Carrying amount versus tax base Calculate the temporary difference
Chapter 16 LEASES
1 Business Context Businesses may obtain financing from a number of different sources. Such financing arrangements may vary significantly in nature, from a simple bank overdraft to a complex sale and leaseback transaction. Leases can be a major source of finance to a business and it is therefore important that the financial statements provide sufficient information for users to be able to understand fully the substance of such transactions. The accounting treatment for leases has caused much debate among national standard setters, with important issues such as gearing and financing arrangements that are not recognised in the financial statements i.e. ‘hidden’ at the centre of the debate. IAS 17 Leases sets out the treatment for reporting lease transactions in the financial statements and provides a framework for investors to understand how an entity deals with the financing it accesses in the form of leases. The debate on the accounting for lease transactions is continuing, with the IASB currently working with the US standard setter, the Financial Accounting Standards Board FASB, on the topic.. The outcome of the project is expected to result in a fundamental change in the treatment of leases. No timescales are currently available for publication of a new standard as the project is at an early stage. 2 Chapter Objectives On completion of this chapter you should be able to: explain how the concept of substance over form relates to the treatment of leases; identify and justify whether a lease should be treated as an operating or a finance lease; understand the difference between the accounting requirements for a lessee and a lessor; calculate the amounts to be included in profit or loss and the statement of financial position of lessees and lessors for each type of lease; and describe the relevant disclosures for both types of leases. Chapter 16 – Leases Page 202 3 Objectives, Scope and Definitions of IAS 17 IAS 17 sets out the appropriate accounting treatment and disclosures for lease transactions in the financial statements of an entity; it should be applied in accounting for all lease transactions except those that are specifically identified below. IAS 17 sets out the accounting requirements for both lessees and lessors. IAS 17 does not apply to: [IAS 17.2] lease agreements set up for the exploration or use of minerals, oil, natural gas and similar non-regenerative resources; and licensing agreements that are entered into for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights. In addition, the measurement basis of IAS 17 does not apply to items which, due to their unique nature, are specifically addressed in other international standards. Examples include: properties that are recognised as investment properties in accordance with IAS 40 Investment property; and biological assets that are held by a lessee under finance lease arrangements or provided by a lessor under an operating lease and accounted for in accordance with IAS 41 Agriculture. A ‘lease’ is a transaction between two parties, a lessor and a lessee, whereby the right to use an asset is transferred to the lessee in return for a defined series of payments to the lessor. IAS 17 applies even if under the terms of the lease the lessor provides substantial services in connection with the operation or maintenance of the asset. An example of such a service would be the provision of ongoing security arrangements for the asset. [IAS 17.3, 17.4] IAS 17 identifies two types of lease transaction: [IAS 17.4] a finance lease which “is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred”; and an operating lease which is “a lease other than a finance lease”.Parts
» The International Accounting Standards Committee IASC
» The International Organisation of Securities Commissions IOSCO
» The Financial Accounting Standards Board FASB
» The Committee of European Securities Regulators CESR
» The IASB FINANCIAL REPORTING CONTEXT
» The Standards Advisory Council SAC
» The International Financial Reporting Interpretations Committee IFRIC
» The standard-setting process THE IFRS FRAMEWORK
» Preface to International Financial Reporting Standards
» Definition THE IFRS FRAMEWORK
» Financial statements THE IFRS FRAMEWORK
» Economic decisions Users and their information needs
» Accountability of management THE IFRS FRAMEWORK
» Financial position, performance and changes in financial position
» Underlying assumptions THE IFRS FRAMEWORK
» Understandability Qualitative characteristics of financial statements
» Relevance Qualitative characteristics of financial statements
» Reliability Qualitative characteristics of financial statements
» Definitions of elements Elements of financial statements
» Recognition of elements in financial statements Measurement in financial statements
» The statement of financial position
» The statement of comprehensive income
» Currentnon-current distinction PRESENTATION OF FINANCIAL STATEMENTS
» Notes PRESENTATION OF FINANCIAL STATEMENTS
» Fair presentation and compliance with IFRS
» Comparative information Other considerations
» Additional disclosures Other considerations
» ACCOUNTING POLICIES IFRSs) Learning Materials
» Servicing fees included in the price of the product
» Cost of inventories INVENTORIES
» Cost formulae Net realisable value NRV
» Initial recognition and elements of cost
» Self-constructed assets PROPERTY, PLANT AND EQUIPMENT
» Ceasing recognition of costs
» Subsequent expenditure PROPERTY, PLANT AND EQUIPMENT
» Depreciation and revalued assets
» Which costs should be capitalised?
» When should capitalisation of borrowing costs commence?
» Suspension of capitalisation BORROWING COSTS
» Ceasing capitalisation BORROWING COSTS
» Non-monetary government grants GOVERNMENT GRANTS
» Repayment of government grants
» No specific relation to operating activities
» Proposed revision of standard
» Changes of plan NON-CURRENT ASSETS HELD FOR SALE
» Nature of investment properties Scope
» Initial recognition INVESTMENT PROPERTY
» Measurement after recognition INVESTMENT PROPERTY
» Applicable to both the fair value model and the cost model
» The cost model INVESTMENT PROPERTY
» Separately acquired intangible assets
» Exchanges of assets INTANGIBLES
» Intangible assets acquired as part of a business combination
» The research phase INTANGIBLES
» The development phase INTANGIBLES
» The cost of internally generated intangible assets
» Stage 1 – Indicators of impairment
» Stage 2 – Measuring recoverable amount
» Stage 3 – Recognising an impairment loss
» Future operating losses Provisions
» Contingent liabilities and contingent assets
» Best estimate PROVISIONS AND CONTINGENCIES
» Present value PROVISIONS AND CONTINGENCIES
» Other measurement points PROVISIONS AND CONTINGENCIES
» Reimbursements PROVISIONS AND CONTINGENCIES
» Decommissioning, restoration and environmental funds
» Waste management costs PROVISIONS AND CONTINGENCIES
» Carrying amount versus tax base Calculate the temporary difference
» Determining deferred tax TAXATION
» Revaluations Recognition criteria: further issues
» The expected manner of recovery of an asset
» Annual review Recognition criteria: further issues
» Discounting Recognition criteria: further issues
» Temporary differences and investments
» Other related disclosures TAXATION
» Risks and rewards Situations indicating the existence of a finance lease
» Initial recognition Finance lease recognition
» Depreciation Finance charge Finance lease recognition
» Actuarial method Methods of allocating finance charges
» Disclosures for finance leases
» Operating lease incentives Accounting treatment of operating leases
» Disclosures for operating leases
» Disclosure by a lessor for finance lease arrangements
» Disclosure by a lessor for operating lease arrangements
» Operating lease incentives Operating leases
» An overview All short-term benefits
» Short-term compensated absences Profit-sharing and bonus plans
» Recognition and measurement Disclosure
» The discount rate Movements during the period
» Variations in actuarial assumptions
» Past service costs Sundry considerations
» Curtailments and settlements Sundry considerations
» Minimum funding requirements and the limit on a defined benefit asset
» Disclosure and presentation of defined benefit plans
» Share-based payment transactions – cash-settled or equity-settled
» Group and treasury share transactions
» Objectives, scope and definitions of IFRS 2 Disclosure requirements
» EVENTS AFTER THE REPORTING PERIOD
» The functional currency FOREIGN EXCHANGE
» The presentation currency FOREIGN EXCHANGE
» Monetary and non-monetary items
» Summary of the approach of IAS 21
» Initial recognition FOREIGN EXCHANGE
» Reporting at the ends of subsequent reporting periods
» Transactions settled within the period
» Transaction balance is outstanding at the end of the reporting period
» Net Investment in a Foreign Operation
» Change in Functional Currency
» Translation of a foreign operation
» Disposal of a foreign operation
» Settlement options FOREIGN EXCHANGE
» Compound financial instruments FOREIGN EXCHANGE
» Financial assetliability at fair value through profit or loss
» Held-to-maturity investments Loans and receivables
» Available-for-sale financial assets Financial assets
» IFRIC 2 Members’ shares in co-operative entities and similar instruments
» Derecognition in its entirety Continuing involvement after a transfer
» Financial liabilities FOREIGN EXCHANGE
» Qualifying for hedge accounting
» Fair value hedge Cash flow hedge
» Hedge of a net investment in a foreign operation
» Objectives and Scope of IFRS 7
» Fair value Other disclosures
» Statement of comprehensive income Nature and extent of risks
» Objective and scope What is cash?
» The direct method FOREIGN EXCHANGE
» Indirect method FOREIGN EXCHANGE
» Non-cash transactions FOREIGN EXCHANGE
» Additional disclosures FOREIGN EXCHANGE
» Identifying segments FOREIGN EXCHANGE
» Reportable segments FOREIGN EXCHANGE
» Reporting formats FOREIGN EXCHANGE
» Discontinued operations Disclosure Prior periods
» Contents Form FOREIGN EXCHANGE
» Selected explanatory notes FOREIGN EXCHANGE
» Impairment in the interim period
» Calculating earnings FOREIGN EXCHANGE
» Calculating the weighted average number of ordinary shares
» Calculation of earnings Calculation of the weighted average number of shares
» Related parties FOREIGN EXCHANGE
» Contract revenue FOREIGN EXCHANGE
» Contract costs FOREIGN EXCHANGE
» Stage of completion FOREIGN EXCHANGE
» Reliable measurement FOREIGN EXCHANGE
» Loss making contracts FOREIGN EXCHANGE
» Key Concepts FOREIGN EXCHANGE
» Valuation of assets Disclosure
» What is an insurance contract?
» Scope of consolidated financial statements
» Special purpose entities FOREIGN EXCHANGE
» Basic approach FOREIGN EXCHANGE
» Reporting dates and consistent accounting policies
» The statement of financial position The statement of comprehensive income
» Gain or loss on net monetary position
» Introduction Statement of cash flows
» Initial application of IAS 29
» Identifying a business combination
» Acquisition method of accounting
» General principle FOREIGN EXCHANGE
» Specific issues FOREIGN EXCHANGE
» A business combination achieved in stages
» Subsequent accounting for contingent consideration
» Classifying and measuring the identifiable net assets acquired
» Initial recognition and subsequent adjustments
» Subsequent measurement FOREIGN EXCHANGE
» Recognition and measurement of goodwill
» Gain on bargain purchase Adjustments to provisional values
» Impairment losses FOREIGN EXCHANGE
» Jointly controlled operations FOREIGN EXCHANGE
» Proportionate consolidation Equity method
» Jointly controlled assets Investors separate financial statements
» Transactions between a venturer and a joint venture
» Operators of joint ventures Investors of a joint venture
Show more