FIN 4130A

SPRING 2025

IAS 17 — Leases

Overview

IAS 17 Leases prescribes the accounting policies and disclosures ap-

plicable 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 recognized 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 super-
seded by IFRS 16 Leases as of 1 January 2019.

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, copy-
rights, 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]
  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
 investment property provided by lessors under operating
leases (see IAS 40)
 biological assets held by lessees under finance leases (see IAS
41)
 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]

 the lease transfers ownership of the asset to the lessee by the

end of the lease term
 the lessee has the option to purchase the asset at a price which
is expected to be sufficiently 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
 the lease term is for the major part of the economic life of the
asset, even if title is not transferred
 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
 the lease assets are of a specialized 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:

 if the lessee is entitled to cancel the lease, the lessor's losses as-
sociated with the cancellation are borne by the lessee
 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)
 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. 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 recognized 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 ac-
cordance with IAS 40 and the fair value model is adopted.

Accounting by lessees

The following principles should be applied in the financial state-

ments of lessees:
  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)
 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)
 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]
 for operating leases, the lease payments should be recognized
as an expense in the income statement over the lease term on a
straight-line basis, unless another systematic basis is more rep-
resentative 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 recognized 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 payment

Accounting by lessors

The following principles should be applied in the financial state-

ments of lessors:

 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]
 the lessor should recognize 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]
 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 recognized 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 recognized 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.]

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.

Under the 2003 revisions to IAS 17, initial direct and incremental
costs incurred by lessors in negotiating leases must be recognized
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 recognized.

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
amortized over the lease term.

For a transaction that results in an operating lease:

  if the transaction is clearly carried out at fair value - the profit
or loss should be recognized immediately
 if the sale price is below fair value - profit or loss should be
recognized immediately, except if a loss is compensated for by
future rentals at below market price, the loss should be
amortized over the period of use
 if the sale price is above fair value - the excess over fair value
should be deferred and amortized over the period of use
 if the fair value at the time of the transaction is less than the
carrying amount – a loss equal to the difference should be
recognized immediately

Disclosure: lessees – finance leases

 carrying amount of asset

 reconciliation between total minimum lease payments and
their present value
 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
 contingent rent recognized as an expense
 total future minimum sublease income under no cancellable
subleases
 general description of significant leasing arrangements,
including contingent rent provisions, renewal or purchase
options, and restrictions imposed on dividends, borrowings, or
further leasing

Disclosure: lessees – operating leases

 amounts of minimum lease payments at balance sheet date

under no cancellable operating leases for:
o the next year
o years 2 through 5 combined
 o beyond five years
 total future minimum sublease income under no cancellable
subleases
 lease and sublease payments recognized in income for the
period
 contingent rent recognized as an expense
 general description of significant leasing arrangements,
including contingent rent provisions, renewal or purchase
options, and restrictions imposed on dividends, borrowings, or
further leasing

Disclosure: lessors – finance leases

 reconciliation between gross investment in the lease and the

present value of minimum lease payments;
 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
 unearned finance income
 unguaranteed residual values
 accumulated allowance for uncollectible lease payments receiv-
able
 contingent rent recognized in income
 general description of significant leasing arrangements

Disclosure: lessors – operating leases

 amounts of minimum lease payments at balance sheet date

under no cancellable operating leases in the aggregate and for:
o the next year
o years 2 through 5 combined
o beyond five years
 contingent rent recognized as in income
 general description of significant leasing arrangements
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