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Operating lease or Finance lease? Need your help
08-16-2009, 09:00 PM
Post: #36
 
Dear,

I was expecting something conclusive and reflecting the basis of such a stiff disagreement but could not find in all the 3 posts.

Again nothing conclusive has been explained in view of the query raised in this thread.

However, to my surprise it has been agreed that all the risks have been trasnferred and one of three rewards has also been shifted.

So, now we have left with two identified rewards. Let's talk about them.

If one agrees that transfer of title at the end of lease term is not compulsory to treat it as Finance lease (except in case of land) then two things should also be apprehended.

Why the profit of selling the asset by lessor after the lease term is not taken into account by IAS? Are they really fools that on one hand they make us to agree that title transfer is not compulsory but fail to realise the profit earning by lessor which tentamounts to non transfer of the rewards and which we have succeeded to point out. I mean the fools forgot (although we agree with the issue of titles) but we have searched out.

I said there are two things to be understood. Every asset loses its value with the passage of time (consumption of useful life) except land. I must remind that it should not be confused and mixed up with the concept of revaluation that comes against the historical cost and not against the real value of an asset. So if some profit is earned by lessor it is mainly due to currency value impact. I assume Waqas might have seen some revaluation report in real life scenario which normally takes into account only money value differences due mainly to technological obsolesence and incomparability with new models of a given asset. So the actual profit taking is expected to be meager provided the Useful Life of the asset was carefully determined and it was accordingly depreciated.

So, the first thing is; profit taking by lessor cannot be huge if useful life of asset was correctly arrived at. Mainly because value of an asset except land does not increase in real meanings.

Secondly, when major part of the life of the asset (mind it not 100 percent) has been used, then chances of profit taking are deemed to have been further diluted.

Since as per accounting principles there should be no significant or material profit opportunity left, it accordingly leaves no major imapct on the issue of transfer of rewards.

Now we discuss other reward issue. Residual value is doubted to be increased. I think brother Waqas wanted us to enjoy this last analysis of reward given by him. A person who wants to hunt a lion is not stepping out of his home fearing of a dog sitting in the street. People may not feel this joke suitable but I do.

How much the value which is "residual value" will give the opportunity to earn profit? It's amazing objection if we understand what useful life means.

So both the objections are not relevant when the writer agrees that title transfer is not required as per standard because the "fools" which agreed that for transfer of RR, title transfer is not required must also have thought on the profit taking opportunities identified by our brother. Do we feel they are really "fools"?

All other RR issues have been agreed so need not to be commented upon.

This again confirms that the lease agreement discussed in query was finance lease agreement.

Having concluding the above, I also feel like saying that it's the major part of useful life of an asset and not 100 percent of such life. So there is always expected that little bit profit will flow to the lessor in all such cases. This is not something out of the world.

The example of HORSE is totally and extremely irrelevant for many reasons including the reason that, as I tried to mention in my earlier post, the asset in the query was being leased for 5 out of 8 Years life. At the end of 5 years (although major part) it is not expected to be a dead horse or CRAP. This is always the sense of finance lease arrangement. Otherwise for a lessor there should be no logic to take back the asset by incurring disposal costs.

I think enough has been discussed. Our fellow agrees that title trasnfer and lease term for 100 percent life are not required to conclude RR transfer. However, he some how again gets caught up in same two point agenda which I pointed out in last post.

I advise him to write a letter to IASB for revision in IAS 17. Not to be taken personalized. May be this way we achieve a "better" reporting guidelines whereby we cap the arrangements treated as finance lease as per our fellow's RR transfer concept.

This post has been sent through my blackberry and may contain some spelling mistakes. Regrets are due if it comes true.

Regards,



Kamran.
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Messages In This Thread
[] - 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
[] - Star - 04-25-2009, 06:26 PM
[] - 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
[] - kamranACA - 08-17-2009, 01:24 AM
[] - wsafca - 08-18-2009, 01:24 AM
[] - kamranACA - 08-18-2009, 05:20 AM
[] - wsafca - 08-19-2009, 12:16 AM
[] - kamranACA - 08-19-2009, 03:33 AM
[] - kamranACA - 08-19-2009, 03:37 AM
[] - applejo88 - 03-17-2011, 07:16 PM

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