Problems with Ias17

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Existing lease accounting standards require lessees to classify their lease contracts as either finance (capital)* leases or operating leases. Finance leases are defined as those leases that transfer to the lessee substantially all the risks and rewards incidental to ownership of the leased asset. All other leases are operating leases.

Leases classified as finance leases are treated as similar to a purchase of the underlying asset. Consequently, the lessee recognizes in its statement of financial position the leased item and an obligation to pay rentals. The lessee depreciates the leased item and apportions lease payments between a finance charge and a reduction of the outstanding liability. No similar assets or liabilities are recognized by the lessee when the lease is classified as an operating lease. The lessee recognizes lease payments under an operating lease as an expense, normally on a straight-line basis over the lease term.

Under IAS 17 Leases lessors are required to classify leases as finance leases or operating leases. Finance leases are defined as leases that transfer substantially all the risks and rewards incidental to ownership. All other leases are operating leases.

If the lease is classified as a finance lease, the lessor derecognizes the leased asset and recognizes a receivable for an amount equal to the net investment in the lease. The net investment in the lease is equal to the present value of the minimum lease payments and the present value of any unguaranteed residual value. Finance income is recognized on the basis of a pattern reflecting a constant periodic rate of return on the net investment in the finance lease. Manufacturer or dealer lessors recognize selling profit or loss on finance leases in the same way as for outright sales. If the lease is classified as an operating lease, the lessor continues to recognize the leased asset and presents it in the statement of financial position according to the nature of the asset. The...
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