IAS 17 Leases Essay Example | Topics and Well Written Essays - 1750 words

IAS 17 Leases - Essay Example This accounting standard is quite comprehensive in its nature such that it encompasses different aspects of leases in a very detailed manner. This section briefly analyzes 1) Scope of IAS 17, 2) Classification of Leases, 3) Accounting by Lessor, 4) Accounting by Lessee, 5) Disclosure Requirements for Lessor and, 6) Disclosure Requirements for Lessee. 1. Scope of IAS 17 The applicability of IAS 17 rests with all the leased assets except the following assets: †¢ Natural regenerative resources including oil, gas and other minerals †¢ Licensing agreements in respect of videos, manuscript, copyrights, brands, films, games etc. †¢ Investment property valued on fair value basis by lessee under IAS 40 †¢ Investment property considered as operating lease by the lessor under IAS40 †¢ Biological assets considered as finance lease by the lessee under IAS 41 †¢ Biological assets considered as operating lease by the lessor under IAS 41 2. Classification of Lease Lease s are generally classified into either finance lease or operating lease. The major distinguishing factor between a finance lease and an operating lease is the transfer of substantial risk and rewards even if the ownership is not transferred. It is important to note that the classification must be made before the commencement of the lease. The major criteria for the finance lease is as followed: †¢ At the expiry of the lease term, the ownership title is transferred to the lessee. At the inception of the lease the lessee has been provided the option to purchase the leased asset a price lower than the fair value of the asset, and there is likelihood that the option would probably be exercised by the lessee. Leased asset is provided to the lessee for a major part the useful life of the leased asset. The present value of the minimum lease payments (MLP) should be approximately equal to the fair value of the leased asset at the inception of the lease. The leased assets can be used by the lessee without any significant modification in the asset due to its specialized nature. 3. Accounting by the Lessor The following accounting treatment is provided under IAS 17 for the recognition of the leased assets by the lessor: There are three major recognition criteria should be used by the lessor in respect of accounting for lease. The criteria are highlighted as under: Finance lease should be recorded by the lessor in the balance as a receivable. The amount of the receivable should be approximately equal to the net investment made in the lease by the lessor. For finance lease, the income earned from the leased asset by the lessor should be presented as a constant rate of return of the outstanding amount of the lease by lessor. For the case of operating lease, those leased assets should be recognized in the balance sheet according to the nature of the leased asset. The income earned in respect of the operating lease should be recognized on straight line basis over the lea se term of the leased asset or on the basis of any other suitable and systematic criteria. 4. Accounting by the Lessee The following accounting treatment is provided under IAS 17 for the recognition of the leased assets by the lessor: In respect of the finance lease, the