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AASB 117 - Leases

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Text of the Standard 
Summary 
AIFRS compared to IFRS and old AGAAP 
Interpretations and guidance 
Questions & answers 
Articles 

 
Comparison between AASB 117 and IAS 17 
Comparison by Jeffrey Knapp 
 
Background 
 
AASB 117 ‘Leases’ is the Australian equivalent to IAS 17 of the same name. It was made by the AASB on 15 July 2004 as part the AASB’s program to adopt International Financial Reporting Standards by 2005. 
 
AASB 117 Compared to IAS 17 
 
Additions 
 
Paragraph Description 
 
Aus 1.1 Which entities AASB 117 applies to, ie. reporting entities and general purpose financial reports. 
 
Aus 1.2 The application date of AASB 117, ie. annual reporting periods beginning 1 January 2005. 
 
Aus 1.3 Prohibits early application of AASB 117. 
 
Aus 1.4 Makes the requirements of AASB 117 subject to AASB 1031 ‘Materiality’. 
 
Aus 1.5 Explains which Australian Standards have been superseded by AASB 117. 
 
Aus 1.6 Clarifies that the superseded Australian Standards remain in force until AASB 117 applies. 
 
Aus 1.7 Notice of the new Standard published on 22 July 2004. 
 
Deletions 
 
Paragraph Description 
 
67 Transitional provision for entities applying IAS 17 for the first time encourages retrospective application. 
 
68 Transitional provision for entities that applied the previous version of IAS 17. 
 
69 Effective date of IAS 17. 
 
70 Reference to superseded IAS 17. 
 
 
 
Differences Between AASB 117 and AASB 1008 
Comparison from the Australian Accounting Standards Board 
 
This section identifies differences between AASB 117 Leases and AASB 1008 Leases under the following headings. 
 
A: Incompatibilities between AASB 117 and AASB 1008 
B: AASB 1008 is more detailed or restrictive 
C: AASB 117 is more detailed or restrictive  
 
The analysis of differences should not be taken as providing an exhaustive list of differences. 
 
Introduction 
 
Both AASB 1008 and AASB 117 look to the economic substance of the leasing arrangement when prescribing the appropriate accounting treatment. In both cases it is the transfer (or lack thereof) of substantially all the risks and benefits associated with the leased asset that determines the accounting treatment for both the lessor and lessee. 
 
Scope 
 
AASB 117 differs in scope from AASB 1008 in the following ways: 
  • AASB 1008.2.1 excludes from its scope both operating and finance lease agreements to use self-generating and regenerating assets (SGARAs). In contrast, AASB 117.1 excludes from its scope the measurement by lessees of only some SGARAs (in particular, living animals and plants) held under finance leases, and the measurement by lessors of some SGARAs (in particular, living animals and plants) leased out under operating leases; 
  • unlike AASB 1008, the measurement by lessees of investment property held under finance leases and the measurement by lessors of investment property leased out under operating leases are excluded from the scope of AASB 117. Such properties fall within the scope of AASB 140 Investment Property.
 
Differences 
 
A. Incompatibilities between AASB 117 and AASB 1008 
 
A.1 Leases of non-human living assets other than biological assets 
 
Non-human living assets, other than biological assets, held under a lease are subject to AASB 117, such that where: 
  • the item is subject to a finance lease, the lessee recognises a lease asset and lease liability, measured at the commencement of the lease term at the lower of the fair value of the leased property and the present value of the minimum lease payments (AASB 117.20); or 
  • the item is subject to an operating lease, it continues to be lessor-controlled property and the lessor applies the measurement requirements of AASB 116 Property, Plant and Equipment, together with the AASB 117 requirement that such assets be presented according to their nature.
Where exclusive rights to non-human living assets other than biological assets are obtained under a finance lease, AASB 1037 Self-Generating and Regenerating Assets paragraph 2.1(b) requires a lessee to recognise and measure the right at its net market value, as if that right is itself a non-human living asset other than a biological asset. Similarly, where such an asset is subject to an operating lease, the lessor applies AASB 1037. 
 
A.2 Operating leases of biological assets 
 
Under AASB 117.33 a lessee of a biological asset does not recognise an asset but instead recognises the operating lease payments as an expense. In contrast, where an operating lease gives the lessee an exclusive right over SGARAs, AASB 1037.2.1(b) requires the lessee to recognise and measure that right at its net market value, as if that right is itself a SGARA. 
 
A.3 Interest rate implicit in the lease 
 
AASB 117.4 defines the interest rate implicit in the lease as the discount rate that, at the inception of the lease, causes the aggregate present value of the minimum lease payments and any unguaranteed residual value to be equal to the sum of the fair value of the leased asset and any initial direct costs of the lessor. In contrast, AASB 1008.20.1 defines the interest rate implicit in the lease as the interest rate that, at the beginning of the lease term, equates the present value of the minimum lease payments and any unguaranteed residual value expected to accrue to the benefit of the lessor at the end of the lease term to the fair value of the leased asset at the inception of the lease. Therefore, the interest rate implicit in the lease under AASB 117 will differ from the interest rate implicit in the lease under AASB 1008 whenever the inception of the lease (that is, the date of the lease agreement or, if earlier, the date of a commitment by the parties to the principal provisions of the lease) differs from the beginning of the lease term (that is, the date from which the lessee is entitled to exercise its right to use the leased asset). This difference in the interest rate implicit in the lease gives rise to the following incompatibilities between AASB 117 and AASB 1008 in relation to the accounting for finance leases: 
  • in the case of lessees, the amounts recognised as assets and liabilities arising from finance leases and as interest expense each period over the lease term under AASB 117 will differ from the amounts recognised under AASB 1008; and 
  • in the case of lessors, the amounts recognised as finance revenue each period over the lease term under AASB 117 will differ from the amounts recognised under AASB 1008;
whenever the inception of the lease differs from the beginning of the lease term. 
 
A.4 Relationship between fair value and present value of minimum lease payments 
 
Where a lease is classified as a finance lease, AASB 1008.6.1and 6.2 require the lessee to recognise an asset and a liability equal in amount to the present value of the minimum lease payments, calculated using the interest rate implicit in the lease or, if that could not be determined practicably, the lessee’s incremental borrowing rate. To calculate the rate implicit in the lease the fair value of the leased asset must be known. AASB 117.20 requires the lessee to recognise an asset and a liability at amounts equal at the inception of the lease to the fair value of the leased property or, if lower, at the present value of the minimum lease payments calculated using the interest rate implicit in the lease or, if that cannot be determined practicably, the lessee’s incremental borrowing rate.  
A difference may arise where the amount of unguaranteed residual is unknown. In this case, it is impossible to determine the implicit rate. Under AASB 117, the lessee would record a value equal to the fair value today or, if lower, the present value of the minimum lease payments discounted at the entity’s incremental borrowing rate. In contrast, the default amount in AASB 1008 is the present value of the minimum lease payments discounted at the incremental borrowing rate. Thus, if the present value of the minimum lease payments discounted at the incremental borrowing rate exceeds the fair value (an unlikely scenario) the amounts recorded as assets and liabilities would differ under AASB 117. 
 
A.5 Lease term with cancellable period 
 
Where a lease includes a cancellable period, that period would have been included as part of the lease term under AASB 1008, whereas a cancellable period will only be included as part of the lease term under AASB 117 where, at the inception of the lease, there is reasonable certainty that the lessee will not cancel the lease during the cancellable period. In most cases AASB 117.4 and AASB 1008.20.1 will lead to the same lease term. Where the lease term under AASB 1008 includes a cancellable period which is not included as part of the lease term under AASB 117, the change has implications for the amounts capitalised as assets and liabilities (finance leases), sale and leaseback transactions, and the amortisation of initial direct costs under an operating lease.  
 
A.6 Contingent rentals under an operating lease 
 
AASB 117.33 requires a lessee to recognise operating lease payments as an expense on a straight-line basis over the lease term unless another systematic basis is representative of the time pattern of the user’s benefit. AASB 1008.8.1 requires a lessee to recognise that part of lease payments comprising contingent rentals as an expense in the reporting period in which the contingent rentals are incurred. Therefore, the basis on which contingent rentals under an operating lease are recognised as an expense by the lessee under AASB 117 will differ from the basis on which they are recognised as an expense under AASB 1008. 
 
A.7 Definition of sales-type lease 
 
AASB 1008.20.1 defines a sales-type lease as a finance lease in which the fair value of the asset at the inception of the lease differs from its carrying amount to the lessor. In contrast, AASB 117.42-46 refer to manufacturer or dealer lessors. Because AASB 1008 does not limit lessors in sales-type leases to manufacturers and dealers, there will be circumstances when an entity disposes of surplus property, plant and equipment through a finance lease, where a finance lease would be classified as a sales-type lease under AASB 1008 but is not under AASB 117. This difference in definition has the effect that for sales-type leases other than manufacturer or dealer finance leases: 
  • AASB 1008.12.4 requires the “selling” profit or loss to be recognised in the period of the lease transaction, whereas AASB 117 is silent on the issue; and 
  • initial direct costs for sales-type leases other than manufacturer or dealer lessors would be amortised over the lease term instead of being recognised as an expense in the period in which the transaction occurs.
 
A.8 Basis for recognition of operating lease revenue – lessor 
 
AASB 117.50 requires a lessor to recognise lease revenue (which presumably includes contingent rentals) under an operating lease “on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished”. AASB 1008.13.2 and 15.1 require a lessor to recognise lease revenue under an operating lease as follows: 
  • for that part of the revenue comprising minimum lease payments, by allocating the minimum lease payments on a basis representative of the pattern of service rendered through the provision of the leased asset; and 
  • for that part of the revenue comprising contingent rentals, in the reporting period in which the contingent rentals are earned.
Where the benefits from the leased asset are derived on a time basis AASB 1008 is consistent with AASB 117. However, because of the difference in treatment of contingent rentals, where the benefits from the leased asset are derived on some other basis (for example, on an output basis such as units of production, operating hours or distance travelled), the minimum lease payments would be recognised differently on adoption of AASB 117. 
 
A.9 Definition of initial direct costs 
 
The definition of initial direct costs is consistent with AASB 1008, except that under AASB 1008 initial direct costs include costs incurred by a manufacturer or dealer lessor. Manufacturer and dealer lessors are specifically excluded from capitalising initial direct costs as part of the receivable and liability (finance lease) or carrying amount of the leased asset (operating lease) under AASB 117. Instead, AASB 117.42 requires costs incurred by a manufacturer or dealer lessor in connection with negotiating and arranging a lease to be immediately recognised as an expense when the selling profit is recognised. 
 
B. AASB 1008 is more detailed or restrictive  
 
B.1 Leases of biological assets 
 
In respect of leases covering exclusive rights over SGARAs, AASB 1037.2.1(b), 5.2 and 5.3 require that: 
  • where a finance lease gives an exclusive right over a SGARA, the lessee recognise and measure that right as if that right is a SGARA; and 
  • where a lessor leases a SGARA under an operating lease, the lessor recognise and measure that right as if that right is a SGARA.
In respect of leases giving non-exclusive rights over SGARAs, there are no specific requirements in AASB 1037, and these leases are excluded from AASB 1008.2.1(a). 
AASB 117.2 states that AASB 117 does not apply to: 
  • biological assets held by lessees under finance leases; and 
  • biological assets provided by lessors under operating leases.
It follows that, unlike AASB 117 and AASB 141 Agriculture, AASB 1037 contains “specific” requirements about leases of biological assets conveying exclusive rights. In some circumstances AASB 1008 and AASB 1037 and AASB 117 and AASB 141 would require a lessor to apply lease accounting in respect of operating leases conveying non-exclusive rights over biological assets controlled by the entity. 
 
B.2 Recognition date 
 
When a lease is classified as a finance lease, AASB 1008.6.1 requires the lessee to recognise the resulting asset and liability as at the beginning of the lease term. In the case of the lessor, the lease receivable must also be recognised as at the beginning of the lease term (AASB 1008.12.1). For lessees, AASB 117.20 requires the finance lease asset and liability to be recognised in the financial statements at the commencement of the lease term. For lessors, however, AASB 117 is silent in relation to the point in time at which the lessor must recognise the lease receivable. 
 
B.3 Executory costs 
 
AASB 1008.20.1 defined executory costs as the costs specifically related only to the operation and maintenance of the lease asset (including insurance, repairs and property taxes). Under AASB 1008.9.1 and 16.1: 
  • a lessee recognises any part of lease payments representing a reimbursement of executory costs incurred by the lessor as an expense in the reporting period in which those rentals are incurred; and 
  • a lessor recognises any part of lease payments representing a recovery of executory costs as revenues in the reporting period in which the related costs were incurred.
AASB 117 does not address these issues. 
 
B.4 Sale and leaseback losses 
 
Where a sale and leaseback transaction involves a leaseback which is classified as a finance lease by the lessee, both AASB 1008.10.1 and AASB 117.59 require any excess of the proceeds received over the carrying amount of the asset to be deferred and amortised by the lessee over the lease term. However, AASB 1008.10.1 also requires an excess of the carrying amount of the asset over the proceeds received to be deferred and amortised over the lease term. AASB 117 does not address this issue, meaning that where there is a loss to the lessee in a sale and leaseback transaction, that loss may be deferred or it may be recognised immediately under AASB 117. 
 
B.5 Sale and leaseback – amortisation of excess 
 
AASB 117 does not specify the amortisation method to be adopted. Therefore AASB 117 permits but does not require the AASB 1008 approach of amortising the excess in proportion to the rental payments. 
 
C. AASB 117 is more detailed or restrictive 
 
C.1 Allocation of minimum lease payments between land and buildings 
 
AASB 117 and AASB 1008 provide similar guidance on the allocation of minimum lease payments between land and buildings. AASB 117.16 specifically addresses the situation where the minimum lease payments cannot be allocated reliably between the land and buildings. Unless it is clear that both elements (land and buildings) are operating leases, the lease must be classified as a finance lease. AASB 1008 provides no such guidance. 
 
C.2 Balance sheet – Lessor 
 
AASB 117.49 requires a lessor to present leased assets subject to operating leases in its balance sheet according to the nature of the assets. Although AASB 1008 addresses the classification by lessors of leased assets subject to operating leases, AASB 1008 does not address the presentation of such assets in the lessor’s balance sheet.