1. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-1 Chapter 11 Accounting for leases

2. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-2 Objectives of this lecture Understand what a lease represents Understand that the central accounting issue is whether the leased asset and lease liability should appear on the statement of financial position Understand that under existing accounting rules, leases can be classified as either finance leases or operating leases and know the differences between operating leases and financial leases Understand how lessors and lessees should account for financial leases

3. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-3 Objectives (cont.) Understand how lessors and lessees should account for operating leases Understand the implications that lease recognition will have for a reporting entity’s financial statements Be aware of joint efforts currently being undertaken by the IASB and the FASB to develop a revised accounting standard that will lead to significant changes in how leases are to be accounted for

4. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-4 Introduction to accounting for leases It needs to be emphasised that the following discussion relates to the accounting requirements in place in 2012. That is, we will be discussing the accounting requirements incorporated within AASB 117. While there had been an expectation that a new accounting standard on leasing would be released by the IASB by late 2011 a further exposure draft on leasing is to be released by the IASB before the end of 2012. A final accounting standard is not expected to be released until at least 2013 with an application date expected to be in 2015, or later.

5. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-5 Introduction to accounting for leases (cont.) As already indicated, accounting for leases is currently governed by AASB 117 Leases Applies to accounting for leases other than: –leases to explore for or use minerals, oil, natural gas and similar non-regenerative assets –licensing agreements for such items as motion picture films, video recordings, plays, manuscripts and copyrights Lease defined (AASB 117, par. 4) An agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time

6. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-6 Introduction to accounting for leases (cont.) Central accounting issue Whether or not the leased assets and the associated commitments relating to the lease arrangement should appear in the reporting entity’s statement of financial position Should lack of legal ownership preclude the lessee’s reporting of the asset and the related liability in the statement of financial position?

7. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-7 Introduction to accounting for leases (cont.) As we know in relation to assets, it is a question of ‘control’ and not ‘ownership’ that governs recognition A firm may recognise assets it does not own as long as it is able to control their use Do leases transfer control of the asset to the lessee? –Depends on the terms of the lease agreement –It is, in fact, possible for control of the asset to be vested in the lessee

8. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-8 Introduction to accounting for leases (cont.) Central issue concerns whether lease is: –a finance lease, or –an operating lease. Finance leases (under AASB 117) must be disclosed in the statement of financial position –Lease asset –Corresponding lease liability

9. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-9 Introduction to accounting for leases (cont.) Finance lease –A lease that transfers substantially all the risks and rewards incidental to ownership of an asset –Title may or may not be eventually transferred

10. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-10 Risks and rewards of ownership Risks and rewards of ownership central to the application of AASB 117 –If the lessee holds the risks and rewards of ownership, the lessee’s risk exposure is basically what it would have been if the lessee acquired the asset by way of a purchase transaction –If the risks and benefits of ownership are transferred in substance to the lessee, the lessee’s risk exposure in relation to holding the asset is basically equivalent to what it would have been if the lessee acquired the asset for cash or by way of a loan

11. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-11 Is it a finance or operating lease? AASB 117 (par. 10)—Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. Examples of situations that, individually or in combination, would normally lead to a lease being classified as a finance lease AASB 117 (par. 11)—Indicators of situations that, individually or in combination, could also lead to a lease being classified a finance lease

12. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-12 Operating versus finance lease If a lease is cancellable at limited cost to the lessee, the lessee has limited risks and the lease is considered an ‘operating’ lease For the lessee to be considered to bear the risks associated with asset ownership there should be costs for the lessee should the lessee choose to cancel the lease Thus, par. 11(a) is considered an important consideration in determining whether a lease is a ‘finance’ lease

13. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-13 Classification of a lease is a matter of professional judgment, i.e. it depends on the economic substance of the lease agreement Leases that do not appear to satisfy any of the criteria of AASB 117 (pars 10–12) will be classified and accounted for by the lessee as ‘operating’ leases They will not require disclosure within the statement of financial position, and the lease payments are typically treated as rental expenses Operating versus finance lease (cont.)

14. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-14 Key terms used in accounting for leases 1.Fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date Necessary for determining the amount to be included for the leased asset in the statement of financial position of the lessee

15. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-15 Key terms (cont.) 2. Non-cancellability A non-cancellable lease is a lease that is cancellable only: (a)upon occurrence of some remote contingency (b) with the permission of the lessor (c) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor, or (d) upon payment by the lessee of such an additional amount that, at inception of the lease, continuation of the lease is reasonably certain

16. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-16 Key terms (cont.) 3. Contingent rent (AASB 117, par. 4) That portion of the lease payments that is not fixed in amount but is based on the future amount of a factor that changes other than with the passage of time (e.g. percentage of future sales, amount of future use, future price indices, future market rates of interest) 4. Transfer of ownership If a lease transfers ownership of the asset to the lessee at the end of the lease term it is considered a finance lease (AASB 117, par. 10a) If the lease is also non-cancellable, the lease is really only another type of debt agreement with title passing after the last payment is made

17. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-17 Key terms (cont.) 5.Bargain purchase option Considered in AASB 117 (par. 10b) A provision that allows a lessee an option to purchase a leased property at a lower price in the future Difference between the option price and expected fair market value If exercise of an option is likely (bargain) it is also likely that transfer of ownership will occur Probable that the amount will ultimately be paid by the lessee

18. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-18 Key terms (cont.) 6. Lease term The non-cancellable period for which the lessee has contracted to lease the asset, together with any further terms for which the lessee has the option to continue to lease the asset with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option 7. Economic life Either: (a)the period over which an asset is expected to be economically usable by one or more users, or (b)the number of production or similar units expected to be obtained from the asset by one or more users

19. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-19 Key terms (cont.) 8. Minimum lease payments AASB 117 (par. 4) The payments over the lease term that the lessee is or can be required to make, excluding contingent rent, costs for services and taxes paid by and reimbursed to the lessor together with: (a)for the lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or (b)for a lessor, any residual value guaranteed to the lessor Expressly exclude contingent rent

20. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-20 Key terms (cont.) 8.Minimum lease payments (cont.) Include guaranteed residual values (a) Guaranteed residual value defined for the lessee (b) Guaranteed residual value defined for the lessor (c) Amount of a guaranteed residual value (d) Minimum lease payments 9.Guaranteed/Unguaranteed residual (a) Guaranteed residual (b) Unguaranteed residual

21. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-21 Interest rate for determining the present value of minimum lease payments AASB 117 (par. 20) At the commencement of lease term lessees are to recognise finance leases as assets and liabilities in their statements of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments Discount rate to be used in calculating present value is: –interest rate implicit in the lease (if this is practical to determine) or, if not –the lessee’s incremental borrowing rate to be used

22. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-22 Interest rate for determining the present value of minimum lease payments (cont.) Interest rate implicit in the lease (AASB 117) The discount rate that, at the commencement of the lease term, causes the aggregate present value of: (a)the minimum lease payments; and (b)the unguaranteed residual value to be equal to the sum of: (i)the fair value of the leased asset; and (ii)any initial direct costs of the lessor. Refer to Worked Example 11.1, p. 372—Example of computing discount rate Refer to Worked Example 11.2, p. 367—Classification of a lease as a finance or operating lease

23. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-23 Lessee accounting for finance leases Overview Lessee records an asset (leased) and a lease liability Asset and liability recorded value Unguaranteed residual excluded Rental payments to lessor Interest expense calculation Balance of payment Depreciation of leased assets

24. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-24 Lessee accounting for finance leases (cont.) Journal entries To record the leased asset and lease liability (at PV of minimum lease payments) To record lease depreciation expense To record the lease payment, with the payment being allocated between principal and interest To record payment of executory costs

25. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-25 Lessee accounting for finance leases (cont.) Initial indirect costs (AASB 117) Costs directly associated with negotiating and executing a lease agreement Initial direct costs relating to a finance lease must be capitalised as part of the leased asset The lease asset comprises the present value of the minimum lease payments and the amount of the initial direct costs incurred—total amount subject to amortisation Refer to Worked Example 11.5, p. 384—Comprehensive example of accounting for leases by a lessee

26. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-26 Lessee accounting for operating leases A lease that does not substantially transfer all the risks and rewards incidental to ownership of the asset to the lessee Lease payments are expensed on a basis representative of the pattern of benefits derived from the leased asset If lease payments do not represent prepayments, they should be expensed in the period made

27. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-27 Lessee accounting for operating leases (cont.) AASB 117 (par. 33) Lease payments under an operating lease are to 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 benefits Journal entry DrRental expense CrCash Refer to Worked Example 11.3, p. 378—Example of accounting for an operating lease

28. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-28 Lessee accounting for sale and leaseback transactions Occurs when the owner of a property (seller/lessee) sells the property to another party and simultaneously leases it back from the purchaser/lessor (the legal owner) Seller does not lose control of the asset if the lease is a finance lease Property often sold at a price equal to or greater than current market value—leased back for a term approximating useful life

29. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-29 Lessee accounting for sale and leaseback transactions (cont.) Where the lease is a finance lease Where substantially all risks and rewards incidental to ownership remain with lessee—represents refinancing of an asset Any profit or loss on sale deferred in the statement of financial position and amortised to profit or loss over the term of the lease (AASB 117, par. 59) Asset considered not to have been ‘sold’ to lessor, therefore inappropriate to recognise entire profit or loss (AASB 117, par. 60)

30. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-30 Lessee accounting for sale and leaseback transactions (cont.) Where the lease is an operating lease Where substantially all risks and rewards incidental to ownership effectively pass to the lessor AASB 117 (par. 61) If a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss shall be recognised immediately

31. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-31 AASB 117 (par. 63) For operating leases, if the fair value at the time of the sale and leaseback transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value is to be recognised immediately Refer to Worked Example 11.4, p. 379—Example of sale and leaseback transaction Lessee accounting for sale and leaseback transactions (cont.)

32. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-32 Worked Example 11.4—Sale and leaseback transaction As at 1 July 2015, Winki Company owns a building that cost $5 million and has accumulated depreciation of $3.5 million. The building is sold on 1 July 2015 to Pop Ltd for $2 007 520, and then leased back over 10 years (the remaining life). Lease payments are $400 000 per year, paid at the end of the year. The lease is non-cancellable. The implicit rate is 15% REQUIRED Provide the accounting entries in the books of Winki Ltd for the year ending 30 June 2016

33. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-33 Lessee disclosure requirements Finance lease Numerous disclosures required—Refer to AASB 117, paragraph 31 Operating lease Numerous disclosures required—Refer to AASB 117, paragraph 35 Refer to Exhibit 11.2, p. 382—Lease commitment note—Qantas Airways Ltd

34. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-34 Accounting by lessors Lessor’s perspective Leases also classified either as operating leases or finance leases Adoption of same criteria for non-cancellable lease as for lessee Factors addressed in AASB 117, pars 10–12 Finance leases can be further classified as: leases involving manufacturers or dealers direct finance leases.

35. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-35 Lessor accounting for direct financing leases Direct financing lease A lease where the lessor provides the financial resources to acquire the asset Lessor typically acquires the asset, giving the lessor legal title, then enters a lease agreement to lease the asset to the lessee, who subsequently controls the asset No sale is recorded Lessor derives income through periodic interest revenue Where risks and rewards of ownership are held by lessee, the lessor substitutes lease receivable for the underlying asset

36. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-36 Lessor accounting for direct financing leases (cont.) Direct financing lease (cont.) AASB 117 (par. 36) Lessors shall recognise assets held under a finance lease in their statements of financial position and present them as a receivable at an amount equal to the net investment in the lease Net investment in lease (AASB 117, par. 4) The gross investment in the lease discounted at the interest rate implicit in the lease

37. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-37 Lessor accounting for direct financing leases (cont.) Direct financing lease (cont.) Interest earned by the lessor over the lease term Initial indirect costs incurred by lessor Recovery of executory costs

38. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-38 Lessor accounting for direct financing leases (cont.) Direct financing lease—Net vs gross method Either net method or gross method can be used to record the lease Net method –Most commonly used –Lease receivable recorded at its present value and does not use contra account (unearned interest revenue)

39. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-39 Lessor accounting for direct financing leases (cont.) Direct financing lease—Net vs gross method (cont.) Gross method –Lease receivable recorded at the sum of the undiscounted minimum lease payments and the unguaranteed residual –Unearned interest revenue also recorded (contra account) and amortised to interest revenue over the lease term –Unearned interest revenue is subtracted from lease receivable to determine carrying (present) value of the lease receivable Refer to Worked Example 11.6, p. 389—Accounting for leases by lessor

40. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-40 Lessor accounting for direct financing leases (cont.) Lessor disclosure requirements for finance lease AASB 117, par. 47 Lessors shall, in addition to meeting the requirements in AASB 7, disclose the following for finance leases: (a)A reconciliation between the gross investment in the lease at the end of the reporting period, and present value of minimum lease payments receivable at the end of the reporting period. In addition, an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period, for each of the following periods: (i)not later than one year (ii)later than one year and not later than five years (iii)later than five years

41. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-41 Lessor accounting for direct financing leases (cont.) Lessor disclosure requirements for finance lease (cont.) (b) unearned finance income (c) the unguaranteed residual values accruing to the benefit of the lessor (d) the accumulated allowance for uncollectible minimum lease payments receivable (e) contingent rents recognised as income in the period (f) a general description of the lessor’s material leasing arrangements

42. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-42 Accounting for lessors who are manufacturers or dealers of the leased asset Where fair value of the property at the inception of the lease differs from its cost to the lessor (dealer or manufacturer) Represents a finance lease Two parts of the transaction 1.A sale with a resulting gain (fair value vs cost to dealer/manufacturer) 2.A lease transaction that will provide interest revenue over the period of the lease

43. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-43 Accounting for lessors who are manufacturers or dealers of the leased asset (cont.) Lessor’s investment in lease accounted for in same manner as direct financing lease –Value of sale recorded as fair value of asset at date of sale (equal to present value of minimum lease payments) –Indirect costs (e.g. commissions, legal fees, etc.) accounted for by lessor as a cost of sales in year in which transaction occurs—not as part of net investment in lease receivable (AASB 117, par. 38) –Lease rentals representing a recovery of executory costs (if material) to be treated by lessor as revenue in year in which costs incurred Refer to Worked Example 11.7, p. 391—Example of lease involving a dealer or manufacturer

44. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-44 Lessor accounting for operating leases Leased property accounted for as a non-current asset Required to depreciate if a depreciable asset Lease receipts treated as rental revenue AASB 117 (par. 53) The depreciation policy for depreciable leased assets is to be consistent with the lessor’s normal depreciation policy for similar assets, and depreciation is to be calculated in accordance with AASB 116 and AASB 138

45. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-45 Leases involving land and buildings Land is an asset with usually an indefinite life When a lease includes both land and buildings elements, an entity assesses the classification of each element as a finance or an operating lease separately Allocating the minimum lease payments (including any lump-sum upfront payments) For a lease of land and buildings in which the amount that would initially be recognised for the land element is immaterial Refer to Worked Example 11.8, p. 394—Accounting by the lessee for a lease involving land and buildings

46. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-46 Lessee accounting for lease incentives under a non-cancellable operating lease Incentives by lessor May offer incentives to enter non-cancellable operating leases Lease incentives not specifically dealt with under AASB 117 Incentives by lessee Generally in exchange for benefits, lessee pays higher lease payments than if no lease incentive were provided Interpretation 115 Operating Leases states that incentives are to be treated as borrowings (liability), which will be repaid by the lessee as part of future lease rentals Refer to Worked Example 11.9, p. 396—Accounting for a lease incentive under an operating lease

47. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-47 Implications for accounting-based contracts Classification as finance rather than operating lease will affect debt–asset constraints Introduction of accounting standards requiring capitalisation of finance leases has negative cash- flow effects on firms Negative cash-flow effects found to have negative impact on security prices

48. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-48 Likely future changes in accounting for leases The final contents of the new accounting standard is expected to be released in 2013. It is anticipated that it will not have an application date prior to 2015. Another exposure draft is to be released in 2012. A major concern of the IASB and the FASB was the differentiation between finance leases and operating leases. Implication of failure to include operating leases in the statement of financial position. Current thinking indicates that the differentiation between finance leases and operating leases should be abandoned.

49. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-49 Likely future changes in accounting for leases (cont.) Whether a lease provides rights to use the asset and generates related obligations vs whether the risks and rewards of ownership pass to the lessee If the lessee’s obligation to pay rentals under a lease aligns with the IASB Conceptual Framework. Recognition and measurement of the assets and liabiltiies within a lease arrangement Increased number of leases traditionally referred to as operating leases, will have to be included in the statement of financial position. Implications for reporting entities’ assets and liabilities, and therefore for their gearing ratios and so forth. Refer to Table 11.1, p. 401—Expectations about the contents of the future leasing standard

50. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-50 Summary The lecture has addressed the treatment of accounting for leases Currently, a major issue in accounting for leases is whether the leased asset-related liability should appear on the statement of financial position of the lessee Leases are classified as either operating leases or financial leases

51. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-51 Summary (cont.) Finance lease –Transfers the risks and rewards of ownership from the lessor to the lessee –The leased asset and lease liability must appear on the statement of financial position of the lessee –Where the lease is capitalised (included within the statement of financial position) the amount to be capitalised is the present value of the minimum lease payments or the fair value of the leased asset, whichever is the lower –Where the lessee has capitalised a lease, the lease payments are to be apportioned between interest expense and the repayment of the lease liability, and the lessee must amortise the leased asset over its expected useful life to the lessee

52. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-52 Summary (cont.) Operating lease –Does not transfer the risks and rewards of ownership to the lessee –No asset or liability is recognised in the accounts of the lessee (unless periodic lease payments are made in advance or in arrears) –Periodic lease payments are treated as an expense in the accounts of a lessee and as revenue in the accounts of the lessor

53. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-53 Summary (cont.) From the perspective of the lessor - Leases must be classified as either operating or financing - Finance leases can be further broken down into leases involving dealers or manufacturers or direct finance leases - If a finance lease, the underlying asset is removed from the statement of financial position and the asset is replaced with a lease receivable - Periodic lease receipts from the lessee will be apportioned between interest revenue and the recoupment of the lease receivable

54. Copyright © 2012 McGraw-Hill Australia Pty Ltd PPTs to accompany Deegan, Australian Financial Accounting 7e 11-54 Summary (cont.) We have also learned that in the near future there are likely to be significant changes in how we are to account for leases The classifications of operating versus financial leases will likely be abandoned The likely future changes will mean that many more leased assets and liabilities will be disclosed in a reporting entity’s statement of financial position