Leases are covered by financial reporting standards, IAS 17 (IFRS) and TAS 17 (TFRS). In this article, Mazars examine some of the key definitions, suggested accounting treatment and disclosure requirements.
Keywords: Thailand, Accounting, Leases, TFRS for NPAEs
Leases can be either classified as a finance lease or an operating lease. A lease which transfers substantially all of the risks and rewards of ownership to the lessee is classified as a finance lease. All other leases are classified as operating leases.
Classification of Finance lease
When considering the lease classification, reference must be made to the substance of the lease over its form. The standard sets out the following situations that would normally lead to a lease being classified as a finance lease:
- the lease transfers ownership of the asset to the lessee by the end of the lease term;
- the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value;
- the lease term is for the major part of the economic life of the asset;
- at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and
- the lease assets are of a specialised nature such that only the lessee can use them without major modifications being made.
These situations should not be considered in isolation but collectively. For example, when considering the classification of a 5 year lease of an asset with a useful life of 7 years it would be important to consider the total value of the lease payments, the fair value of the asset and whether the asset can be purchased at the end of the lease term.
Accounting by Lessees
I. Initially recognised at the commencement of the lease term as an asset and a liability at the fair value of the leased asset or, if lower, the present value of the minimum lease payments;
II. Subsequent payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability.
III. The leased asset is depreciated using a depreciation rate consistent with that for owned assets.
I. Lease payments should be recognised as an expense in the income statement over the lease term on a straight-line basis.
Accounting by Lessors
The accounting treatment for Lessors is also dependent on whether the asset leased is classified as a finance or operating lease. A finance lease is initially recognised as a receivable at an amount equal to the net investment in the lease. Finance income is subsequently recognised over the period of the lease using a systematic and rational basis.
Operating lease income is recognised over the lease term on a straight line basis.
The standard requires a significant amount of disclosure for both finance and operating leases. This includes details of lease payments, carrying amounts of assets held, descriptions of the leasing arrangements and any restrictions imposed by the lease.
Accounting for Leases as per TFRS for NPAEs
The recently issued TFRS for NPAEs, applicable for accounting periods commencing on or after 1 January 2011, sets out additional examples of situations to consider when determining a lease’s classification. Reflecting the new standard’s purpose to reduce the financial reporting burden on NPAEs, there are also fewer disclosure requirements.
For further information on the new TFRS for NPAEs please refer to the Mazars TFRS Technical Bulletin: