26 Lecture - Leasing – IAS 17

  1. Home
  2. Courses
  3. (Financial Accounting – II)
  4. 26 Lecture

26 Lecture

MGT401

Midterm & Final Term Short Notes

Leasing – IAS 17

Leasing is a common practice in business where one party (lessor) grants the use of an asset to another party (lessee) for a specified period in exchange for periodic lease payments. IAS 17 is the accounting standard that outlines the accounting


Important Mcq's
Midterm & Finalterm Prepration
Past papers included

Download PDF

  1. Under IAS 17, how are leases classified? a) Finance leases and rental leases b) Operating leases and financing leases c) Long-term leases and short-term leases Answer: b

  2. How are finance leases recognized under IAS 17? a) As an expense in the income statement b) As an asset and a liability on the balance sheet c) As a liability on the balance sheet only Answer: b

  3. Which of the following is a characteristic of a finance lease? a) The lease term is less than 12 months b) The lease transfers substantially all the risks and rewards of ownership to the lessee c) The lease payments are variable Answer: b

  4. Which of the following is a characteristic of an operating lease? a) The lease transfers substantially all the risks and rewards of ownership to the lessee b) The lease term is equal to or greater than 12 months c) The lease payments are based on the fair value of the asset Answer: c

  5. How are lease payments allocated under a finance lease? a) The payments are allocated between interest and principal b) The payments are allocated between operating expenses and financing expenses c) The payments are allocated between current and non-current liabilities Answer: a

  6. Which of the following is not a finance lease criterion under IAS 17? a) The lease term is for the major part of the asset's useful life b) The present value of the lease payments is less than the fair value of the asset c) The lessee is responsible for maintenance and repairs of the asset Answer: c

  7. How are lease incentives treated under IAS 17? a) As a reduction in lease payments b) As a separate asset on the balance sheet c) As a liability on the balance sheet Answer: a

  8. Which of the following is true for a sale and leaseback transaction? a) It can only be classified as an operating lease b) The leased asset is recognized as a finance lease for the lessee c) The leased asset is derecognized from the lessor's balance sheet Answer: b

  9. How are contingent rent payments treated under IAS 17? a) They are recognized as an expense in the period incurred b) They are included in the lease payments and allocated between interest and principal c) They are recognized as revenue for the lessor Answer: a

  10. Which of the following disclosures is required under IAS 17? a) The amount of capital expenditure committed under operating leases b) The future minimum lease payments under finance leases c) The useful life of the leased asset Answer: b



Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included

Download PDF

  1. What is a lease under IAS 17? Answer: A lease is an agreement where one party (lessor) grants the use of an asset to another party (lessee) for a specified period in exchange for lease payments.

  2. What are the two types of leases under IAS 17? Answer: The two types of leases under IAS 17 are finance leases and operating leases.

  3. How are lease payments accounted for under a finance lease? Answer: Under a finance lease, lease payments are allocated between interest expense and reduction of the lease liability.

  4. What is the lease term under IAS 17? Answer: The lease term is the non-cancellable period for which the lessee has agreed to lease the asset, together with any further periods for which the lessee has the option to continue to lease the asset.

  5. What is the criterion for a lease to be classified as a finance lease? Answer: A lease is classified as a finance lease if it transfers substantially all the risks and rewards of ownership to the lessee.

  6. How are lease incentives treated under IAS 17? Answer: Lease incentives are treated as a reduction in lease payments and recognized as a liability on the balance sheet.

  7. What is the treatment for a sale and leaseback transaction under IAS 17? Answer: In a sale and leaseback transaction, the leased asset is recognized as a finance lease for the lessee.

  8. What are the disclosure requirements under IAS 17 for finance leases? Answer: The future minimum lease payments under finance leases must be disclosed in the financial statements.

  9. Can an operating lease be accounted for as a finance lease? Answer: No, an operating lease cannot be accounted for as a finance lease.

  10. How are contingent rent payments accounted for under IAS 17? Answer: Contingent rent payments are recognized as an expense in the period incurred.

Leasing is a common business practice where an entity obtains the use of an asset for a specified period by entering into a lease agreement with the lessor. IAS 17 provides guidance on accounting for leases by the lessee and the lessor. Under IAS 17, leases are classified as either finance leases or operating leases. A finance lease transfers substantially all the risks and rewards of ownership to the lessee, whereas an operating lease does not. In a finance lease, the lessee recognizes the leased asset and a corresponding liability on the balance sheet. The lease payments are allocated between interest expense and reduction of the lease liability. The leased asset is depreciated over its useful life or the lease term, whichever is shorter. In an operating lease, the lessee recognizes lease payments as an expense on a straight-line basis over the lease term. The leased asset is not recognized on the balance sheet. IAS 17 also provides guidance on accounting for sale and leaseback transactions, which involve the sale of an asset by the owner to another party and the subsequent lease of that same asset back to the seller. The treatment of sale and leaseback transactions depends on whether the lease is a finance lease or an operating lease. Lease incentives, such as rent-free periods or payments made by the lessor to the lessee, are treated as a reduction in lease payments and recognized as a liability on the balance sheet. IAS 17 also requires certain disclosures for lessees and lessors, including the future minimum lease payments under finance leases and the amount of contingent rent payments. Compliance with IAS 17 ensures that entities accurately reflect the economic substance of their lease arrangements in their financial statements.

Course Lectures