• a lease is a contractual agreement between the lessor

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    Leasing

    A lease is a contractual agreement between the lessor

    (owner of the property) and the lessee (the user of the

    property) , giving the lessee the right to use the lessors

    property for a specific period in exchange for stipulated

    cash payments .

    Lessee: is the person who rents a property from its

    owner, the properties can be real estate precious metal

    or other assets, when the asset is real estate the lessee

    is the tenant. Lessor: is the person who leases out a property to

    another person (lessee).

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    Type of leases

    The leases consist of:

    Capital leases (finance lease).

    Operating lease .

    The important financial difference between finance and

    operating lease is that:

    Operating lease typically cover less than the economic life

    of the asset whereas financial lease cover the entireeconomic life.

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    Type of leases

    Capital leases (finance leases): are accounted for as if

    the lease agreement transfers ownership of the asset

    from the lessor to lessee

    Capital leases are that the lease payments fully amortize

    the asset and the lease cannot be canceled unless

    cancelation penalty payments are made.

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    Type of leases

    Operating leases: are accounted for a rental agreementwith no transfer of effective ownership associated withthe lease.

    Operating leases are short term rentals for less than theeconomic life of the asset, And lease payments dontfully amortize the cost or purchase price of the leasedasset.

    Examples of asset used under o.l photocopyingequipment, computers and furniture.

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    Type of leases

    The lessee has the right to cancel the lease at any timeby returning the asset to the lessor, because the lessordoesnt expect the original lease contract to cover thewhole economic life of the asset.

    The lessor usually maintains the equipment and makesinsurance payment.

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    Financial lease forms

    direct lease : originates when a firm acquiresthe use of an asset it doesnt own through afinancial lease contract , and if require thelessee to pay maintenance and insurance

    expenses called net lease ,but if the lessormade this are called full-service leases.

    sale and leaseback : describes an

    arrangement whereby a firm sells an asset itowns to another party and then immediatelyleases back the asset

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    Financial lease forms

    Leveraged leases: involve a long term lender as

    well as a lessor and lessee ,a group of investors

    pool their equity and put up perhaps as much as

    50 percent of assets purchase price, this groupborrows the necessary remaining funds from a

    financial institution or some other group of

    lenders .

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    Lease classification criteria

    A lease is classified as capital lease if anyone of thefollowing four criteria is met:

    The lease transfers ownership of the property to thelessee by the end of the lease term.

    The lease contains a bargain purchase option. The lease term is equal to 75 percent or more of theestimated economic life of the leased property.

    The present values of the minimum lease paymentsequals or exceed 90 percent of the fir market value of

    the property.If just one of the above criteria is met, then the leaseagreement is classified as capital lease and is accountedfor by lessee as (a debt-financed purchase)*.

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    *

    If the lease is accounted for as capital lease, OwnerCompany would recognize the sale of the equipment onthe lease signing date and would also recognize earnedinterest revenue; User Company would recognize the

    leased asset as well as the liability for the future leasepayments on its balance sheet.

    if the lease is accounted of as operating lease , ownercompany recognizes no sale of the equipment on thelease signing date ; instead ,lease rental revenue is

    recognized each year when the lease payment iscollected ; user company recognizes no leased assetand no lease liability but reports only a periodic leaserental expense equal to the annual lease payment .

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    Lease classification criteria

    A lease that does not meet the capital lease

    criteria is considered an operating lease.

    with an operating lease ,the lessor retains

    control and ownership of the property , which

    reverts back to the lessor at the end of the leaseterm .

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    Economic advantages of leasing

    From the standpoint of the lessee there are threeprimary advantages of leasing:

    No or low down payment: leases are often available forlittle or no money down as a result; a company can gainaccess to an asset without scrambling to find the cashfor the down payment.

    Avoids risks associated with ownership: the lessee isable to protect itself from such risks as technologicalobsolescence, physical deterioration, and changingeconomic condition, ex. market value of leased asset

    increase or decrease. Flexibility: business conditions and requirements change

    over time ,for example you can choose any car for leaseand you can replace the car after specific period .

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    Economic advantages of leasing

    For lessor:

    Increase sales the attractiveness of leasing topotential customers increase sales opportunities

    for the lessor. Ongoing business relationship with lessee: thelessee often need to replace the leased asset,the lessor has an opportunity to build an ongoing

    business relationship with the lessee. Residual value retained: the lessor gets the

    leased asset back at the end of the lease term.

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    IAS 17

    Objective of IAS 17 The objective of IAS 17 (1997) is to prescribe, for lessees and

    lessors, the appropriate accounting policies and disclosures to applyin relation to finance and operating leases.

    Scope

    IAS 17 applies to all leases other than lease agreements forminerals, oil, natural gas, and similar regenerative resources andlicensing agreements for films, videos, plays, manuscripts, patents,copyrights, and similar items. [IAS 17.2]

    However, IAS 17 does not apply as the basis of measurement forthe following leased assets: [IAS 17.2]

    property held by lessees that is accounted for as investmentproperty for which the lessee uses the fair value model set out inIAS 40

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    IAS 17

    investment property provided by lessors under

    operating leases (see IAS 40)

    biological assets held by lessees under finance

    leases (see IAS 41) biological assets provided by lessors under

    operating leases (see IAS 41)

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    IAS 17

    Classification of Leases A lease is classified as a finance lease if it

    transfers substantially all the risks and rewardsincident to ownership. All other leases are

    classified as operating leases. Classification ismade at the inception of the lease. [IAS 17.4]

    Whether a lease is a finance lease or anoperating lease depends on the substance of the

    transaction rather than the form. Situations thatwould normally lead to a lease being classifiedas a finance lease include the following: [IAS17.10]

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    IAS 17

    the lease transfers ownership of the asset to the lesseeby the end of the lease term

    the lessee has the option to purchase the asset at a

    price which is expected to be sufficiently lower than fairvalue at the date the option becomes exercisable that, atthe inception of the lease, it is reasonably certain that theoption will be exercised

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

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    IAS 17

    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 specialized nature such

    that only the lessee can use them without major

    modifications being made

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    IAS 17

    Other situations that might also lead to classification as a finance

    lease are: [IAS 17.11]

    if the lessee is entitled to cancel the lease, the lessor's losses

    associated with the cancellation are borne by the lessee .

    gains or losses from fluctuations in the fair value of theresidual fall to the lessee (for example, by means of a rebate

    of lease payments) .

    the lessee has the ability to continue to lease for a secondary

    period at a rent that is substantially lower than market rent .

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    IAS 17

    Accounting by Lessors

    The following principles should be applied in the financial

    statements of lessors:

    at commencement of the lease term, the lessor shouldrecord a finance lease in the balance sheet as a

    receivable, at an amount equal to the net investment in

    the lease [IAS 17.36]

    the lessor should recognize finance income based on apattern reflecting a constant periodic rate of return on the

    lessor's net investment outstanding in respect of the

    finance lease [IAS 17.39]

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    IAS 17

    assets held for operating leases should bepresented in the balance sheet of the lessoraccording to the nature of the asset. [IAS 17.49]Lease income should be recognized over thelease term on a straight-line basis, unlessanother systematic basis is more representativeof the time pattern in which use benefit isderived from the leased asset is diminished [IAS

    17.50]

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    IAS 17

    Disclosure: Lessors - Finance Lease [IAS 17.47] 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:

    the next year years 2 through 5 combined beyond five years

    unearned finance income unguaranteed residual values accumulated allowance for uncollectible lease payments receivable

    contingent rent recognized in income general description of significant leasing arrangements

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    IAS 17

    Disclosure: Lessors - Operating Lease [IAS 17.56]

    amounts of minimum lease payments at balance sheet

    date under noncancellable operating leases in the

    aggregate and for:

    the next year

    years 2 through 5 combined

    beyond five years

    contingent rent recognized as in income general description of significant leasing arrangements

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    IAS 17

    Accounting by Lessees

    The following principles should be applied in the financial statements oflessees:

    at commencement of the lease term, finance leases should be

    recorded as an asset and a liability at the lower of the fair value ofthe asset and the present value of the minimum lease payments(discounted at the interest rate implicit in the lease, if practicable, orelse at the entity's incremental borrowing rate) [IAS 17.20]

    finance lease payments should be apportioned between the finance

    charge and the reduction of the outstanding liability (the financecharge to be allocated so as to produce a constant periodic rate ofinterest on the remaining balance of the liability) [IAS 17.25]

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    IAS 17

    the depreciation policy for assets held underfinance leases should be consistent with that forowned assets. If there is no reasonable certaintythat the lessee will obtain ownership at the end of

    the lease - the asset should be depreciated overthe shorter of the lease term or the life of theasset [IAS 17.27]

    for operating leases, the lease payments shouldbe recognized as an expense in the income

    statement over the lease term on a straight-linebasis, unless another systematic basis is morerepresentative of the time pattern of the user'sbenefit [IAS 17.33]

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    IAS 17

    Incentives for the agreement of a new or

    renewed operating lease should be recognized

    by the lessee as a reduction of the rental

    expense over the lease term, irrespective of theincentive's nature or form, or the timing of

    payments. [SIC 15]

    http://www.iasplus.com/interps/sic015.htmhttp://www.iasplus.com/interps/sic015.htm
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    IAS 17

    Disclosure: Lessees - Finance Lease [IAS 17.31] carrying amount of asset reconciliation between total minimum lease payments and their

    present value amounts of minimum lease payments at balance sheet date and the

    present value thereof, for: the next year years 2 through 5 combined beyond five years

    contingent rent recognized as an expense total future minimum sublease income under noncancellable

    subleases general description of significant leasing arrangements, includingcontingent rent provisions, renewal or purchase options, andrestrictions imposed on dividends, borrowings, or further leasing

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    IAS 17

    Disclosure: Lessees - Operating Lease [IAS 17.35] amounts of minimum lease payments at balance sheet date under

    noncancellable operating leases for: the next year years 2 through 5 combined

    beyond five years total future minimum sublease income under noncancellablesubleases

    lease and sublease payments recognized in income for the period contingent rent recognized as an expense general description of significant leasing arrangements, including

    contingent rent provisions, renewal or purchase options, andrestrictions imposed on dividends, borrowings, or further leasing

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    Thank you

    Thank you for listening

    Mohammed zatar