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AASB 117 - Leases

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

 
IFRIC Rejections and Guidance
  1. September 2007 - Time pattern of the user’s benefit 
  2. March 2007 - Leases - Sale and Leasebacks with Repurchase Agreements 
  3. July 2006 - Leases - recognition of contingent rentals 
  4. March 2006 - Leases of Land that do not transfer Title to the Lessee 
  5. November 2005 - Time pattern of user’s benefit from an operating lease 
  6. August 2005 - Recognition of operating lease incentives under SIC-15  
  7. June 2005 - Finance subleases of finance leases 
  8. October 2003 - Consideration of the issues addressed in UITF Abstract 36 "Contracts for sale of capacity"
 
1. September 2007 - Time pattern of the user’s benefit 
 
Issue:  
 
The IFRIC received a request for guidance on the application of paragraphs 33 and 34 of IAS 17, which state that ‘For operating leases, lease payments (excluding costs for services such as insurance and maintenance) are recognised as an expense on a straight-line basis unless another systematic basis is representative of the time pattern of the user’s benefit, even if the payments are not on that basis.’ The request asked for guidance on what alternatives to straight-line recognition of lease expense might be appropriate. 
 
IFRIC Decision:  
 
The IFRIC noted that guidance had previously been requested on this issue, and for the reasons elaborated on below, had not been added to the agenda. 
 
The IFRIC noted that IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets require an entity to recognise the use of productive assets using the method that best reflects ‘the pattern in which the asset’s future economic benefits are expected to be consumed by the entity’ (emphasis added). In contrast, IAS 17 refers to the time pattern of the user’s benefit. Therefore, any alternative to the straight-line recognition of lease expense under an operating lease must reflect the time pattern of the use of the leased asset. 
 
The IFRIC also noted that it did not expect significant diversity in practice regarding the application of this requirement. 
 
The IFRIC therefore decided not to add this issue to its agenda. 
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2. March 2007 - Leases - Sale and Leasebacks with Repurchase Agreements  
 
Issue:  
 
During the course of developing its Interpretation on service concession arrangements, the IFRIC tentatively concluded that a transaction that took the form of a sale and leaseback should not be accounted for as such if it incorporated a repurchase agreement. The reason was that the seller/lessee retained control of the asset by virtue of the repurchase agreement. Hence, the criteria for recognising a sale in paragraph 14 of IAS 18 Revenue would not be met.  
 
However, at its meeting in May 2006 the IFRIC noted that this tentative conclusion would apply more widely than to service concession arrangements and that the matter should be the subject of a separate project.  
 
At this meeting, the IFRIC considered whether the conditions for recognition of a sale in paragraph 14 of IAS 18 must be met before a transaction is accounted for as a sale and leaseback transaction under IAS 17. In particular, the IFRIC considered whether transactions that take the form of a sale and leaseback transaction should be accounted for as such when the seller/lessee retains effective control of the leased asset through a repurchase agreement or option.  
 
IFRIC Decision:  
 
The IFRIC noted that IAS 17, rather than IAS 18, provides the more specific guidance with respect to sale and leaseback transactions. Consequently, it is not necessary to apply the requirements of paragraph 14 of IAS 18 to sale and leaseback transactions within the scope of IAS 17.  
 
However, the IFRIC also noted that IAS 17 applies only to transactions that convey a right to use an asset. SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease and IFRIC 4 Determining whether an Arrangement contains a Lease provide guidance on when an arrangement conveys a right of use. If, applying the criteria in SIC-27 and IFRIC 4, an entity determines that an arrangement does not convey a right of use, the transaction is outside the scope of IAS 17 and the sale and leaseback accounting in IAS 17 should not be applied.  
 
The IFRIC noted that significantly divergent interpretations do not exist in practice on this issue and that it would not expect such divergent interpretations to emerge. Consequently, the IFRIC decided not to take the issue onto its agenda.  
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3. July 2006 - Leases - recognition of contingent rentals 
 
Issue:  
 
whether an estimate of contingent rentals payable/receivable under an operating lease should be included in the total lease payments/lease income to be recognised on a straight-line basis over the lease term.  
 
IFRIC Decision:  
 
Although the Standard is unclear on this issue, this has not, in general, led to contingent rentals being included in the amount to be recognised on a straight line basis over the lease term. Accordingly, the IFRIC decided not to add this issue to its agenda but to recommend to the Board that IAS 17 be amended to clarify the approach intended by the Standard.  
 
At its September 2006 meeting, the AASB decided not to add this issue to its agenda. The AASB concurred with the IFRIC view, and noted that paragraphs A.6 and A.8 of the section 
“Differences between AASB 117 and AASB 1008” appended to the July 2004 version of AASB 117 Leases therefore were superseded. 
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4. March 2006 - Leases of Land that do not transfer Title to the Lessee 
 
Issue:  
 
Whether long leases of land would represent a situation when a lease of land would not normally be classified as an operating lease even though title does not transfer to the lessee. 
 
IAS 17 states at paragraph 14 that a characteristic of land is that it normally has an indefinite economic life. If title is not expected to pass to the lessee by the end of the lease term, then the lessee normally does not receive substantially all of the risks and rewards incidental to ownership, in which case the lease will be an operating lease. Even when the land has an indefinite economic life, paragraph 15 states that ‘the land element is normally classified as an operating lease unless title is expected to pass to the lessee by the end of the lease term…’ [emphasis added].  
 
IFRIC Decision:  
 
Leases of land with an indefinite economic life, under which title is not expected to pass to the lessee by the end of the lease term, were classified as operating leases before an amendment to IAS 17 was made in respect of IAS 40 Investment Properties. Specifically, IAS 17 was amended to state that in leases of land that do not transfer title, lessees normally do not receive substantially all the risks and rewards incidental to ownership.  
 
Some have understood the introduction of the word ‘normally’ as implying that a long lease of land in which title would not transfer to the lessee would henceforth be treated as a finance lease, since the time value of money would reduce the residual value to a negligible amount. The IFRIC noted that, as summarised in paragraph BC 8, the Board considered but rejected that approach in relation to the classification of leases of land and buildings, because ‘it would conflict with the criteria for lease classification in the Standard, which are based on the extent to which the risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee’. The Board also made clear that it had not made any fundamental changes to the Standard.  
 
The IFRIC noted that one example of a lease classification affected by the introduction of the word ‘normally’ was a lease of land in which the lessor had agreed to pay the lessee the fair value of the property at the end of the lease period. In such circumstances, significant risks and rewards associated with the land at the end of the lease term would have been transferred to the lessee despite there being no transfer of title. Consequently a lease of land, irrespective of the lease term, is classified as an operating lease unless title is expected to pass to the lessee or significant risks and rewards associated with the land at the end of the lease term pass to the lessee.  
 
The IFRIC decided not to add this item to its agenda as, although leases of land that do not transfer title are widespread, the IFRIC has not observed, and does not expect, significant diversity in practice.  
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5. November 2005 - Time pattern of user’s benefit from an operating lease  
 
Issue:  
 
In relation to the income and expense recognition profile of an operating lease in which the annual payments rise by a fixed annual percentage over the life of the lease, whether it would be acceptable to recognise these increases in each accounting period when they are intended to compensate for expected annual inflation over the lease period.  
 
IFRIC Decision: 
 
The accounting under IAS 17 for operating leases does not incorporate adjustments to reflect the time value of money, for example by deferring a portion of a level payment to a later period. Rather, IAS 17 requires a straight-line pattern of recognition of income or expense from an operating lease unless another systematic basis is more representative of the time pattern of the user’s benefit.  
 
The IFRIC noted that recognising income or expense from annual fixed inflators as they arise would not be consistent with the time pattern of the user’s benefit. Accordingly, the IFRIC decided not to take this item onto its agenda as it did not expect significant diversity in practice to arise.  
 
Note: In reaching the above decision, IFRIC members considered the comment letters received on the draft published in September Update but confirmed that these did not alter their view of the requirements of IAS 17. 
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6. August 2005 - Recognition of operating lease incentives under SIC-15 
 
Issue:  
 
The IFRIC considered the appropriate period over which to recognise an incentive for an operating lease, when an incentive is provided and the lease contains a clause that requires rents to be repriced to market rates.  
 
Two possible approaches for the period over which to recognise the incentive are:  
  • recognise the incentive over the full term of the operating lease; or  
  • recognise the incentive over the shorter of the lease term and a period ending on a date from which it is expected the prevailing market rentals will be payable.
IFRIC Decision: 
 
The IFRIC noted that SIC-15.5 requires:  
 
the lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.  
 
The IFRIC thought the wording of SIC-15.5 was clear and did not accept an argument that the lease expense of a lessee after an operating lease repriced to market ought to be comparable with the lease expense of an entity entering into a new lease at that same time at market rates. Nor did the IFRIC believe that the repricing of itself would be representative of a change in the time pattern referred to in SIC-15.5. The IFRIC decided not undertake a project to modify SIC-15.  
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7. June 2005 - Finance subleases of finance leases  
 
Issue:  
 
The IFRIC considered a suggestion that IAS 17 needed interpretation when assets obtained under finance leases (e.g., from manufacturers) are in turn leased immediately by intermediaries, in finance leases, to end users. This was because there was a possibility of the intermediaries treating the assets as inventory when received from the manufacturer followed by a sale to the end user.  
 
IFRIC Decision: 
 
This issue was covered adequately by IAS 17’s guidance for finance leases (both for the intermediary in its capacity as a lessee and a lessor and for the end user as a lessee) and by the derecognition requirements of IAS 39 (paragraphs 39-42) as they apply to the finance lease liabilities of the intermediary. The IFRIC did not agree with the treatment that had been suggested.  
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8. October 2003 - Consideration of the issues addressed in UITF Abstract 36 "Contracts for sale of capacity"  
 
Issue: 
 
Some “sales” contracts, such as those found in the telecommunications and electricity industries, convey to the purchaser a right to use some or all of the capacity of a network operated by the seller for an agreed period. The IFRIC considered addressing the issue of contracts for sales of capacity and, in particular:  
(a) Should the seller derecognise the asset recognised for the capacity sold?  
(b) When should income from the sales be recognised?  
(c) Should the treatment of sales be the same when all or part of the consideration received is capacity on another entity’s network?  
(d) Should the seller present the consideration received or receivable from a sale as revenue or another form of income? 
 
IFRIC Decision: 
 
The IFRIC decided to defer consideration of whether to address this issue until after it finalises its Interpretation on "Determining Whether an Arrangement Contains a Lease".  
 
Draft Interpretation D3 "Determining whether an Arrangement contains a Lease" was issued by the IFRIC in January 2004, with a comment deadline of 19 March 2004. Redeliberation of the Draft Interpretation commenced in May 2004. The IFRIC is expected to vote on a final Interpretation at its October 2004 meeting.  
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