IAS 17 Prof Riccardo Tiscini IAS 17 Leases

IAS 17 Prof. Riccardo Tiscini

IAS 17, Leases Definitions o 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. 2

IAS 17, Leases Types of Arrangements Lease classification: two types o Finance lease: A finance lease transfers substantially all of the benefits and risks inherent in ownership of property to the lessee. n Title may or may not eventually be transferred. n o Operating lease- is a lease other than a finance lease Substance over form 3

IAS 17, Leases Types of Arrangements (cont’d) o Lessee, finance lease Criteria : Must meet just one condition to capitalize: n Ownership transfers at end of lease (upon final payment or required buyout) n Written option for bargain purchase n Seventy-five (75%) percent of asset economic life is being committed in lease term. 4

Types of Arrangements (cont’d) Risks and rewards of ownership o Risks may be represented by the possibility of: n Losses from idle capacity or technological obsolescence; n Variations in return due to changing economic conditions o Rewards may be represented by the expectation of: n Profitable operation over the asset’s economic life; n Gain from appreciation in value or realization of residual value 5

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: q The lease transfers ownership of the asset to the lessee by the end of the lease term; q The lessee has the option to purchase the asset at a “bargain price” that is less than fair market value and it seems likely that, at the inception of the lease, this option will be exercised 6

Types of Arrangements (cont’d) Indicators q The lease term is for the major part of the economic life of the asset even if the title is not transferred; q At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; q The leased assets are of specialised nature such that only the lessee can use them without major modifications being made. 7

Types of Arrangements (cont’d) Terms of the lease o The status of the lease may often be determined from an examination of the lease terms. o A transference of risks and rewards is assumed if: n The lessee has the use of the asset for most of its economic life. n The lessee bears the cost normally associated with ownership. n The present value of the amounts guaranteed by the lessee is materially equivalent to the cost of purchase. n Any amounts accruing to the lessor at the end of the lease are relatively small 8

Types of Arrangements (cont’d) Land buildings Land q Normally has an indefinite economic life. q If title does not pass at the end of the lease term, the lease should normally be classified as an operating lease 9

Types of Arrangements (cont’d) Land buildings Buildings q Useful life will probably extend well beyond the lease term. q If title does not pass at the end of the lease term, the lease will be classed as operating lease q If it pass, both are classified as finance leases 10

Example: · · · 8 years duration 1 st initial payment € 12. 000 Annual installment € 6. 500 Purchase option at the end € 6. 500 Fair value € 50. 000 Useful life 12 years Page 11

Example: Repayment YEAR 1 2 3 4 5 6 7 8 INSTAL. INTER. 6. 500 6. 500 2. 869 2. 595 2. 300 1. 983 1. 642 1. 275 881 456 CAPITAL 12. 000 3. 631 3. 905 4. 200 4. 517 4. 858 5. 225 5. 619 6. 044 RES. DEBT 50. 000 38. 000 34. 369 30. 464 26. 264 21. 746 16. 888 11. 663 6. 044 0 Page 12

Leases in the financial statement of lessees Page 13

Leases in the financial statement of lessees Page 14

Leases in the financial statement of lessees Page 15

Leases in the financial statement of lessors o. 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. o. 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. Page 16

Leases in the financial statement of lessors * 50. 000 - 12. 000 - 3. 631 Page 17

Operating Lease Financial statement of lessees o 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. Page 18