Corporate Financial Reporting

Introduction

A lease is an agreement which lessee is given the permission to use the leased asset for period agreed and makes specified rentals or payments to lessor (Regan, P., 2015, p. 341). International accounting standards (IAS) 17 accounting for leases was developed to cover the needed of accounting standard for leases which included accounting treatments and disclosures for both lessor and lessee (BPP Learning Media Ltd, 2009, pp.402 - 403). IAS 17 was issued at September 1982 by IASC (Biondi, Y.,2011, p.862).

IAS 17 contains two type of leases which are finance and operating lease. Finance lease is classified if rewards and risks of asset transferred to lessee. Moreover, IAS 17 provide some conditions to help classified the lease to finance lease. If asset’s ownership is transfer to lessee after the lease term, lessee given the bargain purchase option to own the asset within significantly low price than fair value of asset, minimum lease payment’s present value is almost ninetypercentof thelessor's asset fair value or lessee used the major economic life of asset either one exists will classified as finance lease (Maynard, J., 2013, p.527) . However, when all the above conditions does not exist it will be classified as operating lease.

Finance lease for lessee will record leased liability and asset in statement of financial position (SOFP) at the amount which lower between fair value andthe future lease payment present value while in lessor's SOFP recorded receivable as net investment amount in asset. Lessee will apportion minimum lease payment by recording interest charge in income statement at constant periodic rate and reduce the leased liability in SOFP. Moreover, depreciation will be recorded in income statement in accordance with IAS 16. For lessor, interest income will be record in income statement at constant periodic rate (CPA Australia Ltd, 2011, p.2).

In operating lease, lessee will treated lease payment as expenses in income statement while lessor will record lease incomes in income statement bothon straight line method within the lease duration. Moreover, lessors record underlying assets in SOFP depend on nature of asset and depreciation of asset will charges in lessor's income statement (CPA Australia Ltd, 2011, p.2).

Weaknesses highlighted

However, the current IAS 17 accounting for lease have been criticized as it does not provide a faithful representation of accounting transaction of leasing and thus fail to meet the needs of users of financial statements. So, US Financial Accounting Standards Boards (FASB) and International Accounting Standards Boards (IASB) incorporate a joint project to develop a new approach to the accounting for lease and published the exposure draft ED/2013/6 in May 2013. The exposure draft