International Accounting Standard 17
Leases
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 17 Leases, which had originally been issued by the International Accounting Standards Committee in
December 1997. IAS 17 Leases replaced IAS 17 Accounting for Leases that was issued in
September 1982.
In December 2003 the IASB issued a revised IAS 17 as part of its initial agenda of technical
projects.
Other IFRSs have made minor consequential amendments to IAS 17. They include
Improvements to IFRSs (issued April 2009), IFRS 9 Financial Instruments (issued November 2009 and October 2010) and IFRS 13 Fair Value Measurement (issued May 2011).
CONTENTS
INTRODUCTION
INTERNATIONAL ACCOUNTING STANDARD 17
LEASES
OBJECTIVE
SCOPE
DEFINITIONS
CLASSIFICATION OF LEASES
LEASES IN THE FINANCIAL STATEMENTS OF LESSEES
Finance leases
Initial recognition
Subsequent measurement
Disclosures
Operating leases
Disclosures
LEASES IN THE FINANCIAL STATEMENTS OF LESSORS
Finance leases
Initial recognition
Subsequent measurement
Disclosures
Operating leases
Disclosures
SALE AND LEASEBACK TRANSACTIONS
TRANSITIONAL PROVISIONS
EFFECTIVE DATE
WITHDRAWAL OF IAS 17 (REVISED 1997)
APPENDIX
Amendments to other pronouncements
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
EDITION
APPROVAL BY THE BOARD OF IAS 17 ISSUED IN DECEMBER 2003
BASIS FOR CONCLUSIONS
DISSENTING OPINION
IMPLEMENTATION GUIDANCE
Illustrative examples of sale and leaseback transactions that result in
operating leases
International Accounting Standard 17 Leases (IAS 17) is set out in paragraphs 1-70 and the Appendix. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 17 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
Introduction
International Accounting Standard 17 Leases (IAS 17) replaces IAS 17 Leases
(revised in 1997) and should be applied for annual periods beginning on or after 1 January 2005. Earlier application is encouraged.
Reasons for revising IAS 17
The International Accounting Standards Board developed this revised IAS 17 as part of its project on Improvements to International Accounting Standards. The project was undertaken in the light of queries and criticisms raised in relation to the Standards by securities regulators, professional accountants and other interested parties. The objectives of the project were to reduce or eliminate alternatives, redundancies and conflicts within the Standards, to deal with some convergence issues and to make other improvements.
For IAS 17 the Board's main objective was a limited revision to clarify the classification of a lease of land and buildings and to eliminate accounting
alternatives for initial direct costs in the financial statements of lessors.
Because the Board's agenda includes a project on leases, the Board did not reconsider the fundamental approach to the accounting for leases contained in IAS 17. For the same reason, the Board decided not to incorporate into IAS 17 relevant SIC Interpretations.
Although IAS 40 Investment Property prescribes the measurement models that can
be applied to investment properties held, it requires the finance lease accounting methodology set out in this Standard to be used for investment properties held under leases.
Definitions
Initial direct costs
Initial direct costs are incremental costs that are directly attributable to negotiating and arranging a lease. The definition of the interest rate implicit in the lease has been amended to clarify that it is the discount rate that results in the present value of the minimum lease payments and any unguaranteed residual value equalling the fair value of the leased asset plus initial direct costs of the lessor.
Inception of the lease/commencement of the lease term
This Standard distinguishes between the inception of the lease (when leases are classified) and the commencement of the lease term (when recognition takes place).
Unearned finance income/net investment in the lease
The definitions of these terms have been simplified and articulated more explicitly to complement the changes relating to initial direct costs referred to in paragraphs IN10-IN12 and the change in the definition of the interest rate implicit in the lease referred to in paragraph IN6.
Classification of leases
When classifying a lease of land and buildings, an entity normally considers the
land and buildings elements separately. The minimum lease payments are allocated between the land and buildings elements in proportion to the relative fair values of the leasehold interests in the land and buildings elements of the lease. The land element is normally classified as an operating lease unless title passes to the lessee at the end of the lease term. The buildings element is classified as an operating or finance lease by applying the classification criteria in the Standard.
Initial direct costs
Lessors include in the initial measurement of finance lease receivables the initial
direct costs incurred in negotiating a lease. This treatment does not apply to manufacturer or dealer lessors. Manufacturer or dealer lessors recognise costs of this type as an expense when the selling profit is recognised.
Initial direct costs incurred by lessors in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as the lease income.
The Standard does not permit initial direct costs of lessors to be charged as expenses as incurred.
Transitional provisions
As discussed in paragraph 68 of the Standard, an entity that has previously
applied IAS 17 (revised 1997) is required to apply the amendments made by this Standard retrospectively for all leases, or if IAS 17 (revised 1997) was not applied retrospectively, for all leases entered into since it first applied that Standard.
International Accounting Standard 17
Leases
Objective
The objective of this Standard is to prescribe, for lessees and lessors, the
appropriate accounting policies and disclosure to apply in relation to leases.
Scope
This Standard shall be applied in accounting for all leases other than:
leases to explore for or use minerals, oil, natural gas and similar
non-regenerative resources; and
licensing agreements for such items as motion picture films, video
recordings, plays, manuscripts, patents and copyrights.
However, this Standard shall not be applied as the basis of measurement
for:
property held by lessees that is accounted for as investment
property (see IAS 40 Investment Property);
investment property provided by lessors under operating leases
(see IAS 40);
biological assets held by lessees under finance leases (see IAS 41
Agriculture); or
biological assets provided by lessors under operating leases (see IAS 41).
This Standard applies to agreements that transfer the right to use assets even
though substantial services by the lessor may be called for in connection with the operation or maintenance of such assets. This Standard does not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other.
Definitions
The following terms are used in this Standard with the meanings
specified:
A lease is 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.
A finance lease is a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not eventually be transferred.
An operating lease is a lease other than a finance lease.
A non-cancellable lease is a lease that is cancellable only:
upon the occurrence of some remote contingency;
with the permission of the lessor;
if the lessee enters into a new lease for the same or an equivalent
asset with the same lessor; or
upon payment by the lessee of such an additional amount that, at
inception of the lease, continuation of the lease is reasonably certain.
The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of
the lease. As at this date:
a lease is classified as either an operating or a finance lease; and
in the case of a finance lease, the amounts to be recognised at the
commencement of the lease term are determined.
The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease (ie the recognition of the assets, liabilities, income or expenses resulting from the lease, as appropriate).
The lease term is the non-cancellable period for which the lessee has
contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option.
Minimum lease payments are the payments over the lease term that the
lessee is or can be required to make, excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor, together
with:
for a lessee, any amounts guaranteed by the lessee or by a party
related to the lessee; or
for a lessor, any residual value guaranteed to the lessor by:
the lessee;
a party related to the lessee; or
a third party unrelated to the lessor that is financially
capable of discharging the obligations under the guarantee.
However, if the lessee has an option to purchase the asset at a price that is expected to be sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, the minimum lease payments comprise the minimum payments payable over the lease term to the expected date of exercise of this purchase option and the payment required to exercise it.
Fair value is the amount for which an asset could be exchanged, or a
liability settled, between knowledgeable, willing parties in an arm's length transaction.
Economic life is either:
the period over which an asset is expected to be economically
usable by one or more users; or
the number of production or similar units expected to be obtained
from the asset by one or more users.
Useful life is the estimated remaining period, from the commencement of the lease term, without limitation by the lease term, over which the economic benefits embodied in the asset are expected to be consumed by the entity.
Guaranteed residual value is:
for a lessee, that part of the residual value that is guaranteed by
the lessee or by a party related to the lessee (the amount of the guarantee being the maximum amount that could, in any event,
become payable); and
for a lessor, that part of the residual value that is guaranteed by the lessee or by a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.
Unguaranteed residual value is that portion of the residual value of the leased asset, the realisation of which by the lessor is not assured or is guaranteed solely by a party related to the lessor.
Initial direct costs are incremental costs that are directly attributable to
negotiating and arranging a lease, except for such costs incurred by manufacturer or dealer lessors.
Gross investment in the lease is the aggregate of:
the minimum lease payments receivable by the lessor under a
finance lease, and
any unguaranteed residual value accruing to the lessor.
Net investment in the lease is the gross investment in the lease
discounted at the interest rate implicit in the lease.
Unearned finance income is the difference between:
the gross investment in the lease, and
the net investment in the lease.
The interest rate implicit in the lease is the discount rate that, at the
inception of the lease, causes the aggregate present value of (a) the minimum lease payments and (b) the unguaranteed residual value to be equal to the sum of (i) the fair value of the leased asset and (ii) any initial direct costs of the lessor.
The lessee's incremental borrowing rate of interest is the rate of interest
the lessee would have to pay on a similar lease or, if that is not
determinable, the rate that, at the inception of the lease, the lessee would incur to borrow over a similar term, and with a similar security, the funds necessary to purchase the asset.
Contingent rent is that portion of the lease payments that is not fixed in
amount but is based on the future amount of a factor that changes other than with the passage of time (eg percentage of future sales, amount of future use, future price indices, future market rates of interest).
A lease agreement or commitment may include a provision to adjust the lease payments for changes in the construction or acquisition cost of the leased property or for changes in some other measure of cost or value, such as general price levels, or in the lessor's costs of financing the lease, during the period between the inception of the lease and the commencement of the lease term. If so, the effect of any such changes shall be deemed to have taken place at the inception of the lease for the purposes of this Standard.
IAS 17 uses the term 'fair value' in a way that differs in some respects from the definition of fair value in IFRS 13 Fair Value Measurement. Therefore, when
applying IAS 17 an entity measures fair value in accordance with IAS 17, not IFRS 13.
Classification of leases
The classification of leases adopted in this Standard is based on the extent to
which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the asset's economic life and of gain from appreciation in value or realisation of a residual value.
A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.
Because the transaction between a lessor and a lessee is based on a lease
agreement between them, it is appropriate to use consistent definitions. The application of these definitions to the differing circumstances of the lessor and lessee may result in the same lease being classified differently by them. For example, this may be the case if the lessor benefits from a residual value guarantee provided by a party unrelated to the lessee.