It’s easy to take advantage of leases and avoid debt on your books but have the benefits of the asset.
Comparable information is essential, so leases need to be comparable.
Don’t worry dear, it’s a lease. No liability but all the benefits. You’ve just got to know how to work the system.
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. ( 17.4 ) Operating Lease Finance/Capital Lease OR
Finance Leases : Transferring control of an asset to the lessee, to the extent that the lessee benefits from it in a financial way very close in value to its fair value. That is, the total amount paid to the holder of the asset closely approximates the assets actual value.
Transfer of substantial risk and rewards associated with the asset to lessee. *IAS 17 also covers leases that still require substantial services from the lessor in connection with the asset, as long as the asset is used by the lessee and meets any of the classification criteria.
Lessee capitalizes the asset, Lessor records it as a finance sale. (effectively removing it from the Lessor’s books)
IFRS & US GAAP criteria IFRS US GAAP Ownership transferred to lessee by end of period Included (same) Bargain purchase option Included (same) Lease term covers major part of assets economic life Included (different) Present value of min. lease payments vs. fair value Included (different) Asset is only usable by Lessee
IFRS US GAAP Lease transfer ownership to the lessee by the end of the lease term Lease transfer ownership to the lessee by the end of the lease term Lessee has an option of buying the asset at price less then fair market Lessee has an option of buying the asset at price less then fair market
IFRS US GAAP The lease term is for the major part of the lease asset’s economic life Major part is specifically determined to be 75% The present value of minimum lease payments at the inception of the lease is equal to substantially all the fair value of the leased asset Substantially all is specifically defined as 90% Land and building should be divided into separate components, with separate classification and accounting Land and building generally accounted as a single unit, unless if land represents 25% or more of total fair value of leased property
Depreciation calculated along lines of other PPE depreciation (and in line with IAS 16) If no guarantee asset will be owned by lessee by the end, then depreciation is the lesser of useful life or the lease term. (7-27)
Key facts A government department’s agency (lessee) leases a car from a car rental company (lessor) for 5 years. It is assumed that the residual value is going to be £2,000 at the end of the lease term. The interest rate applied is 3.5% and other details are as follows: Cost of the car 20,000.00£ Annual Payment 3,200.00£ Expected Residual value on disposal 2,000.00£ Economic life7 yearsCommencement Date 1 April 2008lessee's financial year end31 March Cost of the Car Annual Payment 3200£ Expected Residual Value 2,000£ Economic Life 7 yrs Commencement Date 1 April 2008