Disclosure Requirements and Aspects Related to Lease Transactions

This essay explains the disclosure requirements and various aspects related to lease transactions. It covers the types of leases, AASB 117 and IAS 17 standards, and the upcoming changes in lease transactions.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
Author’s Note

1
CORPORATE ACCOUNTING
Table of Contents
Requirement of Part A.......................................................................................................2
Requirement of Part B.......................................................................................................5
Reference..........................................................................................................................7

2
CORPORATE ACCOUNTING
Requirement of Part A
Lease transactions refers to a transaction which takes place between two parties
namely the lessor and the lessee. The transaction involves the assets which is legally
owned by the lessor who allows the lessee to use the asset for a specified period in
exchange of payment or a series of payments (Kazakova and Dun 2014). Lease
transactions are quite common nowadays in business and is a preferred choice when
the business needs to have an asset which is costly. Generally, leases are classified in
two types which are operating leases and financial leases (Yaskova and Alexeeva
2016). The standards which are issued for the effective disclosures of lease
transactions of the business are covered in AASB 117 and also alternatively in IAS 17.
This essay will be focusing on such an aspect and will be explaining the disclosure
requirements and various aspects which are related to lease transactions (Holland
2016).
Operating leases may be defined as a short-term lease which is allowed by the
lessor to the lessee where the rights to use the asset is passed to the lessee and the
risks and rewards which are associated with the asset is retained by the Lessor. The
amount which is charged for the use of the asset is shown in the lessee’s income
statement, however the asset is not shown in the balance sheet of the lessee (Altamuro
et al. 2014). This type of leases is used by business for short-term need basis and
provided by the lessors with a view to take back the asset after the stipulated period and
re-lease the same as the lease period is much lesser than the useful life of the asset.
On the other hand, financial leases are different from operating leases as the risks and
rewards which are associated with the asset is transferred to the lessee. The lessee has

3
CORPORATE ACCOUNTING
an option to purchase the leased asset at the end of the term of the lease. The leased
asset will than be valued at a figure which is lower than the fair value of the asset. As
per recent scenario, amendments are to be implemented to lease transactions where by
AASB 117 will be replaced by AASB 16 which will be implemented on or after 1st
January 2017. The new standard will not be affecting financial leases and the changes
are expected to be made in disclosure requirements of operating leases (Dakis 2016).
The disclosures of Finance leases must be recorded in both of accounts of
lessors and lessee. The requirements of AASB 7 Financial Instruments: Disclosures,
should be followed by the lessee which is related to financial leases (Henraat et al.
2013). As per the requirement of Para 31 of AASB 117, the lessee is required to
appropriately disclose the net carrying amount of each group of assets which is to be
done by the end of the year. The lessee is also required to reconcile the lease
payments which are associated with the lease along with their present values. After
appropriate reconciliation is done, the business needs to provide relevant disclosures
for the different timeframes.
The timeframe which is related to leases may be of 1 year, below 5 years or even
above 5 years. The contingent rents which are associated with lease is to be recognized
in the form of expenses during the year. The organization which has entered in any
lease agreements need to provide appropriate disclosures which are related to material
leases. One of the disclosures which needs to be provided by the business is the basis
which the business uses for the purpose of determining the contingent rent which is to
paid by the business. The contingent rent can be shown in the form of sales, amount of
uses and price indices. Another disclosure is associated with terms and conditions

4
CORPORATE ACCOUNTING
which are associated with the lease transactions which includes escalation clauses and
purchase options.
In case of financial leases, there are certain requirements which are needed to
be fulfilled by the lessor when it comes to disclosure requirements. The management of
the company needs to disclose appropriately the gross investments and present value
of minimal payments relating to lease for the three timeframes. Some other disclosures
which the business must show unearned finance income and unguaranteed residual
values. In addition to this, businesses also need to follow the disclosure requirements
which are stated in AASB 117 as the amendment standard is still implemented by most
of the organizations.
The financial leases obligations will include capital balance and accrued interest
which the business needs to pay. The leases which the business has due during the
year is shown both as current and non-current liabilities of the business depending on
the tenure of the lease (Lightner et al. 2013). The current liability which is associated
with the lease will be incorporating the principle amount which the business needs to
pay during the year along with the accrued interest that the business needs to pay
during the year. The non-current liabilities of the business will be consisting of the
leftovers which the business has not yet paid for the principle amount related to the
lease. In case of finance lease, the risk and rewards which the asset is entitled to is
passed on the lessee and therefore the asset cannot be recorded in the books of lessor
under the head property, plant and equipment.

5
CORPORATE ACCOUNTING
The lease agreement will earn interest income for the lessor and the income will
be shown in the income statement of the business as income. The repayment of
principle amount will lead to lowering of the amount which the lessee owes to the lessor
(Barone, Birt and Moya 2014). At the end of the lease term, the lessee has the option to
either return the asset to the lessor or purchase the same as in the case of finance
lease. In case the lease agreement is cancelled then the lessee can be charged for any
loss or damage which the lessor might face due to such termination of agreement.
Requirement of Part B

6
CORPORATE ACCOUNTING

7
CORPORATE ACCOUNTING
Reference
Altamuro, J., Johnston, R., Pandit, S.S. and Zhang, H.H., 2014. Operating leases and
credit assessments. Contemporary Accounting Research, 31(2), pp.551-580.
Barone, E., Birt, J. and Moya, S., 2014. Lease accounting: a review of recent
literature. Accounting in Europe, 11(1), pp.35-54.
Dakis, G.S., 2016. Upcoming changes to contributions and leasing
standards. Governance Directions, 68(2), p.99.
Henraat, D., Georgakopoulos, G., Kalantonis, P. and Rodosthenous, M., 2013. A
comparative empirical study for the different approaches of the operational leases

8
CORPORATE ACCOUNTING
capitalization. Journal of Computational Optimization in Economics and Finance, 5(1),
p.51.
Holland, D., 2016. Simplifying income recognition for not-for-profit entities. Governance
Directions, 68(11), p.666.
Kazakova, N.A. and Dun, I.R., 2014. Analysis of leaseback transactions. Life Science
Journal, 11(12s).
Lightner, K.M., Bosco, B., DeBoskey, D.G. and Lightner, S.M., 2013. A better approach
to lease accounting: Fixing the shortcomings of the proposed rules. The CPA
Journal, 83(9), p.14.
Yaskova, N. and Alexeeva, T., 2016. Development of modernization tools for
construction complex through the mechanisms of enforcement. In MATEC Web of
Conferences(Vol. 73, p. 07025). EDP Sciences.