IAS 17 : Introduction

Introduction

 

Aim

The aim of this workbook is to assist the individual in understanding the IFRS accounting treatment and disclosures of Leases, as detailed in IAS 17.

Background

Leases involve the owner of an asset renting it to others for payment. Short-term rental agreements are mostly accounted for as ‘operating leases’, in the same way as rental payments are booked.

Long-term rentals (‘finance leases’) have seen dramatic growth over the last 50 years.

The user of the rented asset can benefit from paying by instalments, rather than an initial capital outlay. Some tax benefits have been realised by leasing, in various countries.

The major concern of the IASB has been the distortion created by leasing in financial statements. Previously, balance sheets recorded neither the asset being used, nor the full lease liabilities. Rather than taking out a loan, and purchasing an asset, firms were offered ‘off-balance-sheet’ financing, in the form of leasing.

IAS 17 addresses this issue by accounting for finance (longer-term) leases in a similar manner to the purchase of an asset, matched by a collateralised loan for the same amount. The asset appears on the lessee’s balance sheet, even though the lessee does not own it.

A form of leasing is the sale and leaseback. Here, the lessee owns an asset that it does not wish to lose. However, the lessee wishes to raise cash.

The lessee sells the asset to the lessor, who then leases it back to the lessee. The lessee has given up ownership of the asset, and must pay rent (in the form of lease payments) in return for the money received from the lessor.

For the period of the lease, in economic terms, it is the same as having a loan, secured on an asset. At the end of the period of the lease, the lessee either extends the lease, buys back the asset from the lessor, or relinquishes the asset.

Since 2006, IFRIC 4, Determining whether an Arrangement contains a Lease, has been effective. This IASB interpretation states that IAS 17 should be used more widely than many had believed where specific assets are under the control (though not directly owned) by a bank or company. Outsourcing arrangements need to be reviewed with this interpretation.