IAS 17 provides guidance on accounting for leases. Key aspects include classifying leases as either finance or operating based on transfer of risks and rewards of ownership. Lessees account for finance and operating leases differently, with finance leases requiring recognition of leased assets and liabilities on the balance sheet. Lessors also account for finance and operating leases differently, with finance leases requiring recognition of a net investment receivable that is amortized over the lease term to achieve a constant rate of return. Sale and leaseback transactions are also addressed.

1. IAS 17
LEASES

2. OBJECTIVE

3. DO NOT APPLY AS BASIS OF
DO NOT APPLY IAS17 TO:
MEASUREMENT FOR:
SCOPE

4. DEFINITIONS
Types of Leases

5. DEFINITIONS
Lease Terms

6. DEFINITIONS
Lease Value

7. DEFINITIONS
Residual Value

8. DEFINITIONS
Other
 Interest rate implicit in the lease:
◦ PV of Minimum lease payment + unguaranteed residual value = fair value of
asset + initial direct costs of lessor
◦ or COST of asset x implicit interest rate x period of lease = income from
lease to the lessor
 Gross investment in the lease:
◦ minimum lease payments receivable + unguaranteed residual value accruing to
lessor (Income to lessor or total cost to lessee)
 Net investment in the lease:
◦ gross investment discounted at interest rate implicit in the lease (NPV of the
lease, likely to be the same as the fair value of the asset)
 Unearned finance income:
◦ gross investment – net investment

9. DEFINITIONS
Other
 Lessee’s incremental borrowing rate of interest:
◦ interest rate of comparable loan with same initial advance and
terms of repayment
 Initial direct costs:
◦ directly attributable to negotiating and arranging the lease,
◦ except for manufacturers or dealers of leased assets
 Contingent rent:
◦ lease payments linked to variable factors e.g. % of sales
◦ I.e. not fixed amounts

10. CLASSIFICATION OF LEASES

11. EXAMPLE
The same lease can have different classification in
books of lessor and lessee

12. Finance Lease Operating lease
 Transfer ownership of asset  Transfer of ownership
at end of lease requires payment @
 Option to buy asset < Market Market Value at end of
Value at end of lease lease
 Lease term = majority of
economic life of asset  Contingent rent leaves
 PV of minimum lease risks and rewards with
payments = FV of asset lessor
 Specialised asset (not  Losses on cancellation
transferrable) borne by lessor
 Continuation clause @ <  FV movement in residual
Market Value
value retained by lessor
SUBSTANCE OVER FORM

13. CLASSIFICATION OF
LEASES
Changes in Lease Terms
 If terms change during lease, treat as new
agreement and reassess classification as
operating or finance lease for the rest of the
lease term
 No reclassification for
◦ Changes in estimates
◦ Changes in circumstances

14. CLASSIFICATION OF
LEASES
Land and Buildings

15. CLASSIFICATION OF
LEASES
Minimum Lease Payments
 Allocate minimum lease payments to Fair
Value of separate land and buildings at
inception of the lease
 If allocation not reliable, treat entire lease as
either operating or finance
 If land immaterial, use only economic life of
building

16. CLASSIFICATION OF
LEASES
Investment Property IAS 40
 Separate allocation of minimum lease payments to FV
of land and buildings not required for Investment
Property
 Operating lease can be classified as investment
property (IAS 40)
◦ Carry asset at Fair Value
◦ Calculate interest based on classification as finance lease
◦ Continue to treat as finance lease if asset no longer
classified as investment property (e.g. if asset taken over
or sublet)

17. LEASES IN THE FS OF
LESSEES
Finance Leases: Initial recognition
 To ensure that obligations are not understated distorting financial ratios:
 State asset and liability at Fair Value in Balance Sheet
◦ FV = lower of
 FV of leased asset
 Present Value of minimum lease payments
 At inception of the lease
◦ Discount rate of PV =
 Interest rate implicit in the lease
 If not practicable, incremental borrowing rate
 Increase Asset cost with initial direct costs of the lessee
◦ Costs to negotiate and secure the lease
 Split current and non-current liabilities on the face of the balance sheet

18. Subsequent Measurement Disclosures
 Lease payments reduce remaining  IFRS 7 Financial Instruments
liability  IAS 16, IAS 36, IAS 38, IAS 40, IAS 41
 Asset carrying amount at BS date
 Allocate lease payments to finance
charge and outstanding liability  Reconciliation of total minimum lease payments in
future and their PV
◦ Expense finance charge  Contingent rent expense
◦ May use approximations  Minimum non-cancellable sublease payments receivable
 Expense contingent rent as incurred  Terms
 Depreciation charge on same basis as ◦ Contingent rent
owned assets ◦ Purchase & renewal options
◦ Escalation clauses
◦ Depreciate over shorter of Lease Term and
UEL of asset ◦ Restrictions
 As depreciation not = finance charge,  Total future minimum lease payments and PV for
liability not = asset ◦ < 1 year
◦ 2 – 5 years
 Apply IAS 36 Impairment to leased
assets ◦ > 5 years
LEASES IN THE FS OF LESEES
FINANCE LEASES

19. FINANCIAL
STATEMENTS OF
LESSEES
Operating Lease

20. FS OF LESSEE’S
Operating Lease: Disclosures

21. LEASES IN FS OF
LESSORS
Finance Lease: Initial recognition

22. LEASES IN FS OF LESSORS
Finance Leases: Subsequent measurement
 Finance Income  Review unguaranteed
◦ Constant periodic rate of residual values used to
return on net investment calculate gross
in lease investment regularly
◦ Systematic and rational  Revise income allocation
basis
over lease term
◦ Constant return on
investment  Recognise reduction in
 Lease Payments amounts accrued
◦ Reduce gross investment immediately
by principal and unearned  Classify asset as held for
future income sale (IFRS 5)

23. LEASES IN FS OF LESSORS
Finance Leases: Subsequent measurement
 Manufacturere & Dealer Lessors:
◦ Recognise selling profit/loss in period of
inception of lease
◦ Use policy for normal sales
◦ Restrict profit to that achievable under
market rate of interest
◦ Expense negotiation & arrangement costs
when selling profit recognised

24. Sale proceeds less discounts Finance income
LEASES IN FS OF LESSORS
FINANCE LEASE: LESSOR INCOME

25. Sale proceeds less discounts Finance income
 Sale proceeds are lower of:  Artificially low rates
◦ Present Value of minimum lease sometimes used to attract
payments @ market rate of customers
interest  Results in excessive profits at
◦ Fair value of leased asset time of sale
 Cost of sales  Standard requires use of
market rate to calculate profit
◦ Cost of leased asset
 Arrangement costs relate to
◦ Present value of unguaranteed
residual value
selling profit and are
recognised at the time of sale
 Sale – COS = selling profit
◦ Recognise as outright sale
LEASES IN FS OF LESSORS
FINANCE LEASE: LESSOR
INCOME

26. LEASES IN FS OF LESSORS
FINANCE LEASE: Disclosures
 IFRS 7
 Reconciliation between gross investment in lease and PV of minimum lease
payments receivable at the balance sheet date
 Gross investment in lease and present value of minimum payments
◦ <1 year
◦ 2-5 years
◦ > 5 years
 Unearned finance income
 Unguaranteed residual values accrued to lessor
 Allowance for uncollectible minimum lease payments receivable
 Contingent rent income
 Material leasing arrangements
 Useful disclosures
◦ Gross investment – unearned income of new business in period – cancelled leases
◦ Indicates growth

27. LEASES IN FS OF LESSORS
Operating leases

28. Operating leases in FS of Lessors:
Disclosures
 Non-cancellable minimum lease payments
◦ < 1year
◦ 2-5 years
◦ > 5 years
 Contingent rent income in the year
 Lease arrangements
 IAS 16
 IAS 36
 IAS 38
 IAS 40
 IAS 41

29. Finance Lease Operating lease
 Sale proceeds – CA =  If at Fair Value
◦ Recognise profit immediately
deferred income ◦ Treat as normal sale
 Amortise over lease term  If < Fair Value
◦ If lease payments < MV compensate loss,
 Finance secured over asset defer and amortise over UEL
◦ If lease payments @ MV, recognise
profit/loss immediately
 If > Fair Value
◦ Excess deferred and amortised over UEL
 If Fair Value < carrying amount of
asset, recognise loss immediately
 Normal disclosures + special terms
 IAS 1 separate disclosures
Sale and leaseback: Sell asset and
lease it back to raise finance

30. IAS 17 Transitional Provisions

31. SUMMARY
 Accounting treatment differs for lessors
and lessees
 Classification as finance/operating lease
depends on transfer of risks and rewards
of ownership
◦ Classify economic substance over legal form
of agreement
 Land classified separately from buildings
as UEL infinite

32. SUMMARY
 Lessees expense payments under
operating leases as they become payable
 Lessees show finance leases as assets and
liabilities @ fair value
◦ Spread finance charges over lease term
◦ Spread depreciation over UEL of asset

33. SUMMARY
 Lessors show operating leases as assets
◦ Spread income over lease term
 Lessors show finance lease as net
investment receivable
◦ Spread finance income at constant rate of return
◦ Recognise selling profit as a normal sale
 Sale and leaseback treated in relation to
market value of the asset sold and leased
back