Carrying amount versus tax base Calculate the temporary difference

Chapter 16 – Leases Page 201

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”.