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Chapter 13: Leases


1. Leases are classified on the basis of ‘substance over form’. What does this criterion mean and how does it relate to the capitalisation of finance leases?

The Framework in paragraph 35 states that ‘if information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that they are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. The substance of transactions or other events is not always consistent with that which is apparent from their legal or contrived form’. Thus, all aspects and implications of an arrangement or transaction should be evaluated to determine its substance, with weight given to those aspects and implications that have an economic effect, prior to accounting for that event or transaction.

Whether a lease is classified as a finance lease or an operating lease depends on the substance of the lease arrangement rather than the form of the contract. Thus, if ‘in substance’ substantially all of the risks and rewards incident with ownership are transferred from the lessor to the lessee the arrangement gives rise to a finance lease.

2. What are ‘minimum lease payments’?

See IAS 17, paragraph 4, the definition can be expressed as follows:

Minimum lease payments = (i) Payments over the lease term

+ (ii) Guaranteed residual value

+ (iii) Bargain purchase option

- (iv) Contingent rent

- (v) Reimbursement of costs paid by the lessor

Discuss each component in full.

3. If a lease agreement states that ‘the lessee guarantees a residual value, at the end of the lease term, of $20 000’, what does this mean?

The guaranteed residual value is that part of the residual value of the leased asset guaranteed by the lessee or a third party related to the lessee (IAS 17, paragraph 4). The lessor...

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