IAS 17 – Leases


International Accounting Standard 17: Leases deals with the most controversial accounting loophole of its time. Before there was any standard on leased asset and the concept of substance over form was not given its due importance in accounting, entities were able to misstate information quite easily which was legit as well. IAS 17 dealt with off balance sheet financing by attaching concept of substance over form with non-current assets acquired under lease agreements.

Executive Summary

According to IAS 17 lease can be of two types i.e. finance lease or operating lease. The differentiating factor between two is to determine which party bears the risks and rewards associated with the asset. If the legal form is in conflict with economic substance of business events then for accounting purposes substance of transaction is preferred. IAS 17 clarifies the differences between the two lease types by providing different examples and how to do the accounting under the two types. If the asset is acquired under finance lease then asset is recognized in the books of lessee and accounted for as explained under IAS 17 Leases. However, in case of operating lease, lessee records only the rentals.