IFRS IAS 17 Leases
IFRS IAS 17 Leases: The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) (collectively, the Boards) have substantially completed re-deliberations on new standards that would significantly change the accounting for leases and could have far-reaching implications for a company’s finances and operations.
The standards the IASB and the FASB plan to issue would require lessees to recognise most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. For IFRS reporters, lessor accounting, in essence, would not change. The standards would incorporate feedback the Boards received from constituents on their 2013 exposure draft 1.
IFRS IAS 17 Leases
As with IAS 17 Leases, the standard the IASB plans to issue (the new standard) would require lessors to classify most leases into two types. During re-deliberations, the Boards referred to the two types of leases as:
- Type A.
- Type B.
However, given the IASB’s decision to retain the principle and, essentially, the accounting in IAS 17, for purposes of this publication we will refer to the IASB’s two types of lessor leases as they are in IAS 17, i.e., finance and operating leases.
IFRS IAS 17 Leases– Lessees, however, would apply a single model for all recognised leases and would have the option not to recognise and measure leases of small assets and leases with a lease term of 12 months or less.
The standard the FASB plans to issue would require both lessees and lessors to classify most leases as either
- ‘Type A’ (generally today’s finance/sales-type and direct financing leases)
- ‘Type B’ (generally today’s operating leases) leases using a principle generally consistent with IAS 17.
Lease classification under both the IASB’s and FASB’s new standards would determine how and when a lessor would recognise lease revenue and what assets a lessor would record.
Under the FASB’s new standard, classification also would determine how and when a lessee would recognise lease expense. Generally, the profit or loss recognition pattern for lessors would not be expected to change. For lessees, however, interest and amortisation expense would be recognised separately in the statement of profit or loss.
IFRS IAS 17 Leases
For lessees, recognising lease-related assets and liabilities could have significant financial reporting and business implications, such as:
• Key balance sheet metrics could change
• Debt covenants and borrowing capacity might be affected
• Decisions about whether to lease or buy significant assets might change
IFRS IAS 17 Leases – The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosure to apply in relation to leases. The classification of leases adopted in this Standard is based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee.
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.
IFRS IAS 17 Leases –Leases in the financial statements of lessees Operating Leases Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit. Finance Leases At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease.
IFRS IAS 17 Leases- Discount rate
The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognised as an asset.
IFRS IAS 17 Leases- Finance lease
A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period. The depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned, and the depreciation recognised shall be calculated in accordance with IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets.
If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.
IFRS IAS 17 Leases-Leases in the financial statements
Leases in the financial statements of lessors Operating Leases Lessors shall present assets subject to operating leases in their statements of financial position according to the nature of the asset. The depreciation policy for decipherable leased assets shall be consistent with the lessor’s normal depreciation policy for similar assets, and depreciation shall be calculated in accordance with IAS 16 and IAS 38.
IFRS IAS 17 Leases- Lease income
Lease income from operating leases shall be recognised in income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished. Finance Leases Lessors shall recognise assets held under a finance lease in their statements of financial position and present them as a receivable at an amount equal to the net investment in the lease.
IFRS IAS 17 Leases- Recognition of finance
The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease. Manufacturer or dealer lessors shall recognise selling profit or loss in the period, in accordance with the policy followed by the entity for outright sales. If artificially low rates of interest are quoted, selling profit shall be restricted to that which would apply if a market rate of interest were charged.
IFRS IAS 17 Leases- Costs incurred
Cost incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognised as an expense when the selling profit is recognised. Sale and leaseback transactions A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved.
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