Question

1. Explain, by reference to the requirements of AASB 117, why the consultant prefers operating to finance leases.

Answer 1

Answer:

According to AASB 117, a lease is considered to be a finance lease if it transfers substantially all the risks and rewards incidental to ownership. On the other hand, a lease is considered to be an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

So, it is clear from the above statements that operating lease does not transfer all risks and rewards incidental to ownership and it can be cancelled at limited cost to lessee. Therefore, lessee has limited risks in operating lease as compared to finance lease.

Apart from that, operating leases are easier to treat than finance lease because in finance lease there has to be capitalization of assets, decision on life of assets, calculation of depreciation etc which is more complicated than operating lease.

Hence, consultant prefers operating lease over finance lease due to its simplicity, flexibility and less risky factor.