(Summary) Ind AS 17

Leases

is to prescribe, for lessees and lessors, accounting policies and disclosures to apply in relation to finance and operating leases.

Applied in accounting for all leases except:

  1. Leases to explore for or use minerals, oil, natural gas and similar non-regenerative resources;
  2. Licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights.

Non-application:

  1. Property held by lessees that is accounted for as investment property;
  2. Investment property provided by lessors under operating leases,
  3. Biological assets held by lessees under finance leases,
  4. Biological assets provided by lessors under operating leases.
  1. Lease
  2. Inception of lease
  3. Finance Lease
  4. Lease term
  5. Operating Lease
  6. Minimum lease payments
  7. Non-cancellable lease
  8. Unearned finance income

Lease: 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.

Finance Lease: A lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

Operating Lease: A lease other than a finance lease.

It is based on Risk & Rewards incidental to ownership lie with lessor or lessee.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership.

All other leases are classified as operating leases.

  1. Substance over form: Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form.
  2. Indicators to classify finance Lease:Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are:
  • If the lessee is entitled to cancel the lease, the lessor’s losses associated with the cancellation are borne by the lessee
  • Gains or losses from fluctuations in the fair value of the residual accrue to the lessee (for example, by means of a rebate of lease payments)
  • The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

When a lease includes both land and buildings elements, an entity assesses the classification of each element as a finance or an operating lease separately. In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life.

Whenever necessary in order to classify and account for a lease of land and buildings, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the buildings elements in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception of the lease.

For a lease of land and buildings in which the amount that would initially be recognised for the land element is immaterial, the land and buildings may be treated as a single unit for the purpose of lease classification and classified as a finance or operating lease.

Finance lease:

At commencement of the lease term, leases should be recorded as an asset and a liability at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable, or else at the entity’s incremental borrowing rate).

Minimum lease payments shall be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability.

The depreciation policy for depreciable leased assets should be consistent with that for owned assets.

If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset should be fully depreciated over the shorter of the lease term and its useful life.

Operating leases:

The lease payments should be recognised as an expense over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern of the user’s benefit.

Finance lease:

At commencement of the lease term, the lessor should record a finance lease in the balance sheet as a receivable, at an amount equal to the net investment in the lease.

The lessor should recognise finance income based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment outstanding in respect of the finance lease

 

Operating lease:

Assets should be presented in the balance sheet of the lessor according to the nature of the asset.

Lease income should be recognised over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern in which use benefit is derived from the leased asset is diminished.

  • Manufacturer or dealer lessor does not recognise any selling profit on entering into an operating lease because it is not the equivalent of a sale.
  • Initial direct costs incurred by lessors in negotiating and arranging an operating lease shall be added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income.

Sale and Finance Lease Back:

Any excess of sales proceeds over the carrying amount should be deferred and amortised over the lease term rather than immediately recognising it as income by a seller-lessee.

Sale and Operating Lease Back:

If it is clear that the transaction is established at fair value, any profit or loss shall be recognised immediately.

If the sale price is below fair value, any profit or loss should be recognised immediately except that, if the loss is compensated for by future lease payments at below market price, it shall be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used.

If the sale price is above fair value, the excess over fair value shall be deferred and amortised over the period for which the asset is expected to be used.

  • For each class of asset, the net carrying amount at the end of the reporting period.
  • A reconciliation between the total of future minimum lease payments at the end of the reporting period, and their present value.
  • Disclose the total of future minimum lease payments at the end of the reporting period, and their present value, for each of the following periods:
    1. Not later than one year;
    2. Later than one year and not later than five years;
    3. Later than five years.
  • Contingent rents recognised as an expense in the period.
  • The total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period.
  • A general description of the lessee’s material leasing arrangements including, but not limited to, the following:
  1. The basis on which contingent rent payable is determined;
  2. The existence and terms of renewal or purchase options and escalation clauses; and
  • Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.
  • The total of future minimum lease payments under non-cancellable operating leases for each of the following periods:
    1. Not later than one year;
    2. Later than one year and not later than five years;
    3. Later than five years.
  • The total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period.
  • Lease and sublease payments recognised as an expense in the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments.
  • contingent rent recognised as an expense
  • A general description of the lessee’s significant leasing arrangements including, but not limited to, the following:
  1. The basis on which contingent rent payable is determined;
  2. The existence and terms of renewal or purchase options and escalation clauses; and
  • Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt and further leasing.
  • A reconciliation between the gross investment in the lease at the end of the reporting period, and the present value of minimum lease payments receivable at the end of the reporting period.
  • Disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period, for each of the following periods:
    1. Not later than one year;
    2. Later than one year and not later than five years;
    3. Later than five years.
  • Unearned finance income
  • Unguaranteed residual values
  • Accumulated allowance for uncollectible lease payments receivable
  • Contingent rent recognised in income
  • A general description of the lessor’s material leasing arrangements.
  • The future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the following periods:
  1. Not later than one year;
  2. Later than one year and not later than five years;
  3. Later than five years.
  • Total contingent rents recognised as income in the period.
  • A general description of the lessor’s leasing arrangements.

 

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