Financial Reporting, Leasers Essay Example | Topics and Well Written Essays - 1500 words

Financial Reporting, Leasers - Essay Example In an operating lease, lease payments are recognized 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 entity's benefit. In the case of a finance lease, the lessee recognizes the lease as assets and liabilities in their financial statements at an amount equal to the fair value of the leased property. If the amount is lower, then at the present value of the minimum lease payments, each calculated at the start of the lease. When calculating the present value of the minimum lease payments, the discount rate used is the interest rate implicit in the lease. If this is not practicable to determine, then the lessee's incremental borrowing rate is used. All initial costs of the lessee are capitalized to the asset amount recognized. Minimum lease payments are apportioned between finance charge and the reduction of the outstanding principal liability. The finance charge is set in such a way that it produces a constant rate of interest on the outstanding balance of the liability. Lessors present assets subject to operating leases in their balance sheets according to the nature of the asset. Lease income from operating leases is recognized in income on a straight-line basis over the whole lease term, unless another systematic basis is more representative of the time-pattern of the entity's benefit. ... Treatment in the book of lessors Operating Leases Lessors present assets subject to operating leases in their balance sheets according to the nature of the asset. Lease income from operating leases is recognized in income on a straight-line basis over the whole lease term, unless another systematic basis is more representative of the time-pattern of the entity's benefit. Initial direct costs incurred by lessors in negotiating and arranging an operating lease is to be added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as the lease income. According to paragraph 56 of the incumbent IAS 17 Leases, Lessors shall, in addition to meeting the requirements of IFRS 7, disclose the following for operating leases: The future minimum lease payments under non-cancellable operating leases in the aggregate and 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. Finance Leases For initial recognition, lessors recognize their assets held under a finance lease in their balance sheets and present them as receivable at an amount equal to the net investment in the lease. The recognition of finance income is to be based on a pattern reflecting a constant periodic rate of return on the lessor's net investment in the finance lease. Analysis Now, the above introductory information should put us in a position so as to judge the effect of the proposed changes in the IAS against the benchmark incumbent IAS 17 Leases. Disadvantages The proposed changes in the IAS would render the operating lease to be treated in the same way as a finance lease. For the