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Leasing (IAS 17) Essay

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Updated: Jun 4th, 2019

Leasing IAS 17 refers to a set of regulations put in place by the government to guide the leasing process. The key objective of these regulations is to offer a clear prescription to both lessees and leasers appropriate accounting policies and disclosures to apply in relation to finance and operating leases (Badaracco 2003).

These regulations apply in all leasing processes a part from those concerning the exploitation of such resources as oil, minerals, natural gas and any other asset of similar nature.

The manner in which these regulations apply however, casts a lot of doubt on whether they can govern an extremely expanding real estates industry. The standards upon which such leases are transacted leave both parties with a considerable amount of risk that would jeopardize the entire leasing process.

A summary of some of the risks that would arise due to the failure by the regulations to meet the need of the users include:

Categorizing all leases which transfers risks and rewards incidents into ownership as financial leases. This provision is vague in the housing sector which is largely considered a financial lease. The lease is financial because the leaser seeks financial benefits from the asset but still retains the risks.

Such risks like a fire break out in the rented house would bear consequential risks for both the parties and this therefore becomes the contentious occurrence in the housing and real estates industry.

The fact that the regulations do no spell out the types of risks that these two parties would bear and how to go about the entire remaining lease term in such circumstances make them fail to meet the needs of users and are therefore of no significance to players in the industry.

In a financial lease, the secondary lease should be at a price a little bit lower than the primary lease. The house depreciates but the land on which the house stand normally appreciates. The regulation code does not describe how to go about this and therefore in real estates, laws do not offer much solution to users and this would be referred to as fail (Alexander & Jorissen 2010).

The proposed alternative laws that would treat both the land and the house as two separate assets would be of much help to the sector as the two would always be handled differently despite the fact that there can be no house without a land. The current trend in the real estates industry is the development of sky scrapers; a single acre of land would carry on it a hundred or so flats.

This means that the land bears more than its value. Treating the two differently in such a case would be prudent as the small peace of land would attract several leasers in the form of the countless tenants.

The tenants in this case must be made to understand that they are in the transaction only for the house and not the land. Any occurrence that does a way with the presence of the house definitely ends the viability of the lease (Badaracco 2003).

In retrospect, the lease regulations commonly referred to as the leasing (IAS17) have been very instrumental in reaching a consensus between the leaser and the lessee but the fact that they never anticipated that there would be newer trends as has been witnessed in the real estates sector casts a spell of uncertainty in their viability.

All that is needed is a correctional amendment that would put to rest any conflicting circumstance that would be presented when developing transactions.

Reference list

Alexander, B, & Jorissen, A 2010, International Financial Reporting and Analysis, Oxford University press: oxford.

Badaracco, J 2003, Defining Moments: When Managers must choose between right and wrong. Harvard University; Harvard.

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