Reactions to G4 1 proposed changes to Accounting for Leases
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A lease is an agreement which, in exchange for rental payments, conveys to one party (the lessee) the right to possess and use the asset owned by another party (the lessor) for a stated period of time. The lessor continues to own the asset but does not have possession or the right to use it during the term of the lease. The relevant accounting standards regarding leases are AASB 1008, which was established in 1987 and amended in 1998 in alignment with International Accounting Standards, and AAS17 which originated in March 1984 and was revised in 1987.
There was a substantial gap between the initial exposure paper regarding leases, and the implementation of AASB 1008, which serves to highlight the controversy still surrounding the classification of leases. Originally, all leases were classified as operating leases, but dissatisfaction with their omission in financial statements created another form of leases known as finance leases.
AASB 1008 classifies leases according to their economic substance. Finance leases as those whose risks and benefits pass to the lessee. This means that they are non cancelable and either have lease terms of 75% or more of the remaining useful life of the asset, whose present value of minimum lease payments at the beginning of the lease term are greater than or equal to the fair value of the asset at the end of the lease, or both. An operating lease, on the other hand, has risks and benefits that remain with the lessor. It may or may not be cancelable, has a duration consisting of a shorter term, with no bargain purchase option...