Accounting for leases. Analysis of the IAS 17 and its impact

Seminar Paper, 2014

15 Pages, Grade: 2,7



Table of contents

1 Introduction

2 Accounting for leases IAS 17
2.1 Scope
2.2 Classification of leases

3 Finance leases
3.1 Lessor
3.2 Lessee

4 Operating leases
4.1 Lessor
4.2 Lessee

5 Sale-and-lease-back

6 Significant differences in contrast to HGB and US-GAAP

7 Conclusion


List of Figures

Figure 1: Indicators of a Finance Lease (IAS 17, 10)

List of Abbreviations

illustration not visible in this excerpt

1 Introduction

“In 2013, the value of goods and services financed by way of leasing came to 48.5 billion Euros. Accordingly, 23.0 percent of all German investments in equipment were transacted by way of leasing agreements.”1

This statement reveals that leasing is nowadays an established part of the economy as an investment alternative. These figures are promising for the German market, but also comparable with the US. There the share of the investment market accounted for by leasing remained at over 30 percent for years. Due to the financial crisis this rate decreased, but it's rising again.2 In spite of the crisis leasing expanded its top position as an alternative to the classic bank loans over the past 50 years. Recognized as key engine of innovations, it even assures sufficient financial cushion for investments and contributes to growth dynamics in economies.3 But what exactly is leasing? There is no generally applicable definition of leases, but in its simplest form, it can be described as provision of access to finance.4 According to the International Accounting Standard IAS 17 “a lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.”5 Leasing object can be anything as classical as machines or real estates, but also intangible assets as software or trademark rights.6 Leases are an important instrument of accounting policies for entities.7 In many sectors appropriate equipment is not bought, but leased. Therefore and because of the globalization of capital markets an increasing convergence of accounting standards worldwide is accelerated. The progress toward attaining a global financial reporting framework is focused, and many significant steps have been taken. One of them is the Exposure Draft ED/2013/6. The ambition of it was to guarantee transparency of financial statements as source of information for their readers of financial statements who can be managers, investors, financial auditors but also a big range of stakeholders. Reasons for revising was that the lease accounting model has continually met with criticism.8 Objective of the following term paper is to provide an overview of the current lease accounting standard.

The focus is on the IAS 17. Therefore in the first part the scope and classification of leases are presented. The second part points out specific accounting of finance and operating leases. Each part distinguishes between the lessee and the lessor. Finally significant differences in contrast to HGB and US-GAAP are listed.

2 Accounting for leases IAS 17

2.1 Scope

To be useful the information provided in financial statements have to fulfil the qualitative characteristics which are understandability, relevance, reliability and comparability. Thanks to individual contract drafting, leases enable entrepreneurial flexibility to provide the truest possible reflection of the assets, finances and income of a company.9 To fulfil its information function of a capital market oriented financial accounting, leases are primarily accounted to their economic content.10 IAS 17 applies to all lease agreements other than those to explore for or use minerals, oil, natural gas and similar non-regenerative resources and licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights. IAS 17 also does not apply to lessees of investment property held under finance leases, lessors of investment property leased out under operating leases, lessees of biological assets held under finance leases, or lessors of biological assets leased out under operating leases.11

2.2 Classification of leases

According to the recent regulations of IAS 17 a contract that fulfills the definition of a lease will be classified as either finance or operating.12 What separates the two leases is that the former gives rise to an asset and a liability accomplished by asset acquisition with debt financing, while the latter are conveniences to temporarily use someone else`s property and only causes rent payments.13 The classification happens with the inception of the lease.14 Whether it is classified as finance or operating depends on if substantially all risk and rewards incidental to ownership of the asset has been transferred from the lessor to the lessee.15 This „all-or-nothing-approach“ is often criticized as the classification as an operating lease means that an “off-balance-sheet-effect“ for the lessee is enabled. As consequence the user of the financial statement misses important information detached from the lack of statements about the leasing object and corresponding leasing liabilities.16

3 Finance leases

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee.17 IAS 17.10 provides guidance (see Figure 1) of situations that individually or in combination leads to a finance lease:

a. transfer of ownership by the end of the lease term (Transfer of Ownership);
b. a favorable purchase option for the lessee: the agreed purchase price is significantly lower than the expected present value at the time, that the option will be exercised (Bargain Purchase Option);
c. the contract period covers the major part (not explicit defined; to at least 75% to 90%)18 of the operating life of the asset (Economic Life);
d. the present value of the minimum lease payments generally corresponds to at least the fair value of the leased asset (Recovery of Investment); and
e. it is a case of special lease: the leased assets are of such a specialized nature that only the lessee can use them without major modifications.19

According to IAS 17:11 following situations can as well result in a classification of finance leasing:

a. the lessor`s lost initiated by an early cancellation of the lease by the lessee are born by the lessee
b. gains and losses from the fluctuation in the fair value are ascribed to the lessee
c. the lessee got an extension option, where the continuing rent is significantly lower than the market rent.20

illustration not visible in this excerpt

Source: taken from: (2012), p. 8

Figure 1

However, the guiding examples are not always ruling. If it stands clear from other features that the lease does not transfer substantially all risk and rewards, the lease will be classified as operating.21 The lessee and the lessor are also independent of each other and as a result the lease contract can be classified differently between them.22


1 Bundesverband Deutscher Leasingunternehmen (2014a).

2 cf. Bundesverband Deutscher Leasingunternehmen (2014a).

3 cf. Bundesverband Deutscher Leasingunternehmen (2014b), p. 6.

4 cf. International Finance Corporation (2009), p. 17.

5 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.4.

6 cf. Pellens, J./ Fülbier R. U./ Gassen J./ Sellhorn T. (2011), p. 654.

7 cf. IFRS Foundation (2013), p. 6.

8 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.IN2.

9 cf. Pellens, J./ Fülbier R. U./ Gassen J./ Sellhorn T. (2011), p. 654.

10 ebd.

11 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.2.

12 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.7.

13 cf. Miller, P. B. W./ Bahnson P. R. (2011)

14 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.13.

15 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.7.

16 cf. Fülbier, R. U. (2007), p. 4f.

17 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.8.

18 cf. Bloom, R./ Cenker W. J. (2009), p.41.

19 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.10.

20 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.11.

21 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.12.

22 cf.. Verordnung (EG) Nr. 1126/2008, IAS 17.9.

Excerpt out of 15 pages


Accounting for leases. Analysis of the IAS 17 and its impact
University of applied sciences, Munich
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International Finance, Accounting, Leases, IAS 17
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Anonymous, 2014, Accounting for leases. Analysis of the IAS 17 and its impact, Munich, GRIN Verlag,


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