Question

Let’s imagine an energy company – that leases equipment and large asset bases?

Let’s list the different standard(s) and relevant paragraphs that different financial leases to operating leases?

Please explain/summarise the relevant paragraphs in your own words.

Answer 1

Answer :

1. Leases are classified currently under IAS 17, Leases, as finance or operating leases at inception, depending on whether substantially all the risks and rewards of ownership transfer to the lessee. Under a finance lease, the lessee has substantially all of the risks and reward of ownership. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases. Classification is made at the inception of the lease. [IAS 17.4] Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form.
2. Lessor and lessee
3. Both will greatly affected. To the lessor income in the early years is higher in finance lease than of operating lease. And in later years, income will become lower in finance lease than of the operating lease. The cash operating cash flow is lower in finance lease than of operating lease and the amount of taxes in the early years is higher in finance lease than of operating lease. On the part of the lessee, assets, liabilities, net income in later years, operating income, and cash flow form operation are higher in finance lease as compared to that in operating lease. While the net income in the early years and cash flow from financing are lower in finance lease as compared to operating lease.
4. Accounting in terms of Operating Lease:

A. ACCOUNTING BY THE LESSEE: B. ACCOUNTING BY THE LESSOR:

-Balance Sheet - no recordings -Balance Sheet - leased asset

-Income Statement- rent of an asset -Income Statement- depreciation and interest revenue

Accounting in terms of FINANCE Lease:

A. ACCOUNTING BY THE LESSEE:

-Balance Sheet - Leased asset and leased payable is reported

-Income Statement- interest and depreciation

B. ACCOUNTING BY THE LESSOR:

-Balance Sheet - leased receivable are reduced by the book value of the leased asset

-Income Statement- interest revenue

5. Options can be used to manipulate figures in the balance sheet through fudging of numbers.

6.They are tempted to do it to order to meet established expectations, and to gain personal interest.