Username:
Password:
Forgot Password?

AASB 117 - Leases

Print this Article Print this Article
Email this Article

Summary 
Developments, Key Differences & History 
Compared to IFRS 
Interpretations 
Rejection Notices 
Questions & Answers 
Articles 
AASB website 

 
Novated leases 
as reported in ANT19/2008 
 
Q: Should my client company be capitalising and amortising employees' motor vehicles covered by novated leases? 
 
A: With any lease, it is always a case of looking at the agreement as leases can differ from each other in subtle detail. However, the usual novated lease is designed in such a way that the car belongs to the employee.  
 
If the employee leaves, he or she takes the car and has continued responsibility for the lease payments. The company is only responsible for the lease payments as long as the staff member continues to work there.  
 
Consequently, the substance of the arrangement is that the lease payments are a staff cost with the staff member being paid in kind, rather than in cash. The payments are not within the scope of AASB 117 ‘Leases’ and should be shown as part of wages and salaries. The company should also disclose its commitments under these arrangements in a commitment note. 
 
 
Club facilities on leased land 
as reported in ANT01/2007  
 
Q: My client is a not-for-profit club which has its club facilities on land leased from a government body. The lease is renewed every 10 years. The club has been on this site for over 50 years and we have no indication that the land-owner would evict the club and repossess the land, but because we cannot get any written assurance from the land-owner that they will renew the lease, we are concerned that AASBs 116 and 117 require us to depreciate all the club facilities over the remainder of the lease. 
 
A: There are many arrangements like this in the not-for-profit sector and each must be examined on its own merits. 
 
As you say, AASB 117 para 27 states that "if there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term" depreciation should be calculated in accordance with AASB 116. AASB 116 para 56 lists some factors to be "considered" in determining the useful life of the asset, such as "legal or similar limits on the use of the asset, such as the expiry dates of related leases". "Lease term", however, is defined as "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 our without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise the option." 
 
Based on the current pattern of behaviour by the lessor and lessee to date the substance of this transaction would appear to give the lessee an option to lease the asset for longer than just the current 10 year period to the next renewal. It would also appear reasonably certain the lessee would exercise this option if necessary and therefore a longer term (reflecting the nature of the asset) is likely to be more appropriate for depreciation purposes than the 10-year lease term.  
 
However if the club were to receive an indication from the land-owner that it wishes to repossess the site at the end of the next lease term then at that point the issue of impairment should be considered and the facilities written off over the remaining life of the lease.  
 
 
Employee Motor Vehicles Covered by Novated Leases 
as reported in ANT 34/2005  
 
Q: Should my client company be capitalising and amortising employees' motor vehicles covered by novated leases?  
 
A: With any lease, it is always a case of looking at the agreement as leases can differ from each other in subtle detail. However, the usual novated lease is designed in such a way that the car belongs to the employee. If the employee leaves, he or she takes the car and has continued responsibility for the lease payments. The company is only responsible for the lease payments as long as the staff member continues to work there.  
 
Consequently, the substance of the arrangement is that the lease payments are a staff cost, i.e. the staff member is being paid in kind here, rather than in cash, and the payments should be shown as part of wages and salaries. The company should also disclose its commitments under these arrangements in a commitment note.