IAS 17 LEASES

There are two types of leases - operating leases and finance leases.
Finance leases are those that transfer significant risks and rewards to the lessee. Operating leases are any leases other than finance leases.

The following conditions are indications of finance leases;
a)the lease term is for a significant portion of the economic life of the asset(e.g the lease term is 4 years and the economic life is 5 years)
b)the title will be transferred to the lessee
c)the lessee has the option to purchase the asset at a nominal price at the end of the lease term (e.g. in hire purchase transactions)
d)the present value of the minimum lease payments is a significant portion of the fair value of the asset

1.Finance leases:
INITIAL RECOGNITION
On initial recognition, we capitalise the asset and the lease obligations at the LOWER of the present value of minimum lease payments and the fair value of the asset. The amounts capitalised on initial recognition must be equal.
SUBSEQUENT MEASUREMENT
Subsequently, the asset will be depreciated in accordance with IAS 16 - Property, Plant and Equipment. The liability will be armortised over the lease period using the effective interest rate. When presenting the asset, we amalgamate it with other owned PPE. The liability is however split into current and non current portions and presented as such.

Income Statement (extract)
Depreciation xxx
Finance cost(interest on lease) xxx

Statement of Financial Position (extract)
Non Current Assets:
Property Plant and EQuipemnt xxxx

Non current liabiliites:
Obligations under finance lease xxx

Current Liabilities
Obligations under finance lease xxx

2.Operating Leases
The lease instalments paid are recognised as expenses on a straight line basis. if the lease commenced at a date other than the start of the year, then there will be an accrual or prepayment depending on whether the instalments are payable in arrears or in advance.
For example,if a lease commenced on 1 July 2009 with instalments of $40,000 pa payable in advance,then if the year end is 31 December 2009,the following are the entries;
expenses(operating lease rentals) = $40,000*6/12=$20,000
prepayment (since instalment runs until 30 June 2010) = $40,000 - $20,000 = $20,000