IAS 17 – Leases

5 Effect of misclassification

Under finance lease the lessee is required to record the acquired asset in his books and the corresponding liability at the commencement of lease.

If such lease transactions are not reflected in the lessee’s statement of financial position, the economic resources and the level of obligations of an entity are understated, thereby distorting financial ratios. Therefore, it is appropriate for a finance lease to be recognised in the lessee’s statement of financial position both as an asset and as an obligation to pay future lease payments. At the commencement of the lease term, the asset and the liability for the future lease payments are recognised in the statement of financial position at the same amounts except for any initial direct costs of the lessee that are added to the amount recognised as an asset.

6 Operating leases accounting

Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.

For operating leases, lease payments (excluding costs for services such as insurance and maintenance) are recognised as an expense on a straight-line basis unless another systematic basis is representative of the time pattern of the user’s benefit, even if the payments are not on that basis.

7 Disclosures – Finance lease

Lessees shall make the following disclosures for finance leases:

1. for each class of asset, the net carrying amount at the end of the reporting period.
2. a reconciliation between the total of future minimum lease payments at the end of the reporting period, and their present value. In addition, an entity shall disclose the total of future minimum lease payments at the end of the reporting period, and their present value, for each of the following periods:
   1. not later than one year;
   2. later than one year and not later than five years;
   3. later than five years.
3. contingent rents recognised as an expense in the period.
4. the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period.
5. a general description of the lessee’s material leasing arrangements including, but not limited to, the following:
   1. the basis on which contingent rent payable is determined;
   2. the existence and terms of renewal or purchase options and escalation clauses; and
   3. restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.

In addition, the requirements for disclosure in accordance with IAS 16, IAS 36, IAS 38, IAS 40 and IAS 41 apply to lessees for assets leased under finance leases.

8 Disclosures – Operating lease

Lessees shall make the following disclosures for operating leases:

1. the total of future minimum lease payments under non-cancellable operating leases for each of the following periods:
   1. not later than one year;
   2. later than one year and not later than five years;
   3. later than five years.
2. the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period.
3. lease and sublease payments recognised as an expense in the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments.
4. a general description of the lessee’s significant leasing arrangements including, but not limited to, the following:
   1. the basis on which contingent rent payable is determined;
   2. the existence and terms of renewal or purchase options and escalation clauses; and
   3. restrictions imposed by lease arrangements, such as those concerning dividends, additional debt and further leasing.