IAS 17 LEASES

IAS 17 – LEASES

Finance lease – a finance lease should be recognized as an asset and a liability.
It is a lease that transfers substantially all risk and rewards incident to ownership of an asset. Title may or may not eventually be transferred.
Finance lease gives rise to a depreciation expense. The depreciation policy should be consistent with equivalent owned assets.
At the inception of the lease, the sum to be recorded should be the fair value of the leased property, or of lower, at the PV of the minimum lease payments. The latter is derived by discounting them at the interest rate implicit in the lease.

Operating lease should be expensed in the income statement on a straight line basis over the lease term (or other systematic basis based on the pattern of benefits consumed)


Matters

• Basis of setting the discount rate used to calculate the NPV, if there is no rate implicit in the lease.

• Materiality of PV of lease value relative to total assets.

• Terms of the lease eg. Option to renew, whether the title could under any circumstances eventually be transferred.

• The extend to which risk & rewards are born, eg responsibility to pay business rates, office maintenance, repairs, insurance. Also the right to sublet office space without the lessors consent.

• Reason management wish to capitalize the lease if its and operating lease or vice versa

• The type of lease to be determined will depend on its economic substance rather than its legal form.

Evidence

• Existence and who is using the asset

• Contract setting out the lease terms – to establish its legal form and interpret its economic substance.

• Nature and amount of expenditure incurred in relation to the lease, agreed to invoices, management charges etc.( to gauge the extend of risk & rewards of ownership)

• Recalculation of PV of lease payments (should be as at inception of the lease)

• Recalculate the pre-tax cost of capital of the discount rate used. (If there is no rate implicit in the lease)

• Agree the amortization charge for the year to the income statement.

• Agree completeness & disclosure of minimum lease payments.

If after examining the evidence it appears that the lease should have been treated differently, the auditor’s opinion should be qualified “except for” for non-compliance with IAS 17