2. Synopsis of the standard reviewed A. What is the area of application of this standard? This accounting standard would deal with the accounting treatment that would be necessary for a leasing company (i.e. the lessor) and the entity that had obtained the lease, (i.e. the lessee). As it is common for any accounting standard, LKAS 17 also would contribute to fulfil the accounting concept of consistency in financial statements, with regard to accounting treatment of a lease. B. What is the scope of the standard? The standard excludes application to non-regenerative resources and certain licensing agreements such as films, manuscripts, patents etc. Also the standard cannot be applied as a basis of measurement for property held by lessees that is accounted for as investment property or for investment property provided by lessors under operating leases or for biological assets held by lessees under finance leases. Such exclusions would be dealt under separate accounting standards. Scope covers the following standards: Leases – LKAS 17 Determining whether an arrangement contains a lease – IFRIC 4 De-recognition of finance lease receivables – LKAS 39 Embedded derivatives in lease contracts – LKAS 39 Impairment o LKAS 36 (for leased assets) o LKAS 39 (for recognised lease receivables) Disclosures – SLFRS 7 Investment property – LKAS 40 C. Definition of terms The standard would define the following key terms inherent to leases: Lease; finance lease; operating lease; non-cancellable lease; inception of a lease; commencement of the lease term; lease term; minimum lease payments; fair value; economic life; useful life; guaranteed residual value; unguaranteed residual life; initial direct costs; gross investment in the lease; net investment in the lease; unearned finance income; interest rate implicit in the lease; lessee’s incremental borrowing rate of interest; contingent rent. D. Regulatory framework for lease The leasing industry in Sri Lanka is regulated via the Finance Leasing Act (FLA), No 56 of 2000, with the Central Bank of Sri Lanka acting as its regulator. It is interesting to note that only the finance leases that gets regulated under this statute (and not the operating leases). However the hire purchase transactions are regulated via the Consumer Credit (Amended) Act No 7 of 1990.
3. Impact on Management Accounting Key issues arising from the standard which are relevant to management accountants 1) Transfer of the right to use the assets. This is a common area where the management accountant would be confused as to the extent to which the right to use the asset had got transferred. On the other end of the spectrum would be contracts for services that provide the services provided by assets, but does not substantially transfer the right to use the asset. This area of confusion usually drives the management accountant to consider a contractual service for example a vehicle hiring company that provides transportation services, to be a lease. This mere arrangement to hire, could be distinguished easily when one examines the arrangement in the light of the following section, i.e. transfer of risks and rewards. 2) The locus of risks and rewards incidental to the right to use Together with the right to use the asset, what gets transferred (or not transferred) would be the risks and rewards arising from the leased asset. The difficulty of identifying the locus would also be an issue for the management accountant in the quest for disseminating the appropriate management information to the management.
2 | Accounting standard study group, CIMA Sri Lanka Division: Study of LKAS 18