Each member firm is a separate legal entity.
The Committee received a request for clarification on whether an asset with relatively simple associated processes meets the definition of a business in accordance with IFRS 3 Business Combinations. In particular, the submission questioned whether the acquisition of a contract to provide services alongside the acquisition of an asset constitutes a business combination.
The particular submission highlighted diversity in practice in acquisitions of a single investment property with lease agreements with multiple tenants over varying periods and associated processes, such as cleaning, maintenance and administrative services e. The submission noted that while some consider the acquisition of such an investment property together with an obligation to render services to be a business combination as defined in IFRS 3, others believe that it is the acquisition of only a single investment property.
The staff presented an analysis as to whether the acquisition is indicative of a business or a single asset which considered whether: A majority of the Committee expressed strong concerns with the analysis prepared by the staff, in which they noted the assessment did not consider IAS 40 Investment Property in analysing the fact pattern given. These Committee members requested analysis by the staff as to distinguishing characteristics of the scope of IAS 40 as compared to IFRS 3 in this and similar circumstances.
Other Committee members noted that the scope of the submission was limited to the acquisition of an investment property which was considered part of the acquisition of a business, and likewise, noted that in their view, IAS 40 and IFRS 3 were not mutually exclusive.
Given concerns raised by a majority of the Committee regarding the analysis performed by the staff, the Committee asked the staff to perform further analysis on the following general questions:.
The staff will perform further analysis considering the above questions for deliberation in a future Committee meeting. See Legal for additional copyright and other legal information. This form of accounting did not faithfully represent the transaction. So how does IAS 17 work? IAS 17 states that there are two types of lease, a finance lease and an operating lease. In order to gain classification of the type of lease you are dealing with, you must first look at the information provided within the scenario and determine if the risks and rewards associated with owning the asset are with the lessee or the lessor.
If the risks and rewards lie with the lessee then it is said to be a finance lease, if the lessee does not take on the risks and rewards, then the lease is said to be an operating lease. The main reward is where the lessee has the right to use the asset for most of, or all of, its useful economic life.
The primary risks are where the lessee pays to insure, maintain and repair the asset. Other indicators that a lease is a finance lease include: Initial Accounting The initial accounting is that the lessee should capitalise the finance leased asset and set up a lease liability for the value of the asset recognised. The accounting for this will be: This should be done by using the lower of the fair value of the asset or the present value of the minimum lease payments.
Depreciation Following the initial capitalisation of the leased asset, depreciation should be charged on the asset over the shorter of the lease term or the useful economic life of the asset. As land has an indefinite economic life , the practice up to was to treat it as an operating lease. So a lease of land can be treated as a finance lease if it meets the existing criteria, specifically if the risks and rewards of ownership can be considered to have been transferred.
A lease of buildings will be treated as a finance lease if it satisfies the requirements above. A business has taken out a new lease on a factory building and surrounding land. The fair value of the. The lease payments will be split in line with the fair values of the land and the building. The payment for the building will be treated as a finance lease because it is for the expected useful life of the building.
Disclosure requirements for lessees. IAS 17 requires the following disclosures by lessees in respect of finance leases: As the risks and rewards of ownership of an asset are not transferred in the case of an operating lease, an asset is not recognised in the statement of financial position.
Instead rentals under operating leases are charged to the statement of profit or loss on a straight-line basis over the term of the lease, any difference between amounts charged and amounts paid will be prepayments or accruals.
Example On 1 October Alpine Ltd entered into an agreement to lease a machine that had an estimated life of 10 years. The machine is expected to have a nil residual value at the end of its life. How should the lease be accounted for in the financial statements of Alpine for the year end 31 March ? The accounting for this lease should therefore be relatively straightforward and is shown below: For operating leases the disclosures are as follows.
The total of future minimum lease payments under non-cancellable operating leases for each of the. The most obvious and impactful difference is how operating leases will be brought onto the balance sheet. Under IAS 17 , a lessee is not obligated to report assets and liabilities from operating leases on their balance sheet and they are instead referred to in the footnotes. Similarly, it is difficult to compare businesses that lease assets with those that buy them as a clear indication of the operating leases are left out of the equation.
IFRS 16 changes this by requiring a lessee to recognise arising right of use ROU assets and lease liabilities on their balance sheet.