Operating lease or Finance lease? Need your help

[wsafca]

Dear All

Well said

ok.. I am Wrong

You have made this a personal issue. ok my intention was not this

I thik i have used few wrong words that lead you to misunderstood my view point

I will make one last try

1) A lease shall be classified as finance lease if it transfers substantial Risks and Rewards (RRs) incidental to ownership.

2) 8 examples given in standards are the indicators of this fact and any one reason being fulfilled could be reason to classify a lease as finacne lease. but.... It is not conclusive not full and final

Certain fools talk about "Fictitious" other features. Plz read below what they say

12)The examples and indicators in paragraphs 10 and 11 are not always conclusive. If it is clear from other features that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease.

Those fools have also given some example of those other features.

Also in para 15 they say almost the same thing unless
it is clear from other features that the lease does not transfer substantially all risks and rewards incidental to ownership of one or both elements.

In para 14 they says

However, a characteristic of land is that it normally has an indefinite economic life and, if title is not expected to pass to the
lessee by the end of the lease term, the lessee normally does not receive substantially all of the risks and rewards incidental to ownership, in which case the lease of land will be an operating lease.

Why those fools didn't stoped at beacause the title is nit passed it is operating lease and Why did they said becasuse the titled is not passed it means (only in case of land)substantantial RRs have not been transferred therefore operating lease.

My view point is Measuring tool iss RRs not the examples. We should say like this

PV of MLP = FV it indicates RRs have been transfered so Finance Lease
Purchaese option at the end it indicates RRs have been transfered so Finance Lease
Lease is for major part of use ful life which indicates RRs hve been transfred so Finance Lease

OR

Yes PV of MLP = FV
Yes Purchaese option at the end so on and so forth, but...

because those "Fictitious" other features which have been talked about by some fools clearly indicates that RRs have not been transferred so it is operating lease.

There is only one Critaria to classify the lease.

Others are indicators giving evidence that RRs have been transfered.

Despite all te examples fulfills; due to some Fictitious other Features a lease could be turned out to be an operating.

If you find one solid evidence that RRs have not been transferred It is all over....

Regards

Waqas Shabbir

[kamranACA]

Dear,

We try not to take it personally and we try to feel it may be with some positive intent from you as well. However, the comments given are also not personal and have their links with the objective of this forum and the point being discussed.

We also believe that RRS transfer is the major and focal thing. But we believe RRS transfer has to be identified through some corroborative evidence and does not necessarily entail actual transfer of title at the end of lease term.

The so-called "fools" have provided the way out to decide whether or not RRS has been transferred and have also explained what the heKK this RRS in fact is.

Paragraph 14 also explains why transfer of title for LAND at the end of lease term is necessary. It no where states that transfer of title is a basic for all finance lease arrangements. In fact, this explanation elaborates that transfer of title in case of other assets is not vital.

If you believe that RRS only transfers if

-asset is compulsorily acquired at the end of lease term and title be transferred; or
-100 percent of useful life has beeen consumed during lease term and only a crap is returned after lease term;

then, as I said earlier, we cannot help you.

You are discussing repeatedly the transfer of RRS (of course which is a basic) and continuously failing to understand how such a transfer will be deemed to have taken place and evidenced in the backdrop of a leasing arrangement.

Can we know a logical reasoning of why RRS has not been transferred in the first example of this thread as per your viewpoint? You are saying RRS has not been transferred but not straight forwardly letting us know why it has not been transferred. In this regard I must request you to keep in mind what this RRS actually is.

I hope you will not repeat the two point agenda which I said makes us helpless in making you understand what substance over form in fact means. Do you in fact know what substance over form means. I will like to know your views if you can spare some time.

Regards,


KAMRAN.

[wsafca]

Ok

This time i some what suceeded to put my view point a little better.

I better clear few more things

(In response to your para 4. I do not say, to pass title is essential. Yes it is (but in only case of land due to its specialized feature, that is why i wrote in bracket "(only in case of land)"

I quoted the para to explain that; the indicators are different for different type of items, just because they are trying to evaluate what is actualy ending up in the transfer of RRs.

You said i quote "The so-called "fools" have provided the way out to decide whether or not RRS has been transferred and have also explained what the heKK this RRS in fact is."

You mentioned 2 things, correct me if i am wrong.

1)IAS - 17 has provided the way out to decide whether or not RRs have been transferred (those 8 features, indicators examples whatever). (But these indicators are not conclusive it is also mentioned, though these works normally)

2)IAS -17 also explains what does it means to transfer RRs.

We are in agreement, atleaset now, as of this stage.

My point of view is

We should not say IAS-17 has given 8 critarias to evaluate the classification of lease. Critaria is one, indicators of the fulfillment of that criataria may more than that 8 given is IAS-17.

In "Gripping IFRS" i just read today they says and I quote

"If any of the above situations apply, then the lease is normally classified as finance lease, otherwise it is classified as an operating lease. Always remember that the overriding requirement is whether substantially all the risks and rewards of ownership have been transferred."

and that is what i am saying from the first day. I may have quoted some illogical examples.

Now, Why I critised the answer to the querry.

The answer might be right,but the basis used for the conclusion are wrong. Give reasons for your answers was also the part of question. So first we should be aware that what is measurement tool.

My point of view is, whenever we answer any querry related to classifiation of lease, we should keep in mind the basic critaria and then answer in the way that, Yes these two or three conditions indicate that RRs have been transfered therefore It is Finace lease, or otherwise..


(If you agree, it will be my honour to discuss the case as well)

[wsafca]

Before moving further it is essential to know What does it means to Transfer Risks and Rewards incidental to ownership.

Mr. Faisal arleady quoted a para, which is relevent, we should bring it here again.

The classification of leases adopted in this Standard is based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. Risks include the possibilities of losses from idle capacity or technological obsolescence and of variations in return because of changing economic conditions. Rewards may be represented by the expectation of
profitable operation over the assets economic life and of gain from appreciation in value or realisation of a residual value.

<b>RisK</b>

In the light of above para If the following conditions are apparent from the lease agreement then the risk is considered to be transferred

1- You use or not, you should pay for it.
2- If any fault occurs in machinery, it is your headache not mine.
3- You get lesser benefit from its usage than expected,your headache

<b>Rewards</b>

In the light of above para If the following conditions are apparent from the lease agreement then the Rewards are are considered to be transferred

1- You get more benefit from its usage than expected, Profit is yours.

2- If the value of the asset inceases, the benefit is yours.

3- If the residual value at the end of lease term increases than estimated today profit is yours

All these conditions must be fulfilled to classify the lease as finance lease, The list is not conclusive and may add some more. because the standard does not speaks Risks and Rewards means this, it says it include this.

Further, it doesnot says it should be transferred 100% it says substantial.

Regards

Waqas Shabbir

[wsafca]

The book Gripping IFRS also says

If the risks and rewards

a) are transferred from the lessor to the lessee, then the substance of the transaction is a purchase rather than a true lease; therefore a finance lease;

b) are not transferred from the lessor to the lessee, then the substance of the transaction is a true lease; therefore an operating lease.

In (a) above in substance it is purchase, but legally it is not. i think i understand this. Correct me if iam wrong.

I never said title has to pass to the lessee in order to classify a lease as Finance. No, I never

Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form and substance should be that of the purchase. It should look like that it is purchase but it actually may be not (may be only because the title is not passed). Take the horse give me the rentals and give me the horse back when it will die. all responsibility related to it is yours. In substance you have purchased the asset all RRs have been transfered, although scrap is not yours and title is still of the lessor, but it is finance lease. Horse may be plant. You will again say illogical example, but i think, convincing.

Regards

Waqas Shabbir

[kamranACA]

Dear,

I was expecting something conclusive and reflecting the basis of such a stiff disagreement but could not find in all the 3 posts.

Again nothing conclusive has been explained in view of the query raised in this thread.

However, to my surprise it has been agreed that all the risks have been trasnferred and one of three rewards has also been shifted.

So, now we have left with two identified rewards. Let's talk about them.

If one agrees that transfer of title at the end of lease term is not compulsory to treat it as Finance lease (except in case of land) then two things should also be apprehended.

Why the profit of selling the asset by lessor after the lease term is not taken into account by IAS? Are they really fools that on one hand they make us to agree that title transfer is not compulsory but fail to realise the profit earning by lessor which tentamounts to non transfer of the rewards and which we have succeeded to point out. I mean the fools forgot (although we agree with the issue of titles) but we have searched out.

I said there are two things to be understood. Every asset loses its value with the passage of time (consumption of useful life) except land. I must remind that it should not be confused and mixed up with the concept of revaluation that comes against the historical cost and not against the real value of an asset. So if some profit is earned by lessor it is mainly due to currency value impact. I assume Waqas might have seen some revaluation report in real life scenario which normally takes into account only money value differences due mainly to technological obsolesence and incomparability with new models of a given asset. So the actual profit taking is expected to be meager provided the Useful Life of the asset was carefully determined and it was accordingly depreciated.

So, the first thing is; profit taking by lessor cannot be huge if useful life of asset was correctly arrived at. Mainly because value of an asset except land does not increase in real meanings.

Secondly, when major part of the life of the asset (mind it not 100 percent) has been used, then chances of profit taking are deemed to have been further diluted.

Since as per accounting principles there should be no significant or material profit opportunity left, it accordingly leaves no major imapct on the issue of transfer of rewards.

Now we discuss other reward issue. Residual value is doubted to be increased. I think brother Waqas wanted us to enjoy this last analysis of reward given by him. A person who wants to hunt a lion is not stepping out of his home fearing of a dog sitting in the street. People may not feel this joke suitable but I do.

How much the value which is "residual value" will give the opportunity to earn profit? It's amazing objection if we understand what useful life means.

So both the objections are not relevant when the writer agrees that title transfer is not required as per standard because the "fools" which agreed that for transfer of RR, title transfer is not required must also have thought on the profit taking opportunities identified by our brother. Do we feel they are really "fools"?

All other RR issues have been agreed so need not to be commented upon.

This again confirms that the lease agreement discussed in query was finance lease agreement.

Having concluding the above, I also feel like saying that it's the major part of useful life of an asset and not 100 percent of such life. So there is always expected that little bit profit will flow to the lessor in all such cases. This is not something out of the world.

The example of HORSE is totally and extremely irrelevant for many reasons including the reason that, as I tried to mention in my earlier post, the asset in the query was being leased for 5 out of 8 Years life. At the end of 5 years (although major part) it is not expected to be a dead horse or CRAP. This is always the sense of finance lease arrangement. Otherwise for a lessor there should be no logic to take back the asset by incurring disposal costs.

I think enough has been discussed. Our fellow agrees that title trasnfer and lease term for 100 percent life are not required to conclude RR transfer. However, he some how again gets caught up in same two point agenda which I pointed out in last post.

I advise him to write a letter to IASB for revision in IAS 17. Not to be taken personalized. May be this way we achieve a "better" reporting guidelines whereby we cap the arrangements treated as finance lease as per our fellow's RR transfer concept.

This post has been sent through my blackberry and may contain some spelling mistakes. Regrets are due if it comes true.

Regards,



Kamran.

[wsafca]

All in vien

I think you haven't read what i wrote.

I thnik i wrote more than you can get.

I Just explained What does it mean to transfer risks and rewards. I havn't yet analysed the current scenario. i hve just edited that quote so you cannot get confused.

[kamranACA]

Dear,

I at the outset wrote that you did not provide any basis for declaring the arrangement under query as other than finance lease.

Rest was answer to a conflicting thought portrayed by your posts where you were worried about tha profit taking opportunity available to lessor.

I know you have nothing to comment on the query. You are simply confused of the situation and I have already accepted that I cannot help you.

I simply once again confirm to you that the arrangement under the query was a Finance Lease arrangement.

I conclude again that there is no benefit of wasting time with you. So far you could not even prove your own point.

Regards,



Kamran.

[wsafca]

Dear Mr. Kamran

Thanx to spend time with me.

I agree.. it is finance lease


I fact i never refused,(except first time, i bluntly said no it isnt finance lease, I had intentions behind that,which were not negative. I just wanted to had a discussion. My knowledge has definitly been increased by your pursuasive comments.

One thing to mention,(and I guess you wouldn't again pay attention to it. but hope against hope.)

Let me know only one thing,( i already surrendered as it would be time wasting for you and the readers as well, they will get nothing out of it but will be confused definitly.)

Please tell me one thing and i am finished

Do you believe/understand transfer of RRs is an overriding condition for the lease to be classified as an finance lease, or not? (as i quoted this from "Gripping IFRS")

Do you believe/ understand the 8 liner critaria is not conclusive or not? as it is also written in Para 12.

Yes, I agree it is finance lease, because substantial RRs have been transfered..

Yes, I agree ( and I never ever said before though you quoted me wrongly several times) to pass the title is not compulsory for the lease to be classified as finance lease.

I am sorry if have wasted any of your time or of the readers, intentions were good though

Regards

Waqas Shabbir

Do

[kamranACA]

Dear

Transfer of RR or concluding the arrangement are one and same thing. Transfer of RR cannot be said a "criteria" (a disputed word) since it is a pre-requisit.

Criteria or factors which establish happening of the pre-requisit have to be understood.

A patient will go to doctor and will be treated. Withouting going he can't. Now patient and doctor's medicine are pre-requisit for each other. But whether or not he is a patient requires to establish it. Or in other words which medicind will treat has to be established.

I hope it's not confusing.

Regards,


Kamran.

[wsafca]

Thankx Mr. Kamran

I said tell me one thing but asked two... you havn't given the specific answer of those. Yes i understand it is some time difficult to give answer simply in Yes or No.

I think chapter should be closed here.

Regards

Waqas Shabbir

[kamranACA]

I told you I am unable to help in the condition and phase you are going through.

Regards,

[kamranACA]

I told you I am unable to help in the condition and phase you are going through.

I am also of the view that the purpose has been to remain focussed on the query.

[applejo88]

can i know how to calculate the answer for 96.14% ?