International Accounting Standards Essay Example | Topics and Well Written Essays - 1750 words

International Accounting Standards - Essay Example Many instances were reported by the relevant stakeholders, where the management had concealed liabilities by classifying a lease as an operating lease where it should have been classified as a Finance lease based on the economic reality. To cater these issues IASB drafted and enforced a proper standard â€Å"Accounting for leases†. As the objective indicates, the standard has been divided into two main sections, Operating Lease and Finance Lease. This particular classification has been based on the transfer of risk and rewards of the underlying asset to lessee or lessor. Further aspects distinguishing the leases are discussed below in detail. The scope of the standard proposes it's non – applicability on the following areas: â€Å"Leases to explore minerals, oils, natural gas and similar non-generative resources; Licensing agreements for items as motion picture films, video recordings, manuscripts, patents and copyrights (because they are under scope of IAS 38). IAS 17 shall not be applied as the basis for measurement for leases discussed under IAS 40 (Investment property) and IAS 41 (biological assets). The standard will not apply to contract of services that do not transfer the right to use assets from one contracting party to the other†. (Financedoctors, n.d.) The standard has been further segregated into two aspects. ... In the books of the Bank, it will appear as an Investment held as finance lease with its relating receivables. The classification is explained below in further detail with the criteria defined by the standard as to when a lease is described as a Finance Lease. (Deloitte, 2012) Let's consider the implications of a Lease agreement from the perspective of Lessee. An operating lease is fairly simple to understand and account for. Lease payments under an operating lease arrangement are documented as an expense in the Statement of Comprehensive Income. The distribution of expense is usually done on a straight line basis over the lease term, unless a more logical basis provides a better representation. In the case of operating lease, the asset is not recognised by the lessee in his books of accounts. Instead the asset remains the property of the Lessor, and only used by the lessee in exchange for rentals, recognised as expense for the lessee. (Deloitte, 2012; BPP, 2012) Finance lease become s a little tricky to curtail. As under a finance lease agreement the asset is recognised in the books of the Lessee and subsequently depreciation is charged for the asset in the books of Lessee. Simultaneously, a liability is constructed in the Lessees books in relation to the leased asset. The classification is subject to certain criteria laid down by the standard. An asset is classified as a finance lease subject to the agreements economic reality rather than its legal form. The main factor to be considered is the transfer of risk and rewards. (Deloitte, 2012; BPP, 2012) Circumstances that would lead to a lease being classified as a finance lease are; â€Å"transfer of ownership to lessee at the end of lease term, the Bargain Purchase Option at the end of lease term,