UNDERSTANDING & CALCULATING LEASES – IAS 17

Slide1

The accounting for leases almost always comes up in exams for Financial Reporting (F7), & Corporate Reporting (P2); sometimes in the Auditing papers, when you need to identify the effects of inappropriate accounting policies and calculations on Audit procedure.

As with all other papers in the ACCA syllabus, the knowledge from the earlier papers is built upon for the advanced papers, so for F7, the basics of lease accounting is examined, and then taken further for P2.

I believe that Identifying, & calculating a lease shouldn’t take-up more than 3-5 minutes of the exam time, once the necessary information/data has been identified in the exam paper. Of course, it goes without saying that you get better at it with constant practice.

There are 2 types of leases – Operating, and Finance lease. Although most of the exams deal with finance lease (I believe that is because it requires more calculations), Do not expect to always be told which type of lease it is. Part of the exam is to be able to identify a lease, by the notes given in the question.

 

Identifying leases: What you need to know

The person/company leasing out equipment is the Lessor, the person/company leasing the equipment is the Lessee. I.e. N Manufacturing Ltd is in the business of leasing out Agricultural equipment to large farms; M Ltd is large industrial farm. N Manufacturing ltd is the Lessor, & M ltd is the lessee.

Looking through ACCA past papers, the questions are as the perspective of the lessee company. 

International Accounting Standard No. 17 (IAS 17)  clearly spells out both leases and their accounting treatments. Basic, and more advanced articles on Leases are online 

A finance lease is where ‘the risks & rewards of ownership are transferred to the lessee.  What this means is that the lessee accounts for the equipment, just like if it was purchased out rightly by them.  The lessee is responsible for maintenance & repairs, depreciation and other owner related costs you can think of.

An operating lease is any lease that isn’t a finance lease – it is that simple! If a lease doesn’t meet the criteria set out in IAS 17 for finance lease, then it is an operating lease.

Slide2

Here’s another article on leases

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