Question

Prepare two essays: one on IAS 17 on leases and one on IAS 37 on provisions. Each essay you must highlight the most relevant points to consider about the standard in the practice of accounting.

Answer 1

IAS 17 - Leases It sets out the required accounting treatments and disclosures for finance and operating leases by both lessors and lessees.

The most relevant point in the IAS 17 are highlighted below which are useful in practise of accounting -

1. It classifies lease into two part as financial lease and operating lease. A lease that transfers substantially all the risks and reward of ownership is financial lease and other than financial lease is operating lease.

2. The minimum lease payments (MLP) the payments the lessee is contracted to pay (excluding contingent rents, service costs and taxes) along with any amounts guaranteed by the lessee or its related parties at inception. For lessor MLP is the contractual payment with any guaranteed residual value.

3. Operating Leases - Lessee recognizes the lease payments as a expense on straight line basis over the lease terms. Lessor recognizes the lease income from operating leases on a straight-line basis over the lease term, unless another systematic basis is more representative. Depreciation expense on leased assets are charged by lessor in accordance with IAS 16.

4. Financial Leases - Lessee recognize finance leases as assets and liabilities in their statements of financial position at amounts lower of fair value of asset or the present value of the minimum lease payments.Any upfront direct costs incurred by lessee are added to the amount recognized as an asset. Lessor recognize the finance income based on a periodic rate of return on the lessor’s net investment in the finance lease & recognize assets held under a finance lease in their statements of financial position.

5. Sale and leaseback transactions - IAS 17 covers the transaction of sale of an asset and its subsequent leasing by the former owner. If such transaction result in financial lease then any sale proceeds over the carrying amount should be deferred and recognized over the lease term. In it result in Operating lease then any profit or loss should be recognized immediately.

                                                                                        

IAS 37 - Provisions, Contingent Liabilities and Contingent Assets -It provides the framework for the accounting for provisions, together with contingent assets (possible assets) and contingent liabilities (possible obligations and present obligations that are not probable or not reliably measurable).

The most relevant point in the IAS 37 are highlighted below which are useful in practise of accounting -

1. A provision is a present obligation of uncertain timing or amount. Contingent Liability is a possible obligation depending on whether some uncertain future event occurs or a present obligation but the amount cannot be measured reliably. Contingent asset a possible asset that arises from past events, and whose existence will be confirmed depending occurrence or non-occurrence of one or more uncertain future events which are not wholly within the control of the entity.
   
2. Recognition of provision - The provision is recognized only if it is present obligation, the payment is probable (More likely then not) and amount can be reliably estimated. Amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at balance sheet date. The amount of provision is reviewed at each balance sheet date.
   
3. Contingent Liability - IAS 37 requires that entities should not recognize contingent liabilities but should disclose them when the possibility of an outflow of economic resources is material.
   
4. Contingent Assets - Contingent assets should not be recognized but should be disclosed where an inflow of economic benefits is probable. When the realization of income is virtually certain (more than reasonable), then the asset is not a contingent asset and it can be recognition.
   
5. Disclosure - For each class of provision Reconciliation of opening and closing balance should be disclosed. And a brief description of nature, timing, assumption, & uncertainties of provision are disclosure requirement of IAS 37.

----Efforts are made to make these IAS simple to understand in case of doubt feel free to ask in comment section----