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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 

 
Currency of material 
This material was last updated in August 2008.  
 
Overview 
AASB 117 Leases is equivalent to IAS 17 of the same name as issued by the International Accounting Standards Board. The objective of AASB 117 is to assist entities in classifying leases as operating or finance leases, to state the appropriate accounting treatment for both types of leases for both lessees and lessor and to set out disclosure requirements in respect of leases. 
 
 
SUMMARY 
Main Requirements 
The main requirements of AASB 117 are: 
 
Application and Scope (paragraphs Aus1.1-3) 
This standard applies to all leases other than leases to explore for or use minerals, oil, natural gas and similar resources and licensing agreements for items such as films, patents and copyrights. 
 
Definitions (paragraphs 4-6)
  • Definitions include economic life, fair value, finance lease and operating lease.
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  • The definition of a lease includes hire purchase contracts.
Classification of Leases (paragraphs 7-19)
  • A lessee and a lessor must classify the lease as either a finance lease or an operating lease based on the economic substance of the arrangement.
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  • A lease is classified as a finance lease if it transfers substantially all risks and rewards incident to ownership, which normally arises in the following examples:
    • asset ownership is transferred at the end of the lease term
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    • there is a bargain purchase option
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    • the lease term is for a major part of the economic life of the asset
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    • the present value of minimum lease payments at the inception of the lease approximates the fair value of the leased asset
      •  
    • the leased assets are specialised such that only the lessee can use them.
     
  • A lease of both land and buildings must be split into land and building elements with the land element generally classified as an operating lease.
Lessee’s accounting (paragraphs 20-35)
  • Finance lease:
    • ­At the commencement of the lease term, recognise a lease asset and a lease liability at the lower of the present value of minimum lease payments and the fair value of the asset.
      •  
    • The discount rate used to calculate the present value is the interest rate implicit in the lease. If this is impracticable to determine, the lessee’s incremental borrowing rate is used.
      •  
    • Any initial direct costs are included in the amount recognised as an asset.
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    • Subsequent measurement requires that the lease payments are apportioned between finance charges and liability reduction. Contingent rents are expensed in the periods they are incurred.
      •  
    • The leased asset is depreciated in a manner that is consistent with that for which depreciable assets are owned, in accordance with AASB 116 Property, Plant and Equipment and AASB 138 Intangible Assets.
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    • In addition to the disclosures required by AASB 7 Financial Instruments: Disclosures, other disclosures include:
      • For each class of asset, the net carrying amount at reporting date
        •  
      • A reconciliation between the total of future minimum lease payments at reporting date and their present value
        •  
      • Contingent rents recognised as an expense
        •  
      • A general description of the lessee’s material leasing arrangements
     
  • Operating lease
    • ­Lease payments are recognised as an expense on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern of user’s benefit.
      •  
    • In addition to the disclosures required by AASB 7, other disclosures include:
      • Total of future minimum lease payments under non-cancellable operating leases
        •  
      • Lease and sublease payments recognised as an expense for the period
        •  
      • A general description of the lessee’s material leasing arrangements.
Lessor’s accounting (paragraphs 36-57)
  • Finance lease:
    • Recognise a lease receivable for an amount equal to the net investment in the lease
      •  
    • Recognise finance income based on a pattern reflecting a constant periodic rate of return on the net investment in the lease.
      •  
    • In addition to the disclosures required by AASB 7, other disclosures include:
      • Reconciliation between the gross investment in the lease at reporting date and the present value of minimum lease payments receivable at reporting date.
        •  
      • Unearned finance income
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      • Unguaranteed residual values accruing to the benefit of the lessor
        •  
      • The accumulated allowance for uncollectible minimum lease payments receivable
        •  
      • Contingent rents recognised as income in the period
        •  
      • A general description of the lessor’s material leasing arrangements.
     
  • Operating lease:
    • ­Recognise lease income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern of user’s benefit
      •  
    • Leased asset presented in balance sheet according to the nature of the asset and depreciated according to the lessor’s normal depreciation policy.
      •  
    • Initial direct costs must be recognised over the lease term on the same basis as the lease income.
      •  
    • In addition to the disclosures required by AASB 7, other disclosures include:
      • The future minimum lease payments under non-cancellable operating leases.
        •  
      • Total contingent rents recognised as income in the period
        •  
      • A general description of the lessor’s material leasing arrangements.
Sale and leaseback transactions (paragraphs 58-66)
  • If a sale and leaseback transaction is classified as a finance lease, the lessee must defer and amortise any profit or loss from the transaction over the lease term.
    •  
  • If a sale and leaseback transaction is classified as an operating lease, the lessee must recognise profit or loss immediately where sale price is less than or equal to fair value of asset sold and defer and amortise profit or loss over period asset expected to be used where sale price is above fair value of asset sold.
Implementation Guidance 
Illustrative examples of sale and leaseback transactions that result in operating leases. 
 
 
The information provided is a brief summary of the requirements of this standard and is not intended to be used as a substitute for reading the standard itself nor does it attempt to provide any interpretative advice. To apply the standard to their particular circumstances readers are encouraged to read the text of the standard and, if necessary, seek professional advice from a Chartered Accountant or other suitably qualified professional. The Institute expressly disclaims all liability for any loss or damage arising from reliance upon any information or inaccurate statement made in this summary.