Discussion of Ias 17 Leases

Advanced Accounting Theory & Practice concession Discussion of IAS 17 requires Huixuan HUANG Student ID 500284151 Module Organizer Colin Bradley Words turn everyplace 1964 words Date of Submission 17th April, 2012 Discussion of IAS 17 Leases opening Accounting for leasing is always being a hot topic. The standardised setters of IAS 17 encountered much controersy when they tried to stop charging all operate giftments to the income statement.In this essay, firstly, I lead point pay away the key induces of the menses IAS 17 with its work on General galvanising Company for illustrative example. Then I will analyst the development of IAS 17 and its at a lower placeling rationale. Finally, the criticisms of the standard will mainly be discussed, followed by the brief debate of proposed newly leasing standard. signalize features with example IAS 17 aims to prescribe the appropriate bill treatment and revelation to apply in plightd items such as property, plant and eq uipment for both lessees (the user) and lessors (the supplier).First of all, IAS 17 delineates a assume as an agreement whereby the lessor conveys to the lessee in drive home for a payment or series of payments the overcompensate to use an plus for an agreed period of time (IAS 17) and then the standard classified a mesh as pay contain if a lease that im occasioning substantially all the risks and rewards incidental to ownership of an summation (IAS 17). All opposite leases be 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 feat instead, which means it concentrate on the risks and rewards linked with ownership rest with each the lessee or the lessor. IAS 17 stomachs five primary situations in detail as indicators which would normally be viewed as a pay lease. Additionally, the land gene and the buildings element should be nor mally considered separately when distinguishing a lease. The minimum lease payments are allocated in the midst of the elements of the lease proportional to their relative fair set at the incipiency of the lease.Of course, IAS 17 requires different explanation for operating leases and finance leases. In the case of operating leases, as the lessee does non shoulder the risks and rewards of ownership, the yearly 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 pecuniary 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 poise piece of paper.Finance leases must be capitalized in the lessees accounts. Take General Electric Company for example. As a lessee in operating leases, GE recognizes the lease paymen t 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 one thousand thousand and$2,119 million, respectively. Amounts payable in the beside five years follow. Cited from GE Annual report 2011As a lessor in operating leases, it presents these assets in statements of monetary position according to the nature of the asset. The derogation policy for leased assets is consistent with GEs normal wear and tear 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 support receivables at an amount equal to the ne t enthronisation in lease.Its investment funds in finance leases includes direct financing and leveraged leases of aircraft, railroad rolling stock, window pane equipment, medical equipment, commercial real estate, commercial equipment and facilities, etc. Net investment in financing leases is following Cited from GE Annual report 2011 check to IAS 17, many another(prenominal) large companied such as GE have to change their operating leases to finance leases. Such a conversion results in change magnitude on both current liabilities and total liabilities.These increases king have remarkable implication for financial epitome. Development of IAS 17 and its underlying rationale The emergence in the leasing industry became massive in 1970s, which means leasing had been a solid economic re outset. However, accompanied with the growth in off balance sheet financing, leasing in popularity led to a problem that companies financial statements were seemed to be belie by the account ing treatment of leasing transaction. Thus, they did not show a accredited and fair view about their business activities by financial reports.Like many other standards, urgent action was require as on that point was no uniformity in treating and disclosing the lease transactions to prevent manipulated accounting subject matter occurring. IAS 17 proved to be very controversial accounting standards. while witnessed the extent of the controversy. Originally, IAS 17 was published in September 1982 by the IASC and rewrite in December 1997. In December 2003, it was revised again and jazzd by the IASB. In April 2009, an amendment about the classification if land leases as a part of the Annual Improvements to IFRSs as made to IAS. Then the revised IAS 17 body effect to now. The ASC in the UK expressed a concern that the standard might lead to undesirable economic consequences by reducing the quantity of leasing and that the lessee impregnables gearing might be affected disadvantage ously by the inclusion of the lease responsibility. Nevertheless, in the event, the commercial reasons for leasing and the capacity of the leasing industry to building lease agreements to circumvent the standard prevented a reduction in lease activity.Evidence of lessors varying the term of the lease agreements to ensure that they remained off balance sheet is supported by Cranfield and by Abdel-Khalik et al. (2008, Elliott, B. and Elliott, J. ) In current IAS 17, the leased items that substantially transferred the risks and reward to the lessee should be reported in the financial statements. The standard requires finance leases to be capitalized. The asset and liability should be brought onto the statement of financial position. Criticisms of IAS 17Unfortunately, in that location are strong criticisms raised in relation to the existing IAS 17S by securities regulators, professional accountants and other interested parties. The main criticisms focus on the misfortune of the exis ting accounting manikin to meet the needs of financial analysis for users of financial statement. Commonly, investors and other users of financial statements believe operating leases produce assets and liabilities so they routinely adjust the recognized amounts to recognize the assets and liabilities so as to correct comment the effect of lease contracts in profit or loss.However, there are deficiencies in the information on leasing accounting in the current IAS 17. It cannot provide a complete picture of a companys leasing activities and is difficult to compare entities each other. Equally importantly, existing IAS 17 could provide opportunities to structure leasing transactions whereby lease contracts can be built in a particular way in order to achieve a particular lease classification and lead to a particular outcome. For instance, a lease contract could be fabricated in such a way that it is not in accord with any bright-line indicators of IAS 17.Consequently, it is classifie d as an operating lease in order to obtain an economic source of unrecognized financing and thereby achieves a particular capital structure. Moreover, the devil different accounting clay sculptures for leases might lead to very different accounting treatment for similar transactions. This also reduces comparability for users of financial statements. Some critics of IAS 17 have pointed out another problem that the existing accounting model is conceptually deficient. IAS 17 only identifies as liabilities obligations due under finance leases, not those under operating leases.Specifically, arriving at a lease contract, the lessee obtains the right to use the leased equipment, which fulfills the boards definition of an asset. Similarly, the obligation of the lessee to pay rentals also meets the definition of a liability. However, the right and obligation are not recognized if we identify the lease as an operating lease. In addition, accounting model for leases growingly differs from o ther contractual arrangements, which gives rise to inconsistent accounting between lease arrangements and similar arrangements that are not defined as lease arrangements.Besides, managers and auditors have complained about complexity of the existing accounting model. Especially, it is difficult to define a distinction line between finance leases and operating leases in theoretical way. As a result, the standards employ bright-line tests and a mixture of inborn judgment, which is hard to implement. Future of IAS 17 delineate ED/2010/09 In work on 2009, a union discussion paper on leases issued by the IASB and the FASB. The target of this project is to correct and improve those deficiencies in IAS 17.On 17 August 2010, the photo draft, Draft ED/2010/09, was published to set out a design for a new IFRS on leases. in that respect are much than 7 hundred comment letters received on it. A re-exposure is judge in the second quarter in 2012. The board plan to issue the new standard after 1 January 2013. The ED would correct the unembellished weaknesses in the current standard and the end would lead to a world-shattering improvement. The distinction between finance leases and operating leases would be eliminated. It would set out new accounting methods on leasing for both lessees and lessors.Within the scope of the proposal, lessees would be no longer permitted to treat leasing as off-balance sheet financing in the right-of-use model but would be reflected as assets and liabilities, regardless of the form structure, if they meet the definitions in the Conceptual Framework. Further more, ED/2010/6 would help to show a more faultless measure of a companys gearing or capital structure and enhance the comparability characteristic of financial reports. However, new issues emerge that need further consideration. For the proposed revenue standards, further clarification is needed on the continuous transfer of control criterion.The proposal might give rise to diver se explanation for certain types of contracts. Secondly, although the lessons accounting in proposal is conceptually sound, the lessors accounting lacks theoretical virtue. Employing a hybrid model is blow to the champion right-of-use model. The performance obligation method recognizes the underlying assets, lease receivables and two income streams, interest income and lease income as well. It is conceptually weak because, in reality, there is only one underlying asset and one income stream from lease payments.Although this approach brings about significant economic benefits, side-effect could also occur when examination impairment of underlying assets and lease receivables. Turning to derecognition approach, although it more closely consists with the single right-of-use model and has more theoretical merits, its new concept of residual asset requires further deliberation. For instance, whether it meets the definition of an asset? If it is so, is it a tangible asset or an intangib le asset? Conclusion Although the current IAS 17 encountered many comments, the joint leases roject is still under development and the explained provisions are not final. There is no doubt that the proposed new leasing standard provides a more accurate representation of the economic transaction in the leasing field. The users of financial statements will constrain better decision with more complete information. But to some extent, it is more onerous than the existing accounting rules so that probably, some small entities tire their progress faced with the increasing complexity rules and investors will have to face by themselves on the implications of this new information.So IAS17 still works. Hopefully, the final standard is expected to be issued later in 2012 and to become effective in late 2013 or early 2014. In short, it cannot be disputed that it is pivotal for anyone to clearly understand the new standard that is keen to interpret financial statements accurately.Reference 1 Billenness, L. (2010), The Future of Lessee Accounting Everything You Wish You Never Had to Know About the in the raw Lease Accounting Standards, EMEA ViewPiont, December 2010 2 Byrnes, N. 2006), You May Be Liable for That Lease FASBs Review of Lease Accounting Standards Could Really Hammer Retailers, communication channel Week, June 5 2006 3 Deloittes IFRS Global Office, (2010), IFRS in FocusIASB issues Exposure Draft on Lease Accounting, Online useable at http//www. iasplus. com/en/publications/ifrs-in-focus/2010/ifrs-in-focus-2014-iasb-issues-exposure-daft-on-lease-accounting-august-2010/ agitate Accessed 4 April 2012 4 Elliott, B. and Elliott, J. (2008), Financial Accounting and Reporting, 12th edition, London Pearson pedagogy Limited, pp433-448 5 Grossman, A.M. and Grossman, S. D. (2010), Capitalizing Lease Payments Potential Effects of the FASB/IASB Plan, CPA Journal, May 2010 6 IASB (2010), guess Leases, Online Available at http//www. ifrs. org/NR/rdonlyres/FBE30248-225B -48AF-AAE5-96494D83A978/0/LeasesSnapShot0810. pdf Accessed 16 April 2012 7 IASC Foundation staff, Technical thickset IAS 17 Leases, Online Available athttp//www. iasb. org/NR/rdonlyres/B8ABE9AA-8F5B-4301-866E-ED2D423504E7/0/ias17sum. pdf Accessed 4 April 2012 8 IAS 17 Online Available at