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+--- Thread: IAS 17 indepth knowledge (/showthread.php?tid=4716)
IAS 17 indepth knowledge - salloo70 - 08-26-2007
freinds, i have several queries relating to IAS 17 leases. one of which is
1. Manufacturers or dealer lessors should include selling profit or loss in the same period as they would for an outright sale. If <font size="4">artificially</font id="size4"> low rates of interest are charged,<font size="4">selling profit should be restricted to that which would apply if a commercial rate of interest were charged.</font id="size4">[IAS 17.42]
- kamranACA - 08-27-2007
Dear Salloo,
If a lesser has two businesses at the same time i.e. one of manufacturing or trading (as dealer) of a product and secondly the business os leasing of such products as well, then IAS 17 requires that
- the selling profit should be accounted for immediately by such seller (manfacture / dealer / lesser); and
- the interest (finance income) (to be) earned should be deferred and taken to profit and loss account over the lease term.
Now for me this requirement appears to be very simple and sounds quite logical. Selling some product after its manufacturing or (after acquiring it on dealership basis) is another business and logically has its portion of profit or loss in an amalgamated transaction where selling and leasing both occur simultaneously.
On the other hand, leasing of such product after making its sale invoice is another business activity and has nothing to do with the first transaction. Any profit or interest income that is likely to be earned through lease has to be accounted for on the lease term to comply the matching principle laid down in the framework to IFRSs.
Since both these profits have to be accounted for in different ways and window dressing can be made by a leasing business by
- enhancing the declared selling price; and
- reducing the interest income to be earned (i.e. the difference of total rentals and the selling price of the asset sold).
Now if the matter is of dishonesty, it could be expected every where to manipulate the results and in Pakistan specially, so much manipulation is made even in the financials of huge concerns with all the legal covers. This also happens worldwide. There could be so many motives starting from taxation issues to employees bonuses, performance indication for employees, preserving share value in market, inviting attention of investors etc etc.
In above situation, of course the total profit for overall transaction of selling plus leasing will remain same, but the accounts could be manipulated to change the timing of accounting for such profitability.
However, this is not a thing which can remain un-detected by users of the financials (if they have analysis of prices and interest rates), by regulating authorities like SBP and SECP, by directors on the board and audit committees, and last but not least by auditors.
IAS 17 has not to be applied isolatedly. There are other standards like IAS 24 for identifying, pricing and disclosing related parties transactions; specially where things have not been done on fair pricings. Variation of terms cannot be left un-noticed. You must appreciate that selling price as well as charging of interest (in above case), both are the pricing factors for these two transactions seperately and both have to be on fair value initially, otherwise it would tentamount to non-compliance.
IAS 32 and 39 (for measurement and recognition of financial instruments and determining their fair values) is also very important statute to be followed and things cannot remain hidden if one properly analyses the transactions in the light of these standards.
Apart from the above standards, the entities have their written policies which they have to follow strictly and the departures have to be noticed. (Code of corporate governance requires listed companies to draft such business policies and get them approved from board; such documents are also guidelines for auditors etc to judge the methodology of transactions.
In my view the regulators are already alleged for over regulation in Pakistan. {for example IFRSs allow that accounts could be finalised within 6 months of the close of financial year (IAS1), but in Pakistan this period was reduced from 6 months to 4 months and now has further been reduced from 4 months to 3 months). Therefore, in the presence of a number of standards and regulations, authorities, internal and external audits, audit committee and board reviews etc, I dont strictly assume that such manipulation would be possible practically speaking.
However, mis-satements and corporate frauds are the part of the game. One can see Enron like cases. But still, even these could not go un-noticed and when these cases came on the screen the biggest firm of the world Arther and Anderson had to go into liquidation / dissolution.
Now, I think it would be hard to be a part of such fraud/misstatement except for the reason of the inherent limitations of the audit.
Hope u can understand.
I would wait for ur other queries as well and would endeavor to be of any benefit to you!!!
Regards,
Kamran.
- salloo70 - 08-29-2007
Thanks alot Kamran for such a comprehensive answer......
Kamran please give your input on the other topic thread also. its urgent!!! topic name is "P2 corporate reporting faculty"
- kamranACA - 09-03-2007
Where are next questions of IAS 17 dear Salloo?
Counting on you.
Regards,