Exposure Draft 2010 and Its Affects on Lease Accounting
Existing lease accounting standards require lessees to classify their lease contracts as either finance or operating leases. If a lease is classified as a finance lease, assets (and liabilities) are recognized in its statement of financial position. For an operating lease, the lessee simply recognizes lease payments as an expense over the lease term. This split into finance and operating leases has given rise to a number of problems.
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) has recently issued a combined exposure draft on Leases (ED 2010/09) resulting in a converged standard, in an attempt to rectify the weaknesses in the current standard. Significantly impacting how lessees and lessors account for and report leasing transactions in their financial statements.
Australian Accounting Standards Board (AASB) 117 Leases incorporates IAS 17 Leases as issued and amended by the IASB. Entities that comply with AASB 117 as amended will simultaneously be in compliance with IAS 17 as amended, with the exception of entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements.[1]
Paragraph 4 of AASB 117 defines a lease as:
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.
At the inception of the lease, the lease is classified either as an operating or finance lease; as required by paragraph 8 of AASB 117, with the lease classification depending on the substance of the transaction rather than the form of the contract. The key criterion of the finance lease is the transfer of substantially all risks and rewards without the transfer of ownership. The Standard provides examples and indicators of situations that individually or in combination would normally lead to a lease being classified as a finance lease.[2]
Under
The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) has recently issued a combined exposure draft on Leases (ED 2010/09) resulting in a converged standard, in an attempt to rectify the weaknesses in the current standard. Significantly impacting how lessees and lessors account for and report leasing transactions in their financial statements.
Australian Accounting Standards Board (AASB) 117 Leases incorporates IAS 17 Leases as issued and amended by the IASB. Entities that comply with AASB 117 as amended will simultaneously be in compliance with IAS 17 as amended, with the exception of entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements.[1]
Paragraph 4 of AASB 117 defines a lease as:
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.
At the inception of the lease, the lease is classified either as an operating or finance lease; as required by paragraph 8 of AASB 117, with the lease classification depending on the substance of the transaction rather than the form of the contract. The key criterion of the finance lease is the transfer of substantially all risks and rewards without the transfer of ownership. The Standard provides examples and indicators of situations that individually or in combination would normally lead to a lease being classified as a finance lease.[2]
Under
Bibliography: Boatsman, J., and X. Dong. 2011. Equity Value Implications of Lease Accounting. Accounting Horizons 25, no. 1, (March 1): 1-16. Deloitte Survey: Only Seven Percent of Companies are Well Prepared to Comply with New Lease Accounting Standards. 2011. The Pak Banker, February 20, http://www.proquest.com/ (accessed April 6, 2011). KPMG IFRG Limited, 2010. New on Horizon: Leases. UK. Lindorff, D. 2011. Governance & Accounting: Leases on the Books?. Treasury & Risk, 16. [6] KPMG IFRG Limited, 2010. New on Horizon: Leases. UK.