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IAS 17- Leases
Agenda/Contents
• Inception of the lease - the earlier of the date of the lease agreement
and the date of commitment by the parties to the principal provisions
of the lease. As at this date:
- a lease is classified as either an operating or a finance lease
- in the case of a finance lease, the amounts to be recognised at the
commencement of the lease term are determined
• Finance lease - a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not
eventually be transferred
• Operating lease - a lease other than a finance lease
• Minimum lease payments - the payments over the lease term that the
lessee is or can be required to make, excluding contingent rent, costs
for services and taxes to be paid by and reimbursed to the lessor,
together with:
- for a lessee, any amounts guaranteed by the lessee or by a party
related to the lessee
- for a lessor, any residual value guaranteed to the lessor by:
◦ the lessee;
◦ a party related to the lessee; or
◦ a third party unrelated to the lessor that is financially capable of
discharging the obligations under the guarantee
• Interest rate implicit in the lease - the discount rate that, at the
inception of the lease, causes the aggregate present value of:
- the minimum lease payments, and
- the unguaranteed residual value to be equal to the sum of:
◦ the fair value of the leased asset
◦ any initial direct costs of the lessor
• Unearned finance income - the difference between:
- the gross investment in the lease, and
- the net investment in the lease.
If the lessee can cancel the lease, If the lessee can cancel the lease,
the lessor’s losses associated with the lessor’s losses associated with
the cancellation are borne by the the cancellation are borne by the
lessee lessor
• For operating leases, if the fair value at the time of a sale and
leaseback transaction is less than the carrying amount of the asset, a
loss equal to the amount of the difference between the carrying
amount and fair value shall be recognised immediately.
Finance Operating
For each class of asset, the net carrying P O
amount at the end of the reporting period
A reconciliation between the total of future P O
minimum lease payments at the end of the
reporting period, and their present value
The total of future minimum lease payments P P
for each of the following periods:
for non-
• not later than one year cancellable
• later than one year but not later than five leases
years
• later than five years
IAS 17 - Leases July 2017
PwC Slide 37
Disclosures for lessees
Finance vs. Operating leases - continued
Finance Operating
Contingent rents recognised as an expense in P O
the period
Finance Operating
A general description of the lessee’s significant P P
leasing arrangements including, but not
limited to, the following:
• the basis on which contingent rent payable
is determined;
• the existence and terms of renewal or
purchase options and escalation clauses;
and
• restrictions imposed by lease arrangements,
such as those concerning dividends,
additional debt and further leasing
Finance Operating
A reconciliation between the gross investment P O
in the lease at the end of the reporting period,
and the present value of minimum lease
payments receivable at the end of the
reporting period
The gross investment in the lease and the P P
present value of minimum lease payments
receivable at the end of the reporting period, for non-
for each of the following periods: cancellable
leases
- not later than one year;
- later than one year and not later than five
years;
- later than five years
IAS 17 - Leases July 2017
PwC Slide 40
Disclosures for lessors
Finance vs. Operating leases - continued
Finance Operating
Unearned finance income P O
The unguaranteed residual values accruing to P O
the benefit of the lessor
• Initial direct costs are ignored for the purpose of this example
• In this example, the lease is a finance lease because the lessor has
only an insignificant interest in the residual value (3%)
Rental
Present
value
Present
value at • The amounts the lessor expects
payment
€
factor 4.3535%
€ to receive and retain comprise
Lessee's minimum lease payments:
January 2004 12,000 1 12,000
the rentals, plus 3% of the
June 2004
January 2005
12,000
12,000
0.958281
0.918303
11,499
11,020
residual at the end of the lease
June 2005
January 2006
12,000
12,000
0.879992
0.84328
10,560
10,119
term. These amounts can be
June 2006 12,000 0.8081 9,697 used to determine the interest
January 2007 12,000 0.774387 9,293
June 2007 12,000 0.74208 8,905 rate implicit in the lease and the
January 2008 12,000 0.711122 8,533
June 2008 12,000 0.681454 8,177 present value of the lessee’s
minimum lease payments:
99,804
Lessor's residual
December 2008 (€10,000 − €9,700) 300 0.653025 196
Fair value 100,000
• The finance charges for each year and, by deduction, the capital
repayment element of the rental can now be summarised:
Finance
Rental charges
€ €
2004 24,000 7,290
2005 24,000 5,802
2006 24,000 4,184
2007 24,000 2,420
2008 24,000 500
120,000 20,196
• In this example, the lessee’s financial year end coincides with the end
of a rental period and so no interest accrual is necessary.
• Depreciation can now be calculated as follows:
Lease term = 5 years
Economic life = 8 years
• Lessee’s interest in the proceeds of the residual = €9,700
• Therefore, the depreciation charge on a straight line basis is:
(€99,804 - €9,700) / 5 years = €18,021 per annum
• 31 Dec 2004
• 31 Dec 2005
• 31 Dec 2006
• 31 Dec 2007
• 31 Dec 2008
Dr Cash € 9,700
Cr PPE Asset € 9,700
Being net proceeds received upon disposal of the PPE asset (97% X
€10,000)
January 2016:
May 2013: Final standard
Revised
August 2010: exposure draft
March 2009: Exposure draft
July 1996: Discussion paper
G4+1 - Leases:
Implementation of a
new approach
• EU-Endorsement: To be determined
• IFRS 16, ‘Leases’ starts a new era of lease accounting for lessees
• Under the previous guidance in IAS 17, a lessee had to make a
distinction between a finance lease (on balance sheet) and an
operating lease (off balance sheet)
• IFRS 16 requires the lessee to recognise almost all lease contracts on
the balance sheet
- optional exemptions exist for certain short-term leases and leases
of low-value assets
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