Leases - Essay Example

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IAS 17 describes how to account for the leases depending on the type of lease. Under this standard, leases fall into two categories: finance leases and…
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Download file to see previous pages IAS 17 has undergone many revisions in the past to improve its application. However, even with all the amendments and revisions, it still has some issues that cause problems in its application in accounting for leases.
The purpose of IAS 17 is to classify leases and provide the policies to guide how a firm treats leases in its financial statements. The standard has a few exceptions concerning some lease agreements. Some assets are also not part of the standard, therefore, their recognition and treatment do not fall within the standard. For the leases and assets that qualify within the standard, classification divides them into finance and operating leases (IFRS, 2013a, p.771). The determination of the class of a lease as either a finance lease or an operating lease is at the commencement of the lease agreement. IAS 17.4 defines the two classes of leases giving their characteristics. The substance of the transaction, as opposed to the form, determines whether a lease is a finance or operating lease (IFRS, 2013a, p.772). The treatment and accounting for the two classes of leases differs. The lessee recognizes operating leases as an expense. The lease payments appear in the income statement as an expense over the lease term and follow a straight-line basis. The lessor recognizes assets under lease in the balance sheet. The income statement of the lessor recognizes the lease income on a straight-line basis.
As for finance leases, their accounting involves recognition both as an asset and liability in the books of the lessee. The value to appear in the books is either the asset’s fair value or the present value of the minimum lease payments, whichever is lower. The lessee also accounts for the depreciation of the asset in accordance with the existing depreciation policies and apportions lease payments between the reduction of the outstanding liability and the finance charge. On the lessor’s books, the accounting for a ...Download file to see next pagesRead More
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