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IPSAS 13 is based on IAS 17 Leases (Revised 2003).


IPSAS 13 prescribes the accounting treatment and related disclosures for operational and financial leases, both for lessors and lessees. This standard requires leases to be classified into financial and operational leases on the basis of the transfer of the risks and rewards related to the ownership of the asset.


IPSAS 13 was reissued in December 2006 and applies to annual periods beginning on or after 1 January 2008.



History of IPSAS 13













Effective date

Annual periods beginning on or after 1 January 2008.


Full text

Refer to IFAC website here


Summary of IPSAS 13 Leases

Objective


IPSAS 13 prescribes the accounting treatment and related disclosures for operational and financial leases, both for lessors and lessees.


Scope

This standard should be applied by entities that prepare and present financial statement under the accrual basis of accounting [IPSAS 13.2]. IPSAS 13 applies to all public sector entities other than GBEs [IPSAS 13.3].


Following items are explicitly excluded from IPSAS 13 [IPSAS 13.2]:

• Leases to explore for or use minerals, oil, natural gas, and similar non-regenerative resources

• Licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents, and copyrights


Following leases are within the scope IPSAS 13, but the measurement principles of another standard apply [IPSAS 13.2]:
















Key Definitions [IPSAS 13.8]

Lease: an agreement whereby the lessor conveys to the lessee the right to use an asset for an agreed period of time, in return for a payment or series of payments

Finance lease: a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

Operating lease: a lease other than a finance lease


Classification

When the contract transfers substantially all risks and rewards related to an asset incidental to the ownership thereof, the contract is classified as a finance lease, otherwise it is classified as an operating lease [IPSAS 13.13]. This classification has to be determined at the inception of the lease [IPSAS 13.18].


Risk may include [IPSAS 13.12]:

• possibility of loss due to idle capacity or technological obsolescence

• change in value as a consequence of changed economic conditions


Rewards may include [IPSAS 13.12]:

• expectation of service potential or profitable operation

• gain arising of the increase in value or realization of a residual value


Whether a lease is a finance lease or an operating lease depends on the substance rather than on the form of the contract. Following are indicators that would normally lead to a lease being classified as a finance lease [IPSAS 13.15]:

• the lease transfers ownership of the asset to the lessee by the end of the lease term

• the lessee has the option to purchase the asset at expected favourable conditions (sufficiently low price) at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised

• the lease term is for the major part of the economic life of the asset, even if title is not transferred

• at the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset

• the lease assets are of a specialised nature such that only the lessee can use them without major modifications

• the asset cannot be easily replaced


Other indicators of a finance lease are [IPSAS 13.16]:

• if the lease is cancellable by the lessee, the lessor's losses associated with the cancellation are borne by the lessee

• gains or losses from fluctuations in the fair value of the residual accrue to the lessee (e.g. in the form of a rent rebate)

• the lessee has the ability to continue to lease for a secondary period at a rent that is substantially lower than market rent


When classifying a lease of land and buildings, the standard requires the land and building elements to be considered separately. An important consideration in the classification of land is that normally has an indefinite economic life [IPSAS 13.20A].The lease of the land will generally be an operating lease unless title passes to the lessee at the end of the lease. The lease of the building is classified as finance or operating by applying the lease classification criteria. To assist the classification, the minimum lease payments are allocated between the land and the building in proportion to the relative fair values of the leasehold interests in the land and building components [IPSAS 13.21].

For a lease of land and buildings in which the portion allocated to the land element is immaterial, the land and buildings may be treated as a single unit for the purpose of lease classification and classified as a finance or operating lease [IPSAS 13.22]. If the lessee's interest in both land and buildings is classified as an investment property in accordance with IPSAS 16 and the fair value model is adopted, separate measurement of the land and buildings elements are not required [IPSAS 13.23]


Accounting treatment by lessees

Lessee - Finance leases:

• an asset and a liability should be recorded

o at commencement of the lease term

o at the lower of the fair value of the asset and the present value of the minimum lease payments (discounted at the interest rate implicit in the lease, if practicable to determine, otherwise the entity's incremental borrowing rate should be used) [IPSAS 13.28]

• lease payments are apportioned between the finance charge and repayment of principal by using the implicit rate of interest (the finance charge to be allocated so as to produce a constant periodic rate of interest on the remaining balance of the liability) [IPSAS 13.34]

• the assets held under finance leases should have consistent depreciation policies with assets that are owned (in accordance with IPSAS 17 and IPSAS 31). If no reasonable certainty exists  that the lessee will obtain ownership at the end of the lease – the asset should be depreciated over the shorter of the lease term or the useful life [IPSAS 13.36]


Lessee – Operating leases:

• the lease payments are usually recognized as an expense in the income statement over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern of the user's benefit [IPSAS 13.42]


Accounting by lessors

Lessor - Finance leases:


• initially, the asset is derecognised and a receivable recognised, equal to the net investment in the lease, at an amount equal to the net investment in the lease [IPSAS 13.48]

• finance revenue should be recognized based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment [IPSAS 13.51]

• manufacturers or trader lessors should recognize gains or losses in the same period as they would for outright sales [IPSAS 13.54]. If artificially low rates of interest are quoted gains resulting from the sale should be restricted to that what would apply if a market conform rate of interest would have been charged [IPSAS 13.55].


Lessor - Operating leases:


• assets held for operating leases should be presented in the statement of financial position of the lessor according to the nature of the asset [IPSAS 13.62] Lease revenue should be recognized over the lease term on a straight-line basis, unless another systematic basis is more representative of the time pattern in which use benefit is derived from the leased asset is diminished [IPSAS 13.63]

• for operating leases, initial direct costs incurred in negotiating and arranging an operating lease should be added to the carrying amount of the leased asset and recognise them as an expense over the lease term on the same basis as the lease revenue [IPSAS 13.65]

• leased assets should have consistent depreciation policies with the lessor’s normal policies for similar assets (in accordance with IPSAS 17 and IPSAS 31) [IPSAS 13.66].



Sale and leaseback transactions

For a sale and leaseback transaction resulting in a finance lease, any excess of proceeds over the carrying amount should be deferred and amortized over the lease term [IPSAS 13.71].


For a transaction resulting in an operating lease: [IPSAS 13.73]

• if clear that transaction is at fair value - the gain or loss should be recognized immediately

• if the sales price is below fair value - gain or loss should be recognized immediately, except if a loss is compensated for by future lease payments at below market price, the loss should be amortized over the expected period of use

• if the sale price is above fair value - the excess over fair value should be deferred and amortized over the expected period of use

• if the fair value at the time of the transaction is below the carrying amount – a corresponding loss equal to the difference should be recognized immediately [IPSAS 13.75]


Disclosures

Disclosures: finance leases - lessees [IPSAS 13.40]

• the carrying amount for each class of assets at the reporting date

• reconciliation between total minimum lease payments and their present value at the reporting date

• the aggregate amount of the minimum lease payments at the reporting date and their present value for following periods:

o the following year

o later than 1 year and no later than 5 years

o later than five years

• contingent rent recognized as an expense

• total expected income receivable of future minimum sublease payments under non-cancellable subleases

• description, in general terms, of material leasing arrangements, including the determination basis for contingent rent, renewal or purchase options, escalation clauses and restrictions imposed on return of surplus or capital contributions, dividends or similar distributions, borrowings, or further leasing

Disclosure: lessees – operating leases [IPSAS 13.44]

• the aggregate amount of minimum lease payments and their present value under non-cancellable operating leases for following periods:

o the following year

o later than 1 year and no later than 5 years

o later than five years

• total expected income receivable of future minimum sublease payments under non-cancellable subleases

• lease payments (including sublease) recognized as expense, splitted in minimum lease payments, contingent rent and sublease expense

• description, in general terms, of material leasing arrangements, including the determination basis for contingent rent, renewal or purchase options, escalation clauses and restrictions imposed on return of surplus or capital contributions, dividends or similar distributions, borrowings, or further leasing


Disclosures: finance leases - lessors [IPSAS 13.60]

• reconciliation between gross investment in the lease and the present value of minimum lease payments;

• gross investment and present value of minimum lease payments receivable for following periods:

o the following year

o later than 1 year and no later than 5 years

o later than five years

• unearned finance revenue

• unguaranteed residual values

• accumulated allowance for uncollectible lease payments receivable

• contingent rent recognized in the statement of financial performance

• a description, in general terms, of the material leasing arrangements


Disclosure: operating leases – Lessors [IPSAS 13.69]

• the aggregate amount of minimum lease payments under non-cancellable operating leases for following periods:

o the following year

o later than 1 year and no later than 5 years

o later than five years

• contingent rent recognized in the statement of financial performance

• a description, in general terms, of the material leasing arrangements



December 2001

Issuance of IPSAS 13: Leases

December 2006

IPSAS 13 was revised

1 January 2008

Effective date of IPSAS 13

1 January 2012

Effective date of improvements to IPSASs (issued in November 2010)

1 January 2014

Amendments from IPSAS 32, Service Concession Arrangements: Grantor (issued in October 2011)

IPSAS 13  Leases

Item

Covered by

Property held by lessees that is accounted for as investment property

IPSAS 16 Investment Property

Investment property provided by lessors under operating leases

IPSAS 16 Investment Property

Biological assets held by lessees under finance leases

IPSAS 27 Agriculture

Biological assets provided by lessors under operating leases

IPSAS 27 Agriculture