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Operating lease or Finance lease? Need your help
08-15-2009, 01:06 AM
Post: #20
 
Dear Wsafca,

IAS 17 specifically indicates those situations / criteria in which lease is to be classified as a finance lease or operating lease , if any of the aforementioned situations/criteria is met, whether individually or collectively, then lease is to be classified as a finance lease regardless of meeting any other criteria out of the list provided.
The following is being quoted verbatim from IAS 17, furthermore, reference is also being provided so that it shall be sufficed and no further clarification is expected from your side.

http//www.ifrs-portal.com/Texte_englisch/Standards/Standards_aktuell/IAS_17/IAS_17_2.htm


<font face="Times New Roman"><i>(a) the lease transfers ownership of the asset to the lessee by the end of the lease term;
(b) the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised;
© the lease term is for the major part of the economic life of the asset even if title is not transferred;
(d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and
(e) the leased assets are of such a specialized nature that only the lessee can use them without major modifications.</i></font id="Times New Roman">


UNQUOTED

Now examine each of the aforesaid criteria and respond to the following queries, keeping in view that any of the criteria met shall substantiate the lease to be classified as finance Lease.
Criteria D is apparently being met, at this point, in my view, no analysis is required to be assured for further clarification with regards to the said case to be declared as finance lease.

However, look at the criteria C, “the major part of the economic life of the asset” has no where been defined anywhere in the standards, as per general perception, Major part means “more than half”
In the above case, asset is being used for the major part of its life.


Standard also reveals another indication i.e. <b><b><font face="Times New Roman"><i>"A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership".</i></font id="Times New Roman"></b></b>
In this case, risks and rewards are also being transferred , following is being quoted for your reference for the purpose of understanding that how IAS 17 itself defines risk and rewards to be transferred.

<b><font face="Times New Roman"><i>“Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realization of a residual value”.</i></font id="Times New Roman"></b>

UNQUOTED

Risk and Rewards are apparently being transferred, ask yourself, whether they are being or not ?

Furthermore, in reply of your views, IAS 18 is not required to be followed in those cases where other standard has already mention the definition of a specific terminology, in this case it is risk and rewards, which has specifically been mentioned in IAS 17 and issue is also with regards to IAS 17.
At last, in your last Para, lease is to be classified as finance lease on the grounds that one of the situations is being met i.e. criteria D.

Differentiation in views with regards to different people is inevitable, however, purpose is not to discourage others on account of their views.


Best Regards,


Faisal
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[] - kamranACA - 04-01-2009, 08:40 PM
[] - Star - 04-02-2009, 05:53 PM
[] - huu_tung87 - 04-02-2009, 06:24 PM
[] - Star - 04-02-2009, 07:39 PM
[] - huu_tung87 - 04-02-2009, 07:55 PM
[] - Star - 04-02-2009, 08:12 PM
[] - kamranACA - 04-03-2009, 01:51 AM
[] - NYP - 04-25-2009, 02:19 PM
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[] - NYP - 04-25-2009, 07:04 PM
[] - Star - 04-27-2009, 02:40 PM
[] - Abdur.Rehman - 04-29-2009, 07:05 AM
[] - wsafca1 - 08-12-2009, 01:35 AM
[] - wsafca - 08-13-2009, 04:35 AM
[] - kamranACA - 08-13-2009, 07:44 PM
[] - wsafca - 08-14-2009, 02:14 AM
[] - kamranACA - 08-14-2009, 03:16 AM
[] - wsafca - 08-14-2009, 05:47 PM
[] - faisal_desperado - 08-15-2009 01:06 AM
[] - kamranACA - 08-15-2009, 03:13 AM
[] - wsafca - 08-15-2009, 05:00 PM
[] - wsafca - 08-15-2009, 05:04 PM
[] - wsafca - 08-15-2009, 05:55 PM
[] - kamranACA - 08-15-2009, 06:08 PM
[] - kamranACA - 08-15-2009, 06:10 PM
[] - wsafca - 08-15-2009, 06:29 PM
[] - kamranACA - 08-15-2009, 06:48 PM
[] - faisal_desperado - 08-15-2009, 07:11 PM
[] - kamranACA - 08-15-2009, 07:26 PM
[] - wsafca - 08-15-2009, 10:31 PM
[] - kamranACA - 08-15-2009, 11:42 PM
[] - wsafca - 08-16-2009, 05:01 PM
[] - wsafca - 08-16-2009, 05:20 PM
[] - wsafca - 08-16-2009, 05:36 PM
[] - kamranACA - 08-16-2009, 09:00 PM
[] - wsafca - 08-16-2009, 11:19 PM
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