Assignment: Discussion of IAS 17 Leases
Student ID: 500284151
Module Organizer: Colin Bradley
Words Count: 1964 words
Date of Submission: 17th April, 2012
Discussion of IAS 17 Leases
Accounting for leasing is always being a hot topic. The standard setters of IAS 17 encountered much controversy when they tried to stop charging all lease payments to the income statement. In this essay, firstly, I will point out the key features of the current IAS 17 with its effect on General Electric Company for illustrative example. Then I will analyst the development of IAS 17 and its underling rationale. Finally, the criticisms of the standard will mainly be discussed, followed by the brief debate of proposed new leasing standard.
Key features with example
IAS 17 aims to prescribe the appropriate accounting treatment and disclosure to apply in leased items such as property, plant and equipment for both lessees (the user) and lessors (the supplier).
First of all, IAS 17 defines a lease as “an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time” (IAS 17) and then the standard classified a lease as finance lease if “a lease that transfer substantially all the risks and rewards incidental to ownership of an asset” (IAS 17). All other leases are distinguished as operating leases. It is the most prominent feature of IAS 17. Clearly, the classification of a lease, ignoring the legal form of arrangement, depends on the substance of the transaction instead, which means it concentrate on the “risks and rewards” linked with ownership rest with either the lessee or the lessor. IAS 17 provides five primary situations in detail as indicators which would normally be viewed as a finance lease. Additionally, the land element and the buildings element should be normally considered separately when distinguishing a lease. The minimum lease payments are allocated between the elements of the lease proportional to their relative fair values at the incipiency of the lease.
Of course, IAS 17 requires different accounting for operating leases and finance leases. In the case of operating leases, as the lessee does not shoulder the risks and rewards of ownership, the annual leases payment are only recognizes on a straight-line basis over the lease term as an expense through the income statement. However, for finance leases, lessees are required to list leased items as an asset in their financial statements along with a related obligation for future payments to the lessor. It means it is not allowed to leave the leased asset and lease obligation out of the balance sheet. Finance leases must be capitalized in the lessee’s accounts.
Take General Electric Company for example.
As a lessee in operating leases, GE recognizes the lease payment as an expense on a straight-line basis over the lease term. Their rental expense under operating leases is shown as following.
Cited from GE Annual report 2011
At December 31, 2011, minimum rental under operating leases for GE and GECS aggregated $2,387 million and$2,119 million, respectively. Amounts payable in the next five years follow.
Cited from GE Annual report 2011
As a lessor in operating leases, it presents these assets in statements of financial position according to the nature of the asset. The depreciation policy for leased assets is consistent with GE’s normal depreciation policy for similar assets. Lease revenue from operating leases is recognised in income on a straight-line basis over the lease term. GECS revenues from equipment leased to others were $11,343 million in 2011 and$11,116 million in 2010.
As IAS 17 requires, under finance leases, GECS recognize assets in balance sheet and present them as financing receivables at an amount equal to the net investment in lease. Its investment in finance...