CHAPTER 15 Leases 859 objective of the parties involved often is to devise terms that will result in a sale by the lessor but an operating lease by the lessee. 9 In the remaining sections of Part A of this chapter we consider, in order, operating leases, direct financing leases (capital leases to the lessee), and sales-type leases (capital leases to the lessee). International Financial Reporting Standards Lease Classification. Lease accounting under U.S. GAAP and IFRS provides a good general comparison of “rules-based accounting,” as U.S. GAAP often is described, and “principles-based accounting,” which often is the description assigned to IFRS. We discussed four classification criteria used under U.S. GAAP to determine whether a lease is a capital lease. Under IFRS, we don’t have such bright-line rules. Instead, a lease is deemed a capital lease (called a finance lease under IAS No. 17, “Leases” 10 ), if substantially all risks and rewards of ownership are judged to have been transferred. Judgment is made based on a number of “indicators” including some similar to the specific criteria of U.S. GAAP. Here is a comparison: IFRS U.S. GAAP Situations (individually or in combination) that normally would lead to classification as a finance lease are: • The agreement specifies that ownership of the asset transfers to the lessee. • The agreement contains a bargain purchase option. • The noncancelable lease term is for a “major portion” of the expected economic life of the asset. • The present value of the minimum lease payments is equal to or greater than “substantially all” of the fair value of the asset. • The leased asset is of a specialized nature such that only the lessee can use it without major modifications being made. Other situations (individually or in combination) that might also lead to classification as a finance lease are: • The lessor’s losses are borne by the lessee upon cancellation. • Gains or losses from changes in the fair value of the residual value go to the lessee (for instance, by means of a rebate of lease payments). • The lease contains a “bargain renewal option” whereby the lessee can continue the lease for substantially less than market rent. 9 Later in the chapter we discuss ways this is done. ● LO15–11 IFRS Illustration Situations that require classification as a capital lease if any one (or more) is met are: Same as IFRS. Same as IFRS. “Major portion” is defined specifically as 75% or more. “Substantially all” is defined specifically as 90%. No similar situation specified. No similar situation specified. No similar situation specified. No similar situation specified. 10 “Leases,” International Accounting Standard No. 17 (IASCF), as amended effective January 1, 2014. (continued)
Spiceland_Inter_Accounting8e_Ch15
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