IAS 17 – Leases
Objective: To prescribe for lessees and lessor the appropriate accounting policies and disclosure with the applying in relation of finance and operating leases.
Finance Lease: a lease is classified as a finance lease if it transfers substantially all risks and rewards incident to ownership under this conditions
(1)The lease covers substantially all of the asset's life.
(2) Present value of lease payment is substantially equal to the assets fair value.
Operating leases: all other leases are classified as operating leases.
A lease of both land and building should be split into land and building when the land element is generally operating leases, and the building element is or operating lease or finance lease based on the criteria in IAS 17. However, separate measurement of the land and building elements is not required if the lessees interest in both land and building is classified as invested property (see IAS 40).
Finance Leases
Lessees Accounts
(1) Recognize asset and liability, as lower present value of minimum lease payment, and the fair value of the asset.
(2) Depreciation policy, the same as owned assets.
(3) Finance lease payment, interest and reduction in liability.
Lessor Accounts
(1) Recognize as a receivable an amount equal to the net investment in the lease.
(2) Recognize finance income based on pattern reflecting a constant periodic rate of return on the lessor net investment.
Operating Leases
Lessees Accounts
(1) Recognize lease payment as an expense in the income statement on straight line basis over the lease term.
Lessor Accounts
(1) Assets held for operating leases should be presented in lessor balance sheet.
(2) Lease Income should be recognized on straight line basis over the lease term.
Lessor must spread initial direct cost over lease term immediate expensing prohibited.
The Differences and Similarities between US GAAP Law and IFRS
Similarities: Both US GAAP and IFRS require the party that bears substantially all the risk and rewards of ownership of the leased property to recognize a lease asset and corresponding obligation that measured at lower of the present value of the minimum lease payments or fair value of the asset. The criteria or indicators of a capital lease are similar in both standards, capital lease is one:
(1) That the transfer of ownership to the lessee at the end of the lease term and has a bargain purchase option that, is reasonably expected to be exercised.
(2) The lease term is equal to or greater than 75% of the asset's economic life.
(3) The value of minimum lease payment exceeds 90% of the asset's fair value.
All other leases are an operating one.
Also under both US GAAP and IFRS a lease is classified as either a finance lease or an operating lease. And in operating lease the leased asset remains in the balance sheet of the lessor and the lessee recognizes an expense for the lease payment over the lease term.
Significant Differences:
IFRS | US Law GAAP | |
The land and building elements of the lease are considered separately when evaluating all indicators unless the amount recognized as land is immaterial, in this case the land and the building is a single unit for purposes of lease classification. A lessee may be classify as an investment property even if interest are held under an operating lease, if using fair value model, in such case the interest is accounted for as it were a finance lease. | A lease for land and building that transfers ownership to the lessee or contains a bargain purchase option would be classified as a capital lease by the lessee. If the fair value of the land represent 25% or more of the total fair value of the lease, the lessee must consider the land and building components separately. Unlike IFRS there is no concept of "investment property" and the usual lease classification requirements apply. | Lease of Land and building Investment property |
Gain or loss is recognized over the lease term. | If the seller does not relinquish more than a minor part of the right to use the asset, gain or loss is recognized over the lease term. If the seller relinquish more than a minor part of the use of the asset, than part of gain or loss is recognized depending on the amount relinquished. | Profit or loss from sale or leaseback on capital lease: |
Gain or loss is recognized immediately, and adjusted if the sale price is different from fair value. | If the seller does not relinquish more than a minor part of the right to use the asset, gain or loss is recognized over the lease term. If the seller relinquish more than a minor part of the use of the asset, than part of gain or loss is recognized depending on the amount relinquished. | Profit or loss from sale or leaseback on operating lease: |
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