Accounting for Leases

In the IFRS conference held on July 17, 2008, Sir David Tweedie and Warren McGregor said IASB is working towards abolishing the need to differentiate between finance lease and operating lease.

The Board is taking the approach of “right of use” in crafting the new FRS on Leases. With this approach, it would be reflected as an Asset as long as the lessee has the right of use and consequently mirrored as a Liability as long as the lessee has an obligation to pay.

The Board faces difficulties in sorting out the following features in a lease agreement:-
– option to renew or terminate a lease
– measurement eg. contingent rentals
– overlap with other projects in the area of revenue recognition, derecognition and conceptual framework.

Sir Tweedie made an interesting remark. He said he is looking forward to the day when he could say that he is flying in a plane that is actually reflected in the airline’s balance sheet.

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