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Operating lease or Finance lease? Need your help
08-14-2009, 05:47 PM
Post: #19
 
I only got the summary of IFRIC 4 and also read the Prease Release on the same interpretation. this interpretation comments that certain arrangements should be considered as lease under IAS 17, when the entity has control over that asset for a determined period of time and therefore excluding others to use that during this time

Like if i take an asset, whose useful life is 10 years, for 3 years. I have the control on the asset during those 3 years as no one else can use that asset during this period.

This interpretaion explains that like arrangements should be dealt with in accoradance with IAS 17. But it does not say that these are finance leases.


Discussion at the July 2004 IFRIC Meeting

IFRIC members generally agreed that the significance of the residual interest in the assets should be a factor in establishing who controls the assets.
IFRIC discussed other factors that indicate control, including

whether the asset was constructed by the operator
estimated useful lives and concession periods replacement assets expected to be purchased or constructed in the future (whether obliged or not and
the passing on of ownership.

This debate was in the context of the different models used in IAS 18 Revenue and IAS 17 Leases in establishing when risk and rewards are passed and therefore, who controls the assets.

You have mentioned that the IAS 17 gives the "list of critaria" for finace lease and if any one critaria is met it becomes the finance lease. <b>THERE IS NO SUCH LIST GIVEN IN IAS - 17</b> if you have read quote me the standard.

Remember; the bold lines written in the IASs are the framework only. you have to comply those bold lines, rest is the guidance for practical application.

The examples like major part of useful life, PV of MLP = FV and others helps to determin whether when the sunstantial risks and rewards are transfered to the lesse or not and these are used when this is not apprarent.

You mean we classify a lease as finance lease just because we have made a poor bargain and commited abnormaly huge rentals for the assets? Confused .. See if we take an asset, whose useful life is 20 years, for three years but unfortunately rentals are so high that PV of MLP becomes equal to its FV. (your versian being used where there are number of critarias) there is clearly written in the agreement that at the end of lease term asset will be given back. Is it finance lease????? NO

there is only one critaria, i dont know why people are confused.

Regards

Waqas Shabbir
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[] - kamranACA - 04-01-2009, 08:40 PM
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[] - kamranACA - 08-13-2009, 07:44 PM
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[] - kamranACA - 08-14-2009, 03:16 AM
[] - wsafca - 08-14-2009 05:47 PM
[] - faisal_desperado - 08-15-2009, 01:06 AM
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