IAS 17 Leases – Summary with Examples – PDF

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Summary provided by MaterialAccounting.com: This article provides an overview of IAS 17 leases with examples.

IAS 17 Leases Overview

IAS 17 full text prescribe, for lessees and lessors, the appropriate accounting policies and IAS 17 disclosures to apply in relation to finance and operating leases.

Understanding IAS 17 Leases

Key IAS 17 Leases Definition

Inception date of lease: The earlier of lease agreement and the date of commitment by the parties. The type of lease is identified at the date of inception.
Interest rate implicit in lease: That makes present value of lease payment and UN-guaranteed value equal to fair value and ( any ) initial direct costs of lessor.
Economic and Useful life:

- Economic life is the total life of an asset excepted to be economically usable by one or more users.
- Useful life is the Period over which an asset is expected to be available for use by an entity.
Residual Value: this may be Guaranteed or UN-guaranteed ;

- Guaranteed: A guarantee made to a lessor by a party unrelated to lessor that the value of an asset at the end of lease will be at least a specified amount.
- UN-Guaranteed: is that portion of residual value of asset, the realization of which is not assured by a party related to the lessor.
Lease Receipts and Payments: The term lease Payments refer to the payments that a lessee expects to make over a lease term or the Receipts that a lessor expects over the economic life of the asset. Payment by a lessee to lessor during a lease term may comprises of ;
- fixed payments (less) any lease incentives.
- variable lease payments.
- purchase option price.
- payment of penalties for terminating the lease.
Lease Classification:

- Finance lease where it transfers substantially all the risks and rewards incidental to ownership.
- Operating lease where it does not transfers substantially all the risk and rewards incidental to ownership.

The following IAS 17 guide explains the IAS 17 standard with IAS 17 journal entries.

Accounting for IAS 17 Finance Lease

In Finance Lease substantially all the risks and rewards of ownership are transferred to Lessee by Lessor.
Records assets and liabilities in financial statements (at LOWERof; Fair value and Present value) of Lease payments;

Asset Debit
Finance Lease Credit

Charge Initial direct costs to Asset.

Subsequent Measurement:

Apportion lease payments; as finance charge and reduction in liability;

Finance charge Debit
Finance lease Debit
Cash/Bank Credit

Depreciate the Asset.

Dep. Expense Debit
Acc. depreciation Credit

In finance lease the lessor does not record the leased asset in its financial statements ,as its has transferred the risks and reward. Instead, he records the amount as Receivable.
Receivable is described as :

- Net investment(N.I) = Present valve of Gross investment or;
- Net investment (N.I) = Fair value + Initial direct cost.

Subsequent Measurement:

Record payments received during the year by making;

Cash/Bank Debit
Net Investment Credit

Record finance income, adding a period return to the N.I and other side as income in P/L:

Net Investment Debit
Finance Income Credit

Accounting for IAS 17 Operating Lease

The lessee does not records the leased asset in its financial statements.
Instead, Lessee records the Rental Payments as EXPENSE on straight line basis over the lease term.

The lessor records the leased asset in its financial statement, as he has not transferred the risk and reward of ownership.
At commencement the lessor adds initial direct costs incurred by lessor.

Subsequent measurement:

Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
Account for any impairment loss.
Records Rental Income on a straight-line basis over lease term.

Accounting for Manufacturer Dealer LESSOR

A manufacturer or dealer often offers to customers to the choice of either buying or leasing an asset.
As these are Lessors, therefore lessors accounting treatment are applied.

A finance lease gives rise to two types of income:

Profit or loss (difference between sales and cost)
Finance income.

Initial Measurement

Record Sales as:

Lease receivable Debit
Sales Credit (lower of fair value or Present of Lease payments)

Record cost of Sales:
Cost Debit
Inventory (Asset) Credit
Transfer Present value of UN-Guaranteed value of Net Investment:

Lease Receivable Debit
Inventory (Asset) Credit

Expense-out initial direct costs:

Income Statement Debit
Cash/Bank Credit

Record finance income subsequently

Does not Record Sales.
Record Asset:

Asset Debit
Inventory Credit

Record depreciation
Record impairment
Record Rental income

Sale and Lease Back (Finance Lease)

Sale of Asset

Remove the asset from Financial Statements.
Defer and amortize any Surplus/Gain over lease term.
If loss , then immediately recognize.

Lease back of Asset

Recognize asset under finance lease.
Create an obligation under finance lease.
Depreciate Asset and amortize liability subsequently.

Purchase of Asset

Does not records the asset.
As the asset is not transferred physically nor risk and reward are.

Leased the Asset

Record Lessee as Receivable.
Record Lease receipts during the period.
Record Finance Income.

Sale and Lease Back (Operating Lease)

Sale of Asset

Remove asset from financial statements.
Record Gain/Loss, where;

1. sale at fair value: gain/loss is recognized immediately on disposal.
2. sale at less than fair value: gain/loss is recognized immediately on disposal (if lease payments are not compensated at below market price). If NOT so,any loss is deferred over expected use of asset.
3. sale at more than fair value:

- normal gain/loss (Fair value – carrying amount) is recognized immediately.
- excess profit (actual sale – fair value) is deferred and amortized over expected use of asset.

Lease Back of Asset

Record normal Rental payments as Expense.

Purchase of Asset

The lessor records the leased asset in its financial statement.

Subsequent measurement:

Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
Account for any impairment loss.

Lease Back of Asset

At commencement the lessor add initial direct costs incurred by lessor.
Records Rental Income on a straight-line basis over lease term.

IAS 17 pdf (IAS 17 download)

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