Liven a’ big machine, IAS 17 “Leases” has ever been just a small part but stimulated a sizeable debate since its birth. IASB has finally revised the standard in the harmonization process of financial reporting standards for the new era of 2005.The harmonization and revision process by IASB portrays not only the refined reporting but also the redefined reporting in many areas. However IAS 17 is being considered a good example of more refined reporting among reporting gurus. The changes in IAS 17 are numerous and IASB has just succeeded to verbalize many undefined principles embedded in the superseded standard. However, the old and golden rule of nothing’s perfect still plays.
The changes in the IAS 17, pursuant to its revision, may well be categorized into two types. The first type changes are the inclusion and refinement of definitions. While the second type changes are the inclusion of new accounting and reporting issues, which had not been addressed by IASB even after their very presence in local reporting frameworks (like FRS, SFAS, AASB etc). All these changes can be studied under the following heads:
Inception Vs Commencement of lease term
The new definition introduced by IAS 17 is for “Commencement of lease term”. The superseded standard only attended to the term “Inception of lease” and the accountants all over the world were still unclear about the timing of the recognition of financial elements (asset, liability, income & expense). This matter wasn’t of much import as the framework provides a comprehensive guideline for this. The words “Inception” and “Commencement” surrogate each other but they may not be the representatives of the same date. The new IAS 17 clarifies the matter that the recognition stage of financial elements is not necessarily the time of inception of lease. These elements are to be recognized pursuant to the fulfillment of recognition criteria defined by the framework. Moreover, the changes in the lease terms between the date of Inception of lease and commencement of lease would be regarded applicable from the date of inception. (ibid: paras 5 & 13)
The situation may arise where the lease agreement, even after being entered into, may not complements the completion of transaction owing to prospective acquisition or construction of asset by the lessor. This problem may arise in case of manufacture’s lease. In such circumstances, the recognition criteria for financial statement elements are not fulfilled until the actual acquisition/construction of asset by the lessor and its transfer to lessee for subsequent use takes place.
Moreover, the inclusion of the term “Commencement of lease term” doesn’t change the date of lease classification for subsequent accounting and reporting. It remains the actual date of inception when the agreement is entered into by lessor and lessee. In addition, the adjustments to MLP during the intervening period of inception and commencement would be deemed to have taken place at the date of inception. Such adjustments are normally anticipated and provided for in the lease agreements under escalation clauses.
The classification of lease is to be made at the inception rather than on the commencement date. The situation may arise where the classification changes on the commencement date but it still have to be accounted for in accordance with the classification at the inception.