The main contents of the chapter consist of the following: What is a leasing agreement? types of leases, a finance lease, an operating lease, classification of leases, substance over form, lease and the definition of an asset,. | Revise lecture 23 Leases What is a leasing agreement? A leasing agreement is an agreement whereby one party, the lessee, pays lease rentals to another party, the lessor in order to gain the use of an assets over a period of time. Types of leases There are two types of lease: A finance lease An operating lease Finance lease A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. Operating lease An operating lease is any lease other than a finance lease Classification of leases To decide whether a lease is finance or operating, the first step is to assess whether the risks and rewards of ownership have transferred to the lessee. Classification of leases Risks and rewards Risks and rewards of ownership include: Risks: Lessee carries out repairs and maintenance Lessee insures asset Lessee runs the risk of losses from idle capacity Lessee runs the risk of technological obsolescence Classification of leases Risks and rewards of ownership include: Rewards: Lessee has right to use asset for most or all of its useful life. IAS 17 Leases - guidance IAS 17 provides guidance as to the classification of leases as finance leases or operating leases. It gives the following list of situations in which a lease would normally be classified as a finance lease. IAS 17 Leases - guidance 1. The lease transfers ownership of the asset to the lessee by the end of the lease term. 2. The lessee has the option to buy the asset at a price expected to be lower than the fair value at the time the option is exercised. 3. The lease term is for the major part of the economic life of the asset even if title is not transferred. IAS 17 Leases - guidance 4. At the beginning of the lease, the present value of the minimum lease payment (MLP’s) is approximately equal to the fair value of the asset. 5. The leased assets are of a specialised nature so that only the lessee can use them without major modification. IAS 17 Leases - . | Revise lecture 23 Leases What is a leasing agreement? A leasing agreement is an agreement whereby one party, the lessee, pays lease rentals to another party, the lessor in order to gain the use of an assets over a period of time. Types of leases There are two types of lease: A finance lease An operating lease Finance lease A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. Operating lease An operating lease is any lease other than a finance lease Classification of leases To decide whether a lease is finance or operating, the first step is to assess whether the risks and rewards of ownership have transferred to the lessee. Classification of leases Risks and rewards Risks and rewards of ownership include: Risks: Lessee carries out repairs and maintenance Lessee insures asset Lessee runs the risk of losses from idle capacity Lessee runs the risk of technological obsolescence Classification of leases Risks .
