Accounting for Leases in Australia
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AASB 1008 V Leases
1.0 Rationale
AASB 1008 requires a lease to be classified either as an operating lease or as a finance lease at the inception of the lease.
The classification of a lease depends upon its economic substance. Where substantially all of the risks and benefits incident to ownership of the leased asset effectively remain with the lessor, the lease is an operating lease. Where substantially all of these risks and benefits effectively pass to the lessee, the lease is a finance lease.
The risks of ownership include those associated with unsatisfactory performance, obsolescence, idle capacity, losses in realizable value, uninsured damage and condemnation of the asset; the benefits include those obtainable from the use of the asset and gains in realisable value.
Per AASB 1008.5.3.4, the effective passing of substantially all of the risks and benefits incident to ownership from a lessor to a lessee is normally presumed where both of the following criteria are satisfied:
a) the lease is a non-cancellable lease
b) either one or both of the following tests is met:
(i) the lease term is for 75% or more of the remaining economic life of the leased asset;
(ii) the PV at the beginning of the lease term of the minimum lease payments (MLP) equals or exceeds 90% of the FV of the leased asset at the inception of the lease...