IAS 17 Leases Mark FieldingPritchard 5242021 1 IAS

IAS 17 Leases Mark Fielding-Pritchard 5/24/2021 1

IAS 17 Leases Cover accounting for leases: - Finance leases - Operating leases Exclude: - Lease agreements relating to mineral, oil and gas exploration - Licensing agreements for film, manuscripts, patents and copyrights - Investment properties - Biological assets 5/24/2021 2

IAS 17 Definitions Operating Lease – Is a lease other than a finance lease. An operating lease is not recorded in the general ledger accounts and therefore the asset and liability will not appear on the balance sheet. Operating lease payments are treated as current operating expenses by lessee, and income by lessor. 5/24/2021 3

Finance Lease Transferring control of an asset to the lessee, to the extent that the lessee benefits from it in a financial way very close in value to its fair value. That is, the total amount paid to the holder of the asset closely approximates the assets actual value. Transfer of substantial risk and rewards associated with the asset to lessee. IAS 17 also covers leases that still require substantial services from the lessor in connection with the asset, as long as the asset is used by the lessee and meets any of the classification criteria. Lessee capitalizes the asset, Lessor records it as a finance sale. (effectively removing it from the Lessor’s books) 5/24/2021 4

IAS 17, Definitions Minimum Fair Lease Payments: Value: (FV) Economic Useful Life: Interest Rate implicit: Lessee’s incremental borrowing rate of interest 5/24/2021 5

IAS 17 Lease classification is made at the inception of the lease Changes during the term that would have altered the classification of the lease at inception count as a new lease for accounting purposes Contingent Leases are additional payments due under leases 5/24/2021 6

IAS 17 Initial Recognition: Lessee: Asset + Initial Costs, Liability Lessor: Finance Sale Payment Recording: Depreciation calculated along lines of other PPE depreciation (and in line with IPSAS 17) If no guarantee asset will be owned by lessee by the end, then depreciation is the lesser of useful life or the lease term. 5/24/2021 7

Leases- Operating (Lessee) As for IFRS two types, operating and finance Operating leases are shown as rental expenses by the lessee On 1 October a department rents an office for 6 months paying $24000 in advance 1 October Dr Prepayment Cr Cash $24000 30 October and every month $4000 At 31 December prepayment in Statement of Financial Position will be $12000 The lessor will have the office as an asset and will show $4000 per month as rental income 5/24/2021 8

Leases Finance On 1 January 2015 a department leases a motor car. The cost of the car is $60000. The department will pay $15000 for 5 years in arrears starting 31/12/15. Life 5 years, scrap value $0 The department will make entries 1/1/15 Dr Assets at cost $60000 Cr Finance lease liability $60000 Depreciation $1000 per month 31/12/15 and each year Dr Lease liability 12000, Interest expense 3000 Cr Cash $15000 (on simple straight line basis) 5/24/2021 9

Leases Finance On 1 January 2015 a department leases a motor car. The cost of the car is $60000. The department will pay $15000 for 5 years in advance starting 1/1/15. Life 5 years, scrap value $0 The department 1/1/15 Dr Assets at cost $60000 Cr Finance lease liability $60000 Dr Finance lease liability $15000 Cr Cash $15000 Depreciation $1000 per month 31/12/15 and each year Dr Interest expense $3750, Cr Lease liability $3750 (Interest = $15000/4 on simple straight line basis) 5/24/2021 10

Disclosure: lessees – finance leases [IAS 17. 31] carrying amount of asset reconciliation between total minimum lease payments and their present value amounts of minimum lease payments at balance sheet date and the present value thereof, for: the next years 2 through 5 combined beyond five years contingent recognised as an expense total future minimum sublease income under noncancellable subleases general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing 5/24/2021 11

Disclosure: lessees – operating leases [IAS 17. 35] amounts of minimum lease payments at balance sheet date under noncancellable operating leases for: the next years 2 through 5 combined beyond five years total future minimum sublease income under noncancellable subleases lease and sublease payments recognised in income for the period contingent recognised as an expense general description of significant leasing arrangements, including contingent rent provisions, renewal or purchase options, and restrictions imposed on dividends, borrowings, or further leasing 5/24/2021 12

Leases- complications Does an asset exist? Operating or finance? Minimum lease payments Ownership Peppercorns Barters Creations of liabilities 5/24/2021 13