Accounting for Leases

NZ IAS 17 and the concept of accounting for leases has been under scrutiny recently, depicted by the statement, “Accounting for leases under NZ IAS 17 is arbitrary and obscures economic reality”. The following issues will be further examined in the following discussion; whether the current standard faithfully reflects lease arrangements and whether it is or is not consistent with the New Zealand framework.

Where the statement claims �NZ IAS is arbitrary’, the issue it raises is whether the standard faithfully reflects lease arrangements. The distinction between operating leases and finance leases that is required by present standards is arbitrary and unsatisfactory. The criteria to distinguish the type of lease (finance or operating) is very subjective, as the accountant has to determine whether significant �risks and rewards’ has been transferred, through the lease arrangement. As a result companies are portraying their leases as operating, for which they are not required to disclose to the balance sheet. The main deficiency of these standards is that they do not provide for the recognition in lessee’s balance sheets of material assets and liabilities arising from operating leases. Hence, NZ IAS 17 does not faithfully reflect lease arrangements, as to be reliable “information must represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent”.

The second part of the statement which claims, “Accounting for leases obscures economic reality”, refers to the idea that NZ IAS 17 conflicts with NZ framework. For operating leases the only amount shown in the financial statements is the annual lease payments, which are charged to the profit and loss account. Whereas, for finance leases, the present value of the future payments under the lease is shown as a liability and on the other side of the balance sheet, the right to the asset. Instances occur where items according to the NZ