Lecture 3
2.5.3 leased assets
Leased assets= assets the firm does not legally own, but leases from another firm
IFRS standards recognize lease asset on balance sheet, reflecting the company’s right of using an
asset and its obligation to make the rental payments
IAS17 standard for lease assets ( see deloitte)
Since 2019: IFRS16: in the new standards there is no longer a difference between the differences in
lease contracts they all have to be booked as a financial lease method
How to record a leased asset?
Operating lease method ( operating lease) similar to a rent contract
o Impact on balance sheet: no asset, no liability
o Impact on income statement: lease payment=period expense you only record the
rent expense in the income statement
o Off-balance sheet balancing
Finance lease method ( finance/capital lease)
o Impact on balance sheet: asset&liability on balance sheet
o As if you have purchased the asset and financed that with a long term loan
o This methods reflects best the true underlying behaviour of the company
o Impact on income statement:
Depreciation expense
Interest expense ( interest+repayment of loan)
No rent expense ( rent expense only for operating expense)
Question 1: in your opinion, what method for recording leases do
companies prefer?
Operating lease method
ROE= profit/TA TA lower, so ROE higher it seems like you perform better, you look
more profitable
You don’t want to have a lot of liabilities on you B/S
o Ratio: liabilities/TA lower liabilities, lower TA, so lower ratio this ratio is an
indicator for risk, so if this ratio is lower you have lower risk
o You want to have a low risk profile, because creditors are more likely to give you a
loan
Question 2: under IFRS, what is the basic criterion to distinguish a finance
lease from an operating lease
Finance lease method:
o it is a financial lease if you have all the risks of the asset ( such as obsolescence and
physical deterioration) , but also all the rewards
o Lease covers substantially all of the asset’s life
o Present value of lease payments is substantially equal to the asset’s fair value
Otherwise it’s a operating lease
2.5.3 leased assets
Leased assets= assets the firm does not legally own, but leases from another firm
IFRS standards recognize lease asset on balance sheet, reflecting the company’s right of using an
asset and its obligation to make the rental payments
IAS17 standard for lease assets ( see deloitte)
Since 2019: IFRS16: in the new standards there is no longer a difference between the differences in
lease contracts they all have to be booked as a financial lease method
How to record a leased asset?
Operating lease method ( operating lease) similar to a rent contract
o Impact on balance sheet: no asset, no liability
o Impact on income statement: lease payment=period expense you only record the
rent expense in the income statement
o Off-balance sheet balancing
Finance lease method ( finance/capital lease)
o Impact on balance sheet: asset&liability on balance sheet
o As if you have purchased the asset and financed that with a long term loan
o This methods reflects best the true underlying behaviour of the company
o Impact on income statement:
Depreciation expense
Interest expense ( interest+repayment of loan)
No rent expense ( rent expense only for operating expense)
Question 1: in your opinion, what method for recording leases do
companies prefer?
Operating lease method
ROE= profit/TA TA lower, so ROE higher it seems like you perform better, you look
more profitable
You don’t want to have a lot of liabilities on you B/S
o Ratio: liabilities/TA lower liabilities, lower TA, so lower ratio this ratio is an
indicator for risk, so if this ratio is lower you have lower risk
o You want to have a low risk profile, because creditors are more likely to give you a
loan
Question 2: under IFRS, what is the basic criterion to distinguish a finance
lease from an operating lease
Finance lease method:
o it is a financial lease if you have all the risks of the asset ( such as obsolescence and
physical deterioration) , but also all the rewards
o Lease covers substantially all of the asset’s life
o Present value of lease payments is substantially equal to the asset’s fair value
Otherwise it’s a operating lease
