IAS 17 — Leases

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Overview
IAS 17 Leases prescribes the accounting policies and disclosures applicable to leases, both for
lessees and lessors. Leases are required to be classified as either finance leases (which
transfer substantially all the risks and rewards of ownership, and give rise to asset and liability
recognition by the lessee and a receivable by the lessor) and operating leases (which result in
expense recognition by the lessee, with the asset remaining recognised by the lessor).
IAS 17 was reissued in December 2003 and applies to annual periods beginning on or after 1
January 2005. IAS 17 will be superseded by IFRS 16 Leases as of 1 January 2019.

History of IAS 17

October 1980 Exposure Draft E19 Accounting for Leases

September 1982 IAS 17 Accounting for Leases

1 January 1984 Effective date of IAS 17 (1982)

1994 IAS 17 (1982) was reformatted

April 1997 Exposure Draft E56, Leases

December 1997 IAS 17 Leases

1 January 1999 Effective date of IAS 17 (1997) Leases

18 December 200 Revised version of IAS 17 issued by the IASB

3

1 January 2005 Effective date of IAS 17 (Revised 2003)

16 April 2009 IAS 17 amended for Annual Improvements to IFRSs 2009 about classifica-
tion of land leases

1 January 2010 Effective date of the April 2009 revisions to IAS 17, with early application
permitted (with disclosure)

1 January 2019 IAS 17 will be superseded by IFRS 16 Leases

Related Interpretations
o IFRIC 4 Determining Whether an Arrangement Contains a Lease
o SIC-15 Operating Leases – Incentives
o SIC-27 Evaluating the Substance of Transactions in the Legal Form of a Lease
Amendments under consideration by the IASB
o Leases – Comprehensive project

Summary of IAS 17

Objective of IAS 17
The objective of IAS 17 (1997) is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures to apply in relation to finance and operating leases.

Scope
IAS 17 applies to all leases other than lease agreements for minerals, oil, natural gas, and
similar regenerative resources and licensing agreements for films, videos, plays, manuscripts,
patents, copyrights, and similar items. [IAS 17.2]
However, IAS 17 does not apply as the basis of measurement for the following leased assets:
[IAS 17.2]
o property held by lessees that is accounted for as investment property for which the
lessee uses the fair value model set out in IAS 40
o investment property provided by lessors under operating leases (see IAS 40)

o biological assets held by lessees under finance leases (see IAS 41)

o biological assets provided by lessors under operating leases (see IAS 41)

Classification of leases
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. Situations that would normally lead to a lease being classified
as a finance lease include the following: [IAS 17.10]
o the lease transfers ownership of the asset to the lessee by the end of the lease term

o the lessee has the option to purchase the asset at a price which is expected to be suf-
ficiently lower than fair value at the date the option becomes exercisable that, at the
inception of the lease, it is reasonably certain that the option will be exercised
o the lease term is for the major part of the economic life of the asset, even if title is not
transferred
o 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
o the lease assets are of a specialised nature such that only the lessee can use them
without major modifications being made
Other situations that might also lead to classification as a finance lease are: [IAS 17.11]
 o if the lessee is entitled to cancel the lease, the lessor's losses associated with the can-
cellation are borne by the lessee
o gains or losses from fluctuations in the fair value of the residual fall to the lessee (for
example, by means of a rebate of lease payments)
o the lessee has the ability to continue to lease for a secondary period at a rent that is
substantially lower than market rent
When a lease includes both land and buildings elements, an entity assesses the classification of
each element as a finance or an operating lease separately. In determining whether the land
element is an operating or a finance lease, an important consideration is that land normally has
an indefinite economic life [IAS 17.15A]. Whenever necessary in order to classify and account
for a lease of land and buildings, the minimum lease payments (including any lump-sum upfront
payments) are allocated between the land and the buildings elements in proportion to the
relative fair values of the leasehold interests in the land element and buildings element of the
lease at the inception of the lease. [IAS 17.16] For a lease of land and buildings in which the
amount that would initially be recognised for the land element is immaterial, the land and
buildings may be treated as a single unit for the purpose of lease classification and classified as
a finance or operating lease. [IAS 17.17] However, separate measurement of the land and
buildings elements is not required if the lessee's interest in both land and buildings is classified
as an investment property in accordance with IAS 40 and the fair value model is adopted. [IAS
17.18]

Accounting by lessees
The following principles should be applied in the financial statements of lessees:
o at commencement of the lease term, finance leases should be recorded as an asset
and a liability at the lower of the fair value of the asset and the present value of the
minimum lease payments (discounted at the interest rate implicit in the lease, if
practicable, or else at the entity's incremental borrowing rate) [IAS 17.20]
o finance lease payments should be 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)
[IAS 17.25]
o the depreciation policy for assets held under finance leases should be consistent with
that for owned assets. If there is no reasonable certainty that the lessee will obtain
ownership at the end of the lease – the asset should be depreciated over the shorter
of the lease term or the life of the asset [IAS 17.27]
o for operating leases, the lease payments should be recognised as an expense in the
income statement over the lease term on a straight-line basis, unless another sys-
tematic basis is more representative of the time pattern of the user's benefit [IAS
17.33]
Incentives for the agreement of a new or renewed operating lease should be recognised by the
lessee as a reduction of the rental expense over the lease term, irrespective of the incentive's
nature or form, or the timing of payments. [SIC-15]

Accounting by lessors
The following principles should be applied in the financial statements of lessors:
o at commencement of the lease term, the lessor should record a finance lease in the
balance sheet as a receivable, at an amount equal to the net investment in the lease
[IAS 17.36]
o the lessor should recognise finance income based on a pattern reflecting a constant
periodic rate of return on the lessor's net investment outstanding in respect of the
finance lease [IAS 17.39]
o assets held for operating leases should be presented in the balance sheet of the
lessor according to the nature of the asset. [IAS 17.49] Lease income should be
recognised over the lease term on a straight-line basis, unless another systematic
basis is more representative of the time pattern in which use benefit is derived from
the leased asset is diminished [IAS 17.50]
Incentives for the agreement of a new or renewed operating lease should be recognised by the
lessor as a reduction of the rental income over the lease term, irrespective of the incentive's
nature or form, or the timing of payments. [SIC-15]
Manufacturers or dealer lessors should include selling profit or loss in the same period as they
would for an outright sale. If artificially low rates of interest are charged, selling profit should be
restricted to that which would apply if a commercial rate of interest were charged. [IAS 17.42]
Under the 2003 revisions to IAS 17, initial direct and incremental costs incurred by lessors in ne-
gotiating leases must be recognised over the lease term. They may no longer be charged to
expense when incurred. This treatment does not apply to manufacturer or dealer lessors where
such cost recognition is as an expense when the selling profit is recognised.

Sale and leaseback transactions

For a sale and leaseback transaction that results in a finance lease, any excess of proceeds
over the carrying amount is deferred and amortised over the lease term. [IAS 17.59]
For a transaction that results in an operating lease: [IAS 17.61]
o if the transaction is clearly carried out at fair value - the profit or loss should be recog-
nised immediately
o if the sale price is below fair value - profit or loss should be recognised immediately,
except if a loss is compensated for by future rentals at below market price, the loss
should be amortised over the period of use
o if the sale price is above fair value - the excess over fair value should be deferred and
amortised over the period of use
 o if the fair value at the time of the transaction is less than the carrying amount – a loss
equal to the difference should be recognised immediately [IAS 17.63]

Disclosure: lessees – finance leases [IAS 17.31]

o carrying amount of asset

o reconciliation between total minimum lease payments and their present value

o amounts of minimum lease payments at balance sheet date and the present value
thereof, for:
o the next year
o years 2 through 5 combined
o beyond five years
o contingent rent recognised as an expense

o total future minimum sublease income under noncancellable subleases

o general description of significant leasing arrangements, including contingent rent pro-

visions, renewal or purchase options, and restrictions imposed on dividends, borrow-
ings, or further leasing

Disclosure: lessees – operating leases [IAS 17.35]

o amounts of minimum lease payments at balance sheet date under noncancellable
operating leases for:
o the next year
o years 2 through 5 combined
o beyond five years
o total future minimum sublease income under noncancellable subleases

o lease and sublease payments recognised in income for the period

o contingent rent recognised as an expense

o general description of significant leasing arrangements, including contingent rent pro-

visions, renewal or purchase options, and restrictions imposed on dividends, borrow-
ings, or further leasing

Disclosure: lessors – finance leases [IAS 17.47]

o reconciliation between gross investment in the lease and the present value of
minimum lease payments;
o gross investment and present value of minimum lease payments receivable for:
 o the next year
o years 2 through 5 combined
o beyond five years
o unearned finance income

o unguaranteed residual values

o accumulated allowance for uncollectible lease payments receivable

o contingent rent recognised in income

o general description of significant leasing arrangements

Disclosure: lessors – operating leases [IAS 17.56]

o amounts of minimum lease payments at balance sheet date under noncancellable
operating leases in the aggregate and for:
o the next year
o years 2 through 5 combined
o beyond five years
o contingent rent recognised as in income

o general description of significant leasing arrangements