Difference between Leases

jewels.pjewels.p Font Of All KnowledgePosts: 1,774Registered
Equipment Lease Payments of £1800 showing in T.B

It asks you to draft an email to owner explaining WHY it is important for you to know which type of lease it is (Finance or Operating):confused1: I thought it was an expense no matter what type it is:huh:
and also to explain the difference?

Any help appreciated

Julie:001_smile:

Comments

  • Paul24Paul24 Experienced Mentor Posts: 578Registered
    Leases are covered by IAS 17. 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.

    Paul
  • jewels.pjewels.p Font Of All Knowledge Posts: 1,774Registered
    Paul24 wrote: »
    Leases are covered by IAS 17. 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.

    Paul


    Forgive me but what does that mean in plain English?:confused1:
  • Paul24Paul24 Experienced Mentor Posts: 578Registered
    If a unit of x is transferred to you (the lessee) and you are exposed to the risks and rewards of ownership, i.e damage to stock, stock obselesence, slow moving stock, lower sales revenue from x's, (not an exhaustive list by any means) then it may be classed as a finance lease. If you are not exposed to the risk and rewards, it is an operating lease.

    Read up on IAS 17, far too much to post on here, but that is the general concept.
  • burgburg Experienced Mentor GloucesterPosts: 1,440Moderator, FMAAT, AAT Licensed Accountant
    Under a operating lease you effectively just 'hire' the equipment.

    All of this expense is recognised as an expense in the P&L


    Under a finance lease (such as a Hire Purchase agreement) the finance company effectively lends you the money to purchase the equipment and charges you interest. They have a 'hold' over the asset so if you cease to pay they can reclaim.

    Only the interest that is charged is shown as an expense in the P & L. The equipment sits on the balance sheet as an asset and can be depreciated and capital allowances claimed if appropriate.

    IAS 17 will clarify in more detail the differences between them.
    Regards,

    Burg
  • jewels.pjewels.p Font Of All Knowledge Posts: 1,774Registered
    Thanks. Where do I get a copy of IAS17?
  • Paul24Paul24 Experienced Mentor Posts: 578Registered
    Just search through google and you will get something
  • jewels.pjewels.p Font Of All Knowledge Posts: 1,774Registered
    Thanks both

    Julie:001_smile:
  • crispycrispy Trusted Regular SouthamptonPosts: 454Registered
    Hello,

    You can look up the details of IAS here:

    www.iasplus.com/standard/ias17.htm

    I really woudn't get bogged down by all the details though, as long as you can distinguish between a finance and operating lease (as well explained before) you should be fine.

    Finance Lease - Capitalise/Depreciate Asset & recognise corresponding liability. Send Interest payments to Profit & Loss.

    Operating Lease - Send amounts as expense to Profit & Loss only

    I think that is about as much as you would need at this stage.
  • jewels.pjewels.p Font Of All Knowledge Posts: 1,774Registered
    crispy wrote: »
    Hello,

    You can look up the details of IAS here:

    www.iasplus.com/standard/ias17.htm

    I really woudn't get bogged down by all the details though, as long as you can distinguish between a finance and operating lease (as well explained before) you should be fine.

    Finance Lease - Capitalise/Depreciate Asset & recognise corresponding liability. Send Interest payments to Profit & Loss.

    Operating Lease - Send amounts as expense to Profit & Loss only

    I think that is about as much as you would need at this stage.

    Thanks. I was beginning to panic when I started reading the IAS 17. It kinda confused me even more. :crying:
  • Bookworm55Bookworm55 Trusted Regular Posts: 479Registered
    The Technical Summaries on the IASB's website are easier to read:
    http://www.iasb.org/IFRS+Summaries/IFRS+and+IAS+Summaries+-+English+(2009)/IFRS+and+IAS+Summaries+-+English+-+(2009).htm

    IAS17: http://www.iasb.org/NR/rdonlyres/A6A27D4A-1EAB-441E-85E7-2878F30389DD/0/IAS17.pdf

    But still I don't think you need to worry too much about the details, and certainly don't need the full standards themselves at AAT. (Which I have been forced to refer to since and are deeply dull)
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