accounting question

cizolin

Any ideas how to answer the question below.

Discuss finance lease and operating lease in the context of the definition of an asset and liability and with reference to the context of substance over form.

J.Ryan

What do you understand as the substance of the transaction and the legal form of the transaction?

hivizman

cizolin wrote: »

Any ideas how to answer the question below.

Discuss finance lease and operating lease in the context of the definition of an asset and liability and with reference to the context of substance over form.

I think it's probably the "concept of substance over form".

The question probably wants you to criticise the existence of the distinction between finance and operating leases. You need to give a definition of a finance lease (an operating lease is defined by reference to this as any lease that isn't a finance lease). Then quote definitions of asset and liability (for example, from the International Accounting Standards Board's Statement for the Preparation and Presentation of Financial Statements. Show how lease contracts give rise to both assets and liabilities for the lessee, whether the contracts are finance leases or operating leases.

Originally, finance leases were considered to be like loans used to acquire the services of an item over several periods, and hence in substance were equivalent to buying the item and borrowing money to do so. Operating leases were regarded as short-term rental arrangements, which were seen as having a different economic substance from the longer-term finance leases. However, the existence of two different types of lease provided opportunities for lease contracts to be structured so that they were operating leases under the definition in the relevant accounting standard but were virtually the same in economic substance as finance leases.

You will find more about this at the Deloitte IASPlus website - follow this link.

masoodsarwar

cizolin wrote: »

Any ideas how to answer the question below.

Discuss finance lease and operating lease in the context of the definition of an asset and liability and with reference to the context of substance over form.

subtance over form can be better understood if u think it like its " economic substance over legal form"

so basically in case of finance lease, rather than looking to legal form which is that the lessor still own the asset legally, the economic subtance of the transation is that lessee is using the asset, and it meets the definition of the asset

- cuz lessee bears the risk and rewards
-mangerial control over the asset
- probable future economic benefits
-resulting from past event ( you signed the contract)
- you have it for subtancial period of useful life of the asset

is the same way you can advocate about the operating lease keeping in mind these points.

-risk and rewards
- managerial control of the asset
- probable flow of economic benefits
- how long u will have it

Refer to iasplus.com for more detail.

cizolin

Thanks very much for the help. Was hitting a brick wall in trying to answer it