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International Accounting Standard 17

Leases

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IAS 17, LeasesIAS 17, Leases

I. ObjectiveII. AdvantagesIII. DefinitionsIV. Types of arrangementV. DisclosureVI. Sale and Leaseback transactions

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IAS 17, LeasesIAS 17, Leases Objective

The objective of this standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosure to apply in relation to leases.

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Advantages of Leasing

Up to100% Financing at Fixed Rates Protection against obsolescence Flexibility Less costly financing Tax Advantages Off-Balance-Sheet Financing

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IAS 17, LeasesIAS 17, Leases Definitions

A lease: is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

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IAS 17, LeasesIAS 17, Leases Types of Arrangements

Lease classification: two types Finance lease:

A finance lease transfers substantially all of the benefits and risks inherent in ownership of property to the lessee.

Title may or may not eventually be transferred. Operating lease- is a lease other than a

finance lease

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IAS 17, LeasesIAS 17, LeasesTypes of Arrangements (cont’d)

Lessee, finance lease Criteria : Must meet just one condition to capitalize: Ownership transfers at end of lease (upon final

payment or required buyout) Written option for bargain purchase Ninety (90%) percent of leased property FMV <

PV of lease payments Seventy-five (75%) percent of asset economic

life is being committed in lease term. Illustration “A,B”

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Types of Arrangements (cont’d) Risks and rewards of ownership

Risks may be represented by the possibility of: Losses from idle capacity or technological

obsolescence; Variations in return due to changing economic

conditions Rewards may be represented by the

expectation of: Profitable operation over the asset’s economic

life; Gain from appreciation in value or realization of

residual value

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Types of Arrangements (cont’d) Indicators

IAS 17 lists the following as examples of situations where a lease would normally be classified as a finance lease:

The lease transfers ownership of the asset to the lessee by the end of the lease term;

The lessee has the option to purchase the asset at a “bargain price” and it seems likely that, at the inception of the lease, that this option will be exercised

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Types of Arrangements (cont’d) Terms of the lease

The status of the lease may often be determined from an examination of the lease terms.

A transference of risks and rewards is assumed if: The lessee has the use of the asset for most of its

economic life. The lessee bears the cost normally associated with

ownership. The present value of the amounts guaranteed by the

lessee is materially equivalent to the cost of purchase. Any amounts accruing to the lessor at the end of the

lease are relatively small

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Types of Arrangements (cont’d) Land and buildings

Land Normally has an indefinite economic

life. If title does not pass at the end of the

lease term, the lease should normally be classified as an operating lease

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Types of Arrangements (cont’d) Land and buildings

Buildings Useful life will probably extend well

beyond the lease term. If title does not pass at the end of the

lease term, the lease will be classed as operating lease

If it pass, both are classified as finance leases

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IAS 17, LeasesIAS 17, LeasesDisclosure

Operating Leases Lessor and Lessee shall disclose the following

for operating leases: The future minimum lease payments under

non-cancelable operating leases in the aggregate

Total contingent rents recognized as income in the period.

A general description of the lessor’s leasing arrangements. Illustration “C”

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IAS 17, LeasesIAS 17, LeasesDisclosure (Cont’d)

Finance Leases Lessor shall disclose the following for finance

leases: A reconciliation between the gross investment

in the lease at the BS date, and the PV of minimum lease payments receivable at the BS. Unearned finance income.

The accumulated allowance for uncollectible minimum lease payments receivable.

A general description of the lessee’s leasing arrangements.

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IAS 17, LeasesIAS 17, LeasesDisclosure (Cont’d)

Lessee shall disclose the following for finance leases:

For each class of asset, the net carrying amount at the balance sheet date.

A reconciliation between the total of future minimum lease payments at the BS date, and their PV.

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Sale and Leaseback as a finance lease The substance of the transaction is

that is no sale-risks and rewards of ownership have not passed from the original lessee.

Any excess of sales proceeds over the carrying amount should be deferred and amortized over the lease term.

Illustration “D”

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Sale and leaseback as an operating lease If the rentals and the sale price are

established at a fair value, there has in effect been a normal sale transaction.

If the sale price is above fair value, the excess should be deferred and amortized over the period for which the asset is expected to be used.

If the sale price is below fair value, any profit or loss should be recognized immediately.

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