IAS 17 Lease finance Accounting treatment & Disclosure

Finance Lease Accounting treatment & Disclosure:

The lease is classified as a finance lease if all the risks and the reward event are substantially shipped to the owner.

Recording of Finance lease in books of lessee

• The lessee records a liability for the property with its fair value and the same amount.
• He also notes depreciation on the property being leased.
• Lease payment is a combination of the principal payment and the markup component.
• The tenant must recognize the finance lease as its equivalent assets and liabilities on its balance sheet.
• The lease must be spread between finance charges and the reduction of exceptional liability.
• The finance charge must be allocated during this period to generate a consistent periodic interest rate on the remaining liability balance for each period.
• The finance lease leads to the financial expense as well as the depreciation expense for the asset for each accounting period.
• The depreciation policy of the leased asset must be owned by the depreciation asset and the recognized depreciation must be calculated on the basis specified in the IAS 16 estate plant and equipment.
• If there is no reasonable certainty that the tenant will take ownership before the end of the lease period, then the property must be reduced to a lesser extent than the term of the lease or its useful life.

Accounting Treatment:

For AS IAS 17, when a property changes hands under a finance lease, the lessor and lessee must account for transaction. however the transaction is a credit sale. So in tenant books:

Dr Under Asset Finance Lease (Asset Account)
CR. Liability under finance lease (lender liability account)

This is the minimum value of all fair value to be recorded and the present value of the minimum lease payment.

Asset should be depreciated on the basis of IAS 16 and 38

• The Lease term,
• The useful life of the property,

If at last there is reasonable certainty about the ownership of the property, it should be reduced to its useful life.

Estimation of Rental Payment:
When a lessee pays it consists of two items.

• Interest charge of finance provided by Lessor. 
• Repayment of a portion of the capital cost of the property.

Finance Lease - Disclosure

1. Net carrying amount at the balance sheet date for each class of property.
2. Reconciliation between minimum lease payments and their current value on the balance sheet date. In addition, a company must disclose the minimum lease payments at the balance sheet date and their present value for each of the following period

• Not later than one year
• Later than one year but not later than 5 years
• Later than five year.