Location Financement Ias 17 - Financial Business

IAS 17, *Leases*, while superseded by IFRS 16, *Leases*, still holds significance for understanding the historical accounting treatment of leases and the principles that underpin modern lease accounting. IAS 17 identified two primary classifications of leases: finance leases and operating leases. Location financement, which directly translates to “financial leasing” in French, is the French term for finance leases as defined under IAS 17. A finance lease essentially transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. The core principle of finance lease accounting under IAS 17 was to recognize the economic substance of the transaction, which is essentially the purchase of an asset through financing. Instead of treating the arrangement as a simple rental agreement, it recognized the lessee’s effective ownership of the asset. From a lessee’s perspective, a finance lease was initially recognized on the balance sheet as both an asset (the leased asset) and a liability (the lease obligation). The asset was typically recorded at the lower of the fair value of the leased asset or the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding lease obligation was also recorded at the same amount. Subsequent accounting involved depreciating the leased asset over its useful life or the lease term, whichever was shorter. Depreciation followed the entity’s normal depreciation policies for similar assets. Furthermore, the lease payments were allocated between a reduction of the lease liability and an interest expense. The interest expense was calculated using the effective interest rate method, which allocates the total finance cost of the lease evenly over the lease term. For the lessor, a finance lease was treated as a sale of the asset. The lessor derecognized the asset from its balance sheet and recognized a lease receivable, representing the outstanding lease payments due from the lessee. The difference between the gross investment in the lease (the total lease payments) and the net investment in the lease (the present value of the lease payments) represented unearned finance income. This unearned finance income was recognized as revenue over the lease term using a systematic and rational basis, usually the effective interest rate method, mirroring the lessee’s interest expense recognition. Key indicators that a lease was a finance lease under IAS 17 included: * Transfer of ownership of the asset to the lessee by the end of the lease term. * The lessee having an option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable, such that, at the inception of the lease, it is reasonably certain that the option will be exercised. * The lease term being for the major part of the economic life of the asset, even if title is not transferred. * At the inception of the lease, the present value of the minimum lease payments amounts to substantially all of the fair value of the leased asset. * The leased assets are of such a specialized nature that only the lessee can use them without major modifications. While IFRS 16 has significantly changed lease accounting, specifically by eliminating the operating lease classification for lessees in most cases, the understanding of finance lease accounting under IAS 17 remains relevant. It provides a foundation for comprehending the principles behind recognizing the economic substance of leasing arrangements and the treatment of assets and liabilities arising from these agreements. The concepts of transferring risks and rewards of ownership, present value calculations, and effective interest rate amortization are all still pertinent in the context of IFRS 16 and the analysis of legacy lease contracts accounted for under IAS 17.