCEMENT OF THE LEASE

Date of commencement of the lease is the date fro m which the lessee is entitled to exercise the right. Recognize Non current asset and finance lease obligation in the financial statements as determined at the dat e of inception. Any initial direct costs (incremental costs, excluding marketing

and general administration costs) will be added to the amount recognised as non current asset.

Recognition of Liabilities and subsequent treatment Finance lease obligation

Recognize on commencement as per measurement rules. Lease payments apportioned between finance reduction produce a constant periodic interest rate on the remaining balance of the liability for each year. of outstanding liability in a way to charges and

Recognition of Assets and subse quent will be treatment

Finance lease obligation divided into current and non distinction, including interest current when accrued and

current

Non current Asset

in the Recognize notper measuremen t rule. as Depreciate over shorter of lease period or useful life unless rea sonably certain that the title passes to lessee.

otherwise.

Lessee Operating Lease Recognition in Income Statem ent

Recognition in the statement o f Financial Position

Rentals are charged as EXPENSE to the Statement of Compreh ensive income on a straight line b asis or other systematic basis.

No balances appear in the Statement of financial position other than ACCRUALS and PREPAYMENTS on rented assets

Lessor Accounting: Financ e Lease

Lessor Finance Lease

Initial Recognition

Subsequent Measurement

Lessor Accounting: Financ e Lease

Lessor Finance Lease Initial Recogni ase tion ual) Calculate Gross investment in the le (lessors MLPs + unguaranteed resid

discounted @ interest rate implicit i n the lease (as previously calculated)

= Net Investment in the lease

Lessor Finance Leas e OME

INTEREST INC

OF CAPITAL ELEMENT

Rentals received will be allocate d using a Subseque dividing constant periodic rate Statement of of return Statement of Financial Positi into on comprehensive (reduction from Net

REPAYMEN T

Recognition in the statement o f Financial Position

Assets subject to operating lease will remain in the financial statement as before according to the nature of the asset. Any initial direct cost incurred will be added to the carrying amount of the leased asset and recognize as expense

Lessor Operating Lease lease income. Recognition in Income Stateme nt

on the same basis as the

Rentals Received will be credited as INCOME in the Statement o f

Other Issues in IA S 17

Manufacturer or Dealer Lessor

Lease of Land and Building

SALE AND LEASEBACK TRANSACTIONS

Manufacturer or Dealer Lessor

Initial Direct costs sho uld be IAS 17 distinguish manufacturer/dealer lessors from other lessors. Although the term is not defined in the standard, a manufacturer/dealer lessor is a lessor that either manufacturers the leased asset or acquires the leased asset as part of its dealing activities. The issue is whether the manufacturer/dealer lessor should recognize a normal sale profit/loss or not, Which depends on the classification of the lease. In case of the finance lease. Sales revenue (Lower of the FV of the asset or PV of the MLPs computed At Market rate of Interest) (less) Cost of sales less PV of any unguaranteed RV = Profit/Loss in Comprehensive Income

Yes Lease of Land andTreat it Operati Building ng Split the MLPs of L&B MLPs are allocated Lease in proportion to Is the split of MLPs the relative fair between the land an values of leasehold d interest building element possi No ble Land Building Does the title pass to the lessee Yes Treat it Finance No

By applyin g other criter ia, can both element b

Apply the normal rules of classification as

Lease

Yes Treat both element element

No Treat both

Leaseback is a Finance Lease SALE AND LEASEBACK TRA NSACTIONS Sale and options *Repurchase - Certain or notDefer the Profit/ loss on sale transaction and amortized over the lease term

Leaseback is an Operating lease

If transaction is at fair value, profit or loss on sale is recognized immediately. If not, Rules apply*