Frequently Asked Questions on IFRS

28. What are the rules where leases are concerned?

Answer

Accounting for lease transactions are covered in IAS 17 Leases. The actual accounting for lease transactions involves a number of complexities, which derive partly from the range of alternative structures that are available to the parties involved in the leasing transaction. For example, in many cases, leases can be configured to allow manipulation of tax benefits, with other features such as lease term and implied interest rate adjusted to achieve the intended overall economics of the arrangement.

The IASB's Conceptual Framework refers to ‘substance over form’ and IAS 17 is probably the standard where application of this principle is most prevalent. When we refer to ‘substance over form’ we are talking about the commercial reality of the transaction, rather than what it says on paper. In other words, we need to look at the characteristics of the transaction. If the lessor essentially transfers all the risks and rewards of ownership of the asset to the lessee, then the asset is recognized on the statement of financial position with a corresponding liability.

If the lessor retains the risks and rewards of ownership, the rentals are simply charged to profit or loss as and when they arise. IAS 17 recognizes two types of lease:

• finance lease; and
• operating lease.

A finance lease is a lease where the risks and rewards of ownership have been transferred to the lessee. An operating lease is where the lessor retains the risks ...