Essay About Ownership Of The Asset And Major Source Of Finance

Accounting for Leases – Ias 17 Leases
Accounting for Leases – Ias 17 Leases
Introduction
IAS 17 Leases sets out the treatment for reporting lease transactions in the
financial statements. Leases are a major source of finance to a business and it is
important that the financial statements disclose sufficient information to the
readers of the financial statements. IAS 17, paragraph 10, states, “whether a
lease is a finance lease or an operating lease depends on the transaction rather
than the form of contract”.
Substance over form
Information in the financial statements should represent transactions in
accordance with their commercial substance not merely their legal form. The
accounting for leases is the application of this concept, as the classification of a
lease as either a finance lease or an operating lease, depends on the substance
of the transactions rather than the legal form of the contract.
IAS 17 distinguishes between two types of lease transactions:
? A finance lease and an
? Operating lease
A finance lease “is a lease that transfers substantially all the risks and rewards
inherent to ownership of the asset”. An operating lease is a lease other than a
finance lease. The classification of a lease is crucial, as different accounting,
approaches are required for the different types of leases.
Indicators to be considered, individually or in combination, when classifying a
lease as a finance lease includes:
1. If a lease transfers substantially all the risks and rewards, associated with
ownership of an asset the lease should be classified as a finance lease.
Risks involve meeting the costs of maintaining the asset or suffering the
fall in value of the asset through technological obscelecence. Rewards
include using the asset for substantially the whole of its useful life, and
accruing the profits from the use of the asset.
2. Ownership of the asset will pass to the lessee at the end of the lease.
3. The lessee has an option to purchase the asset at a cost significantly