Lease Accounting

Organizations are required to disclose the outcome of their operations by various rules and guide lines in financial statements. Financial statements on their part portray the current status of an organization to the various stakeholders. A company has the duty to report to its stakeholders the results of its operations from time to time. The stakeholders include the shareholders, investors, regulatory bodies, customers, creditors, management and other relevant bodies. The information is used for different purposes by the different stakeholders but generally they portray the financial soundness of a company.

One of the items included in the financial statements is the financing of assets through leases. Lease financing is classified as debt financing as opposed to equity financing. A lease is generally identified as the right to use plant, property or equipment for a specified amount of time with an obligation to pay for such a right periodically. The two parties of a lease agreement are the owner of the property, plant or equipment who is referred to as a lessor and the other party who uses the property, plant or equipment of the lessor for a periodical payment and is referred to as a lessee. Both the lessor and the lessee have to account for the lease in different ways as a guided by the different requirements of IAS 17 and FAS 13 among others (IAS 17 LEASES, 2011).

The two types of leases available are the financial lease and operating lease which is determined by the substance of the lease at the inception of the lease. In an operating lease the rewards and risks transferred to the lessee are limited as opposed to a financial lease where the transferred rewards and risk are substantial. Both types of leases have different impacts on the balance sheets of both the lessor and lessee and therefore their disclosures should be done in such way that gives a true and fair view of the company's operations as regarding the outcome of the leases (Chandraiah, 2004).

1.1 Background of the problem and definition of terms

The existing accounting standards on leases have been subject to criticism because of the way they advocate for lease presentations in the financial statements. In the first place they make comparability and communication to the relevant stake holders difficult. Secondly, they fail to address the needs of financial statement users as they only require a note to be added to the financial statements. This note is not reliable enough for the users of the statements to make conclusive informed decisions. The people who are supposed to make the financial statements and the auditors of the same have a hard time because the reporting standard is complex and it uses subjective judgments that undermine accounting standards.

Due to the above pertinent issues the accounting standards bodies which are the FASB and the IASB have tried to make improvements on the existing set of guidelines and standards. The various interpretations pronounced to aid in the implementation of the standards include IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC 15 Operating Leases - Incentives and SIC 27 Evaluating the Substance of Transactions in the Legal Form of a Lease. Other proposed amendments are in the pipeline and include Leases - Reconsideration of IAS 17 among others (IAS 17 LEASES, 2011).

Both the IASB and the FASB issued a joint proposal to improve on the reporting of leases on August the 17th 2010. The proposal will enable investors to have more information available to them unlike in the old reporting guidelines where they have to reconstruct financial statements to suit their needs depending on the classification of a lease contract. The new proposal will allow for a consistent approach to lease accounting and thus all types of leases will have to be reported in the financial statements of both the lessor and the lessee. This will translate to more information being availed to investors and other relevant stakeholders (Exposure draft and Comment letters, 2011).

The two boards have recommended that leasing disclosures should cover property and equipments and exclude intangible assets leases, leases of natural resources such as oil and gas and biological assets leases. The classification