Accounting Standard AASB117, Leases, was made by the Australian Accounting Standards Board on 15 July 2004 under the section 334 of the Corporations Act 2001. The objective of AASB117 is to prescribe appropriate accounting policies for the lessees and lessors in order to assist entities in classifying leases as operating or finance leases and disclosure to apply in relation to leases. AASB 117 includes economic life, fair value, finance leases, operating leases and also hire purchases contracts which contains a provision giving the firer an option to acquire title to the asset upon the fulfilment of agreed conditions. The substance of the transaction rather than the form of the contract can define a lease whether it is a finance lease or an operation lease. A finance lease transfers substantially all the risks and rewards incidental to ownership but an operating lease does not (2009 pp8, 13-14).
The way that companies in Australia account for leases according to AASB117 leases LESSEES
According to AASB117, to recognise the asset and liabilities at amounts equal to the fair value or the present value of the minimum lease payments at the beginning for a finance lease. To calculate the present value of the minimum lease payments, the discount rate should be the interest rate implicit in the lease. In a finance lease, all the initial direct costs of the lessee are added as an asset. Expense on a straight-line basis could recognise the lease payments of an operating lease (2009 pp17&20).
For lessors, the assets held under a finance leases and present as a receivable and the amount should equal to the net investment in the lease. In an operating lease, the assets are presented based on the nature of the asset. The lease income is recognised on a straight-line basis over the lease term. The initial direct costs should be added to the carrying amount of the leased asset then it should be recognised as an expense over the lease term as the lease income. The minimum lease payments are allocated between the land and the buildings elements to the relative fair values of the leasehold interests in the land element and building element of the lease at the beginning when it is necessary to classify and account for a lease of land and buildings (AASB117 2009 pp21&24).
The way of Qantas Group accounts for and discloses leases
According to the Qantas Group year-end financial report 2011, finance leases are classified as the leased assets are assumed substantially that all the risks and benefits of ownership and they are capitalised. The asset and liability are equal to the present value of the minimum lease payments and guaranteed residual value is recorded at the beginning of the lease. Under sale and leaseback arrangements, the gains and losses arouse are deferred and depreciated over the lease term. Capitalised leased assets are depreciated on a straight-line basis over the period in which benefits are expected to arise from the use of those assets. Lease payments are allocated between the reduction in the principal component of the lease liability and the interest element. The interest element is charged to the Consolidated Income Statement over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the lease liability. Fully prepaid leases are classified in the Consolidated Balance Sheet as hire purchase assets, to recognise that the financing structures impose certain obligations, commitments and restrictions on the Qantas Group (2011 p59). For the operating leases, rental payments under operating leases are charged to the Consolidated Income Statement on a straight-line basis over the term of the lease. Under sale and leaseback arrangements, the gains and losses arouse where the sale price is at fair value are recognised in the Consolidated Income Statement as incurred. When the sale price is below fair value, the gains or losses are immediately recognised in the...
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