Leasing Financial Accounting

In: Business and Management

Submitted By nwpn
Words 1429
Pages 6
Part 2
According to AASB 117, a lease is defined as “an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time” (Certified Public Accountant Australia [CPA], 2009). Leasing is potentially advantageous to organizations in terms of maintaining effective asset management (Noland, 2006). For instance, due to changes in the dynamic business environment organizations are able to replace leased assets more rapidly compared to assets that are owned (Noland, 2006). Furthermore, although it is a more expensive option leasing provides management with the opportunity to utilize different equipment until the optimal combination in terms of productivity is attained (Noland, 2006). Thus, leasing allows an organization to attain flexibility and efficiency in order to keep its business operations current.

In regard to AASB117, preparers of general purpose financial reports (GPFS) are required to categorize leases at the period of inception as either finance or operating leases. This is applied by evaluating the substance of the transaction rather than the form of the contract (CPA Australia,2009). If a non cancellable lease fulfills one or more criteria that includes; “a) ownership transfer to the lessee, b) a bargain purchase option, c) a lease term equating to a minimum 75 percent of the assets estimated useful life and d) the present value of the minimum lease payments to be minimum 90 percent of the leased assets fair value”, then it will be regarded as a finance lease (CPA Australia, 2009). Therefore, this lease will be capitalized into the balance sheet of the lessee and recorded as an asset or liability equal to the assets current fair value. Additionally, any contingent rent will be expensed at the time it is incurred (CPA Australia, 2009).

If a lease does not meet one…...

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