文本課件參考mn50325lecture

1FinancialAccounting2Lecture9Leases–IAS17ObjectivesoflectureDifferentiatewaysofacquiringassetsDiscussmotivationforleasingExaminethetwotypesofleaseDeterminethetypeofleaseAccountforoperatingandfinanceleasesDiscusslatestdevelopmentsinchangingtheaccountingmethodforleasesDifferentWaysofAcquiringassetsPurchaseanassetoutright(usingeithercashorabankloan).Legaltransferoftitle,risksandrewardstransferred.AssetshownonSOFPanddepreciatedoverusefuleconomiclife.Leaseanasset.Payamonthly‘rent’tousetheasset.Risksandrewardsmayormaynotbetransferred.Couldbe‘offbalancesheetfinance’andthereforepresentsproblemsforaccountants.Whylease?AccountingadvantagesPossibleoff-balancesheetfinanceGearingrationothitbybankloansCashAdvantagesPurchasedoesnotneedtobefinancedfromexistingfundsCansellassetsandleasethembacktoraisefundsTaxAdvantages–‘rent’isadeductibleexpenseOtherreasonsforleasingCashflowmanagement–steadypaymentsDoesnotrestrictotherdebtavailabilityContinuity(somebankloansmightberepayableondemand)EaseofaccessTypeofasseti.e.leaseassetswithhighobsolescence.E.g.leasecomputersandreplaceafterthreeyears.LessorandLesseeInaleasetransaction,thereisacontractbetweenthelessorandlesseeforthe‘use’ofanasset:LessorisownerandsupplierofassetLesseeisuserofassetLessornormallyretainslegalownership-‘peppercorn’rentafterprimaryleaseperiodends.IAS17setsoutaccountingrequirementsforbothlesseesandlessors.YouonlyneedtoknowLesseeaccounting.

LeaseTermsThenon-cancellableperiodforwhichthelesseehascontractedtoleasetheassettogetherwithanyfurthertermsforwhichthelesseehastheoptiontocontinuetoleasetheassetwithorwithoutfurtherpayment,whenatinceptionofleaseitisreasonablycertainthatthelesseewillexercisetheoptionPrimaryperiod–normallyleasewillbenon-cancellableSecondaryperiod–usuallycancellableatanytimeatlessee'soptionAccountingStandardsonLeasesIAS17issuedin1982andrevisedin1997and2003IAS17doesnotapplyto:Leaseagreementssetupforexplorationoruseofminerals,oil,naturalgasandsimilarnon-regenerativeresourcesLicensingagreementsenteredintoforitemssuchasmotionpictures,videorecordings,plays,patentsExposuredraftsissuedin2010and2013Revisedstandardexpectedin2015

TheTwoTypesofLeaseTwotypesofleaseundercurrentIAS17financelease–transfersrisksandrewardsofownership.operatinglease–aleasethatisnotafinancelease.UnderIAS17Financeleasesarecapitalised(DRassetandCRloan).Thisisanexampleofsubstanceoverform.Operatingleasesarenotcapitalised.Operatingleasepaymentsaretreatedasarentalexpense.FirmswilltrytokeepdebtoffSOFPsopreferoperatingleases.MotivationforOperatingLeases

Currentyearissummarisedincolumn2.Machinerywithcostof100willimproveprofitby10%.Financeleaseandoperatingleasealternativescomparedincolumns3&4.NBassumesinterestcost+depreciationequalsrent!CurrentFinanceOperatingProfit404444Equity200200200LTDebt100200100CapitalEmployed300400300Gearing33%50%33%ROCE13.33%11%14.67%IAS17Rationaleforincludingfinanceleasesasassetsandliabilitiesinfinancialstatements:EconomicsubstanceLong-termcommitmentSimilartobuyinganassetwithaloanFrameworkdefinesanassetandliabilityas:Liabilityisapresentobligationforanoutflowofresources...Assetisaresourcecontrolledbytheenterprise…ThereforeanassetpurchasedusingafinanceleaseistreatedinthesamewayasanassetpurchasedforcashRISKSLossesmayarisefrom:IdlecapacityFallinassetvalueduetotechnologicalobsolescenceCostofmaintenanceandrepairREWARDSGainsmayarisefrom:GenerationofprofitsfromuseofassetFuturesaleofassetwhichhasincreasedinvalueRisksandRewardsofOwnershipIdentifyingaFinanceLeaseIAS17givesexamplesofconditionsthatindividuallyorincombinationleadtoclassificationasafinancelease:TermsofleasesuchthatownershipofassettransferstolesseebyendofleasetermLesseehasoptiontopurchaseassetatapricethatmakesitreasonablycertainfromtheinceptionoftheleasethattheoptionwillbeexercised(sometimescalleda‘bargainpurchase’option)LeasetermisforamajorpartoftheeconomiclifeoftheasseteveniflegaltitleisnevertransferredLeasedassetsareofsuchaspecialisednaturethatonlythelesseecanusethemwithoutmajormodificationsAtinceptionofthelease,thepresentvalueofminimumleasepaymentsamountstosubstantially(90%ormoreinFASBandoldUKrules)ofthefairvalueoftheassetOtherindicatorsidentifiedbyIAS17are:WhethercancellationlossesarebornebythelesseeWhetherfluctuationsinfairvalueatendoftheleaseaccruetothelesseeWhetherthelesseehastheoptiontoextendtheleaseforasecondaryperiodata'peppercornrent‘InPracticemostoftheconditionscanbebypassed!IdentifyingaFinanceLeaseStudentActivitySmithplcisamajorindustrialchemicalscompany.On1.1.X9SmithplcentersintoaleaseagreementwithJonesBankplc.JonesagreestorentanofficeblocktoSmithfor￡12mperannum.TheofficeblockwillhousealltheadministrationfunctionsofSmithplc.AnnualrentalswillriseinlinewiththeRPI.Theinitialrentalperiodisforsevenyears.AftereveryseventhyearSmithhasanoptiontoextendtherentalperiodforafurthersevenyears.ThedirectorsofSmithplctellyouthattheyhavenoideawhethertheywillexercisetheseoptions.TheofficeblockwaspurchasedbyJoneson1.1.X9for￡120mandhasanestimatedusefullifeofonehundredyears.Joneswillmaintainthebuildingandretainlegaltitle.TheofficeblockislocatedonthemainSmithsplcproductionsite.RequirementIstheleaseanoperatingleaseorafinancelease?AccountingforFinanceleasesLessoraccounting(forinformationonly)Initial:Recordsaleofasset(anddirectcostsofsale)andleaseereceivableSubsequentreceipts:splitbetweenportionthatrepaystheereceivableintheSFPandinterestrevenueintheSCI–reflectperiodicrateofreturnShouldbesymmetricaltoLesseeaccounting(thishasthrowntherevisedIAS17intodoubt)Youwillonlybetestedonlesseeaccounting!LesseeAccountingforaFinanceLeaseInitialrecognition:Debit Non-currentassets Credit Financeleaseliability(Useloweroffairvalueandpresentvalueofminimumleasepaymentsatinceptionoflease)Theminimumleasepaymentsarederivedbydiscountingthe‘rental’paymentsattheinterestrateimplicitintheleaseInitialdirectcostscanbetreatedaspartofthecostoftheasset–providedtheyaredirectlyattributabletoactivitiesperformedbythelesseetoobtainthefinanceleaseSubsequentyears:depreciateassetasnormalovertheshorteroftheusefullifeorleaseterm.Leasepayments-splitbetweenpayingbackleaseliabilityandtheinterestcostoffinancemaintenancecosts(ifapplicable)areexpensesinSCI.AllocatingFinancechargestoAccountingPeriodsIAS17requiresthefinancechargetobeallocatedtoeachperiodduringtheleasetermsoastoproduceaconstantperiodicrateofinterestontheoutstandingleaseobligationAsthelesseerepaysthecapitalsum,thetotalcapitalowedfallsfromperiodtoperiodThemixofcapitalandinterestchangesoverthelifeofloanAllocatingInterestActuarialMethod–interestischargedataconstantpercentageontheoutstandingliability,thismatchinginterestto'loan'balance.ThismethodisspecifiedbyIAS17asthemostaccurate.However,toapplyit,therateofinterestimplicitintheleaseisrequired.Thesumofthedigitsmethodcanbeusedifimplicitrateisunavailable.PresentValueofMinimumLeasePayments(MLP)CalculatedatinceptionofleaseMLPrepresentspaymentsforbenefitstransferredtolesseeMLPincludes:PaymentsoverleasetermGuaranteedresidualvaluebylesseeBargainpurchaseoptionExcludes:ContingentrentReimbursementofcostspaidtolessorDiscountMLPoverleaseperiod–thusneed'implicit’rateCalculationofimplicitinterestrateandMLPAssumethatanassetcanbepurchasedon1.1.X1forcashat￡34,869orcanberentedforfouryearsatanadvancepaymentof￡10,000perannum.Totalinterestchargedis￡40,000-￡34,869=￡5,131.Rateofinterestimplicitintheleaseis:￡34,869=￡10,000(paymentinadvance)+(￡10,000X2.4869)Fromtables,2.487istheannuityfactorforthreeyearsat10%.Iftherewasnocashpriceandyouweretoldthattheinterestratewas10%theminimumleasepaymentswouldbe￡34,869IAS17requiresthatthelowerofthefairvalueandminimumleasepaymentsarecapitalised.Inthisexampletheyhavethesamevalue.Inpracticetheminimumleasepaymentswillbe89%offairvaluetoallowlesseestokeeptheleaseoffbalancesheet!Forexample,supposelessordropstheannualrentto￡8,900withthesameimplicitinterestrateof10%thepresentvalueoftheminimumleasepaymentsisnow89%ofthecashprice.Somethingwillneedtohappenattheendoffouryearstomakeitworthwhileforthelessor–anoptiontocontinue,anoptionalbalancingpaymentandsoonbutthecurrentIAS17doesnotcoverthese‘loopholes’.FinanceLeaseLiabilityCrBalb/f1stJanuary(obligationatstart)DrRentalPayment1stJanuaryCrLoanBalanceremaining1stJanuaryFinancechargeat10%Loanat31December20X134,869(10,000)24,8692,48727,35620X227,356(10,000)17,3561,73619,09220X319,092(10,000)9,09290910,00020X410,000(10,000)40,000--5,132Bewaryofrentalsinadvanceandrentalsinarrears!Interestaccruesovertimeandisincludedintherepayment(ifmadeattheendoftheperiod).However,whereinstalmentsarepaidinadvance:ThefirstinstalmentrepayscapitalonlyasnointeresthasyetaccruedAtendofeachaccountingperiod,theyearendliabilitywillincludecapitalandinterestaccruedtodatebutnotyetbeenpaidDepreciationofAssetsheldunderFinanceLeases

Debit Depreciationexpense(SCI)

Credit AccumulateddepreciationDepreciationpoliciesadoptedshouldbeconsistentwithothernon-currentassetsAswithothernon-currentassets,impairmentreviewsshouldbeconductedinaccordancewithIAS36Ifthereisreasonablecertaintythatthelesseewilleventuallyownasset,itshouldbedepreciatedoveritsestimatedusefullifeNormally,overtime,accumulateddepreciationwillexceedcapitalrepaymentsleadingtoariseingearingAssetheldunderaFinanceLeaseDrBalb/f1stJanuary(assetatstart)CrProvisionforDepreciation(straight-line)DrBalc/f31stDecember(assetatend)201134,869(8,717)26,152201226,152(8,717)17,435201317,435(8,717)8,71820148,718(8,718)34,8690Liabilityis￡10,000attheendof2013Disclosures–financeleasesNon-currentassets–includetheamount￡xxrelatingtoassetsheldunderfinanceleases.Non-currentliabilitiesFinanceleaseliabilities(notex)CurrentliabilitiesFinanceleaseliabilities(notex)NotestotheF/SReconciliationofminimumleasepaymentsandpresentvalueWithin1year X(gross)Between2and5years X(gross)After5years X(gross)Less:futurefinancecharges(X)PVoffinanceleaseliabilitiesX

TheminimumleasepaymentsincludethefinancechargeNotestotheF/SPresentvalueoffinanceleaseliabilitiesWithin1year X(net)Between2and5years X(net)After5years X(net)PVoffinanceleaseliabilitiesX

ThefinancechargeelementisnotincludedAccountingforOperatingleasesLessorAccountingCapitaliseanddepreciateasnormalCostsofmaintenanceetc-expensesLeasee-einSCILesseeAccountingLeasepayments-expenseinSCI.DisclosepaymentcommitmentsOperatingLeaseDisclosuresCancellableandnon-cancellableamountspayable<1year1-5years>5yearsAmountspaidinyearShouldIAS17bechanged?IAS17hasapoorreputation.Rulesaretoopreciseandallowloopholestobeexploited.Severaldiscussionpapersandstatementswereissuedinthe2000’s.AnexposuredraftwasIssuedinAugust2010Asecondexposuredraftwasissuedin2013.IASBandFASBunabletoagree.FASBwillcontinuewithfinancelease/operatingleasesplit.FinalrevisedIAS17expectedin2015withadoptionfrom2017?SeeDavidTweedie’squipfrom2008‘Iwanttosomedayflyonanairplanethatactuallyappearsontheairline’sbalancesheet’‘TheIASBstandardonleases“doesn’twork”,being20-yearsoldandbasedontheUSstandard,it’srules-based.Thetestiswhetherthepresentvalueoffutureleasepaymentsismoreorlessthan90%ofthecostoftheassetwhenyougetit.More,andit’sonthebalancesheet;less,andit’soff.Soalltheleasingdealsintheindustryarestructuredarounddeliveringafigureof89%.’“Icangiveyouaprinciple-basedstandardthatjustsimplysays,‘Principleone:showtheliabilityincurredbysigningtheleasecontractandtherightsintheassettakenthereby.’That’sit.”

ThescaleoftheProblem“Afterthecollapsein2001ofEnron,anenergy-tradingcompanythathadusedaccountingtrickstohideitsliabilities,America’sCongressaskedtheSecuritiesandExchangeCommission(SEC)toinvestigateallformsofoff-balance-sheetfinancing.Fouryearslatertheagencyissuedareportthatidentifiedleasesasagiantloophole.Itestimatedthat$1.25trillionofAmericanbusinesses’futureleaseobligationsweremissingfromtheirpublishedaccounts,andmendedthattheybeincluded.”TheEconomist16/11/13

ResearchfindingsonScaleoftheproblemBeattieetal.(1998):Analysed300listedUKcompaniesThenon-capitalisationofoperatingleases–unrecordedlong-termdebtofupto39%ofreporteddebt.Resultsignificantdifferencesin6ofthe9mostcommonlyusedratios(forperformanceanalysis)Significantinter-industryvariationsProposedchangestoIAS17(1)Removalofthecurrentdistinctionbetweenanoperatingleaseandafinancelease(unlessleaseislessthan1year).

Recognitionprinciple.Forallleases,thelesseewillrecognise:(a)anassetrepresentingitsrighttousetheleaseditemfortheleaseterm(the'right-of-use'asset)(b)aliabilityforitsobligationtopayrentals.Theliabilitycomesfirst–assetisabalfig!ProposedchangestoIAS17(2)Componentsofaleasecontract.

Alesseewouldnotrecognisethecomponentsofaleasecontractseparately(suchasoptionstorenew,purchaseoptions,contingentrentalarrangementsorresidualvalueguarantees).Instead,thelesseewouldrecognise:(a)asingleright-of-useassetthatinitiallymatches:(b)asingleobligationtopayallunavoidablerentalsthatincludesobligationsarisingundercontingentrentalarrangementsandresidualvalueguarantees.Optionalpaymentsneedtobeincludedifitis“reasonablycertain”(>90%probability)thattheywillbemade.ProposedchangestoIAS17(3)Measurementoftheliability.

Thelessee'sobligationtopayrentalsshouldbemeasuredinitiallyatthepresentvalueoftheleasepaymentsdiscountedusingthelessee'sincrementalborrowingrate.Subsequentmeasurementwouldbeonanamortisedcostbasis.ProposedchangestoIAS17(4)Measurementoftheasset.

Thelessee'sright-of-useassetshouldbemeasuredinitiallyatcost.Costequalsthepresentvalueoftheleasepaymentsdiscountedusingthelessee'sincrementalborrowingrate.Thelesseeshouldamortisetheright-of-useassetovertheshorterofthemostlikelyleaseterm(whichmightincluderenewalperiods)andtheeconomiclifeoftheleaseditem.ProposedchangestoIAS17(5)LogicbehindtheproposedchangesWanttoremoveloopholesConceptuallyinlinewiththeFASB/IASBconceptualframeworke.g.useofpresentvalues,recognitionofobligationsasliabilitiesHowever,a‘rightofuse’assetisnotlikeanormalassetandsoanydepreciationishardtounderstandStudentActivitySmithplcisamajorindustrialchemicalscompany.On1.1.X9SmithplcentersintoaleaseagreementwithJonesBankplc.JonesagreestorentanofficeblocktoSmithfor￡12mperannum.TheofficeblockwillhousealltheadministrationfunctionsofSmithplc.AnnualrentalswillriseinlinewiththeRPI.Theinitialrentalperiodisforsevenyears.AftereveryseventhyearSmithhasanoptiontoextendtherentalperiodforafurthersevenyears.ThedirectorsofSmithplctellyouthattheyhavenoideawhethertheywillexercisetheseoptions.TheofficeblockwaspurchasedbyJoneson1.1.X9for￡120mandhasanestimatedusefullifeofonehundredyears.Joneswillmaintainthebuildingandretainlegaltitle.TheofficeblockislocatedonthemainSmithsplcproductionsite.(Thesedetailsarethesameasbefore).RequirementHowwouldthisarrangementbeaccountedforifIAS17waschangedtoa‘right-of-use’approach?AnswerAssumingthereisazeroprobabilityofrenewingafter7yearstherentalpaymentswillbecapitalisedatSmith’sincrementalborrowingrate,say8%.Fromtables,8%for7yearsisa5.21annuityfactor.Sotherentscouldbecapitalisedat￡12m*5.21=￡62.5m(assumingpaymentsareattheendofayear).Debita‘right-of-use’assetandcreditaleaseliability.Theassetwouldbeamortisedoversevenyearsandtheliabilitywouldreducewiththecashpayments-sameasforafinancelease.Iwouldarguethatthisishardtounderstandastheassetvaluedoesnotrepresenthistoricalcostorfairvalue.AlsofuturecostsarenotallowedtobeprovidedforunderIAS37‘Provisions’yetherefuturerentshavebeencapitalisedasliabilities.Iftheprobabilityofalwaysrenewingtherentswasassessedas‘reasonablycertain’thentheright-of-useassetwouldbecapitalisedat￡150m(￡12m/8%),morethanthecashpurchasepriceof￡120m,becauseJonespayformaintenance.AnotherproblemisthatmaybeSmithcannotborrowat8%andthatiswhyithasenteredintothisagreement!Sothesenewrulesareashiftinthinking.Wecouldextendthislogictoeverythinge.g.capitalisethesalesorderbookasanasset!ImpactofanewIAS17onInternationalAirlinesGroup(BAandIberia)Latestac