Leases and licences

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Leases and licences

• Anne Harrison

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Five sets of cases

• Fixed assets other than land
• Prepayments
• Land, both natural and converted
• Other natural resources
• Other types of contract

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Fixed assets

• Contracts concerning fixed assets whose real
  prices decline over their service lives are
  operating or financial leases. They are not
  assets in their own right

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Operating lease

• Where the lessor undertakes an economic activity
  associated with the maintenance and repair of the
  asset being leased and is responsible for these
  the asset appears in the balance sheet of the
  lessor

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Financial lease

• The asset plays no technical part in the
  production of the lessor the lessee is
  responsible for maintenance and repair. The
  asset appears in the balance sheet of the lessee.

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Timing

• Operation leases tend to be shorter than
  financial financial tend to cover most or all of
  the assets life these facts are indicative and
  not determining

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Canberra recommendations

• Agreed operating and financial leases determined
  by economic ownership using criteria of risk and
  reward

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Financial lease

• Do we estimate the breakdown between repayment
  and interest in a manner similar to determining
  depreciation and net operating surplus/return to
  capital in the case of a fixed asset?

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Financial lease (2)

• Is there a financial service associated with a
  financial lease
• Is it a specific fee only
• If indirectly measured, how is this established

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Canberra recommendations

• Financial service may be provided by lessor
• If lessor is a financial institution, this is
  reflected in FISIM

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Partitioning assets

• Group agrees it is possible in theory reluctant
  to do so often
• SAS (para 14.27 and 14.34- from BPM)
• IASB still considering
• PPP
• Residual value on financial lease

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Market price exceeds lease payment

• Lessee has an asset if he can legally and
  practically transfer/trade the lease
• New asset is contract premium or premium on
  leased assets
• No non-financial liability show as ve for
  lessee -ve for lessor (impairment)
• Applies only to operating leases

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Canberra recommendation

• If lease is transferable, value of asset is
  unencumbered value (180) plus lessee has asset of
  40 and lessor of -40
• If lease is not transferable, value of asset is
  encumbered value (140)

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Prepayments

• No single rule - depends on contract terms
• Single up front payment - originals and copies
  financial asset
• Single up front payment on operating lease -
  trade credit

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Prepayments (2)

• Large initial payment followed by smaller ones -
  may be acquisition (copy or equipment) followed
  by service agreement
• May be trade credit for operating lease
  (deposit)-eg caution on property lease

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Prepayments (3)

• One unit may contribute asset to collective
  project in lieu of finance
• Suggest SNA treatment would be impute financial
  transaction and purchase of equipment (parallel
  with wages in kind)

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Canberra recommendations

• Agree but make clear that upfront payments can be
  prepayment for a service of payment for
  acquisition of an asset depending on nature of
  the lease

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Land

• Propose natural and converted
• Does land converted long ago revert to natural
  because depreciation complete
• Or does it remain converted because depreciation
  is negligible

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Converted land

• Treat as other fixed assets
• Can have operational lease
• Is a long term lease where lessee has all rights
  of land protection a financial lease?
• Is property income shown as interest or rent (on
  converted land)?

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Residual values in general

• What happens to residual value of land under a
  financial lease? Capital transfer or financial
  claim (PPP)
• Does solution for land work for other financial
  leases with residual values for lessor?

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Canberra recommendations

• Treat land improvements/improved land as any
  other asset
• If financial lease is for less than whole life,
  treat as PPPs

22
Natural land

• As converted land but
• Lessee may change to converted land
• Does increase in value show in lessees books or
  lessors
• Does eventual transfer to lessor still work in
  this case

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Canberra recommendations

• Not resolved. E consultation to be organised by
  AH and Peter Harper

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Other natural resources

• Radio spectra, waterways for fish farming do not
  change resource
• Mineral exploration (maybe forestry) destroys
  asset

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What sort of lease?

• Owner retains wealth in his book but this
  diminishes
• Extractor determines rate of run down
• Profit sharing arrangements ( not just owner
  extractor but maybe several extractors)

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Possibility 1

• Deposit in books of owner - incomplete link
  between operating surplus of extractor and
  capital on his books

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Possibility 2

• Deposit in books of extractor - no wealth shown
  for owner

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Possibility 3

• Financial lease
• Length and terms not known at outset
• Size of principle changes each year
• Splitting repayments and interest problematical
  in this situation
• Financial accounts changed by large amounts in
  non-financial units

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Solution

• Not which is correct, which is least bad
• No resolution- e-consultation

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Permits

• Those issued by govt are taxes
• What about those not issued by govt?
• Does Group confirm record on an accrual basis?
• What about reselling prepaid taxes?

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Canberra recommendation

• Non-government permits service or rent depending
  on underlying asset
• Government permit with a fee- change in value
  gives rise to non-produced, non-financial asset
  for owner of permit
• For free permit non-produced non-financial
  asset created at inception thereafter value
  changes with market conditions

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Provision of goods in future

• Examples
• Aircraft options
• Full order books

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Only assets when

• the market price of the good at the promised time
  of delivery differs from the contract price,
• a deposit is made by the purchaser against future
  delivery,
• a producer can claim with an acceptable level of
  probability that a given level of sales in the
  future is assured.

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Canberra recommendations

• Options are financial derivatives treat as others
• Prepayments treat as others
• Otherwise contracts to but goods are not assets

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Provision of services in future

• Examples
• Time share
• Footballers

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Even with repeated deliveries, only assets when

• the market price of the service at the promised
  time of delivery differs from the contract price,
• a deposit is made by the purchaser against future
  delivery,
• a producer can claim with an acceptable level of
  probability that the potential future earnings of
  an employee under contract is in excess of the
  contract payments.

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Canberra recommendations

• Can have non-produced non-financial assets in
  some case eg tradeable contracts on footballers

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Guidelines 1

• Leases licences and contracts may relate to
• The use of fixed assets
• The use of natural assets
• Permissions to engage in specified actions or
  activities
• The provision of goods and services in future
  under agreed conditions

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Guidelines 2

• Leases licences and contracts between the owner
  of a fixed or natural asset (licensor or lessor)
  and a potential user (licensee or lessee) may be
  in the form of an operational lease or a
  financial lease.
• The interpretation of the nature of the lease may
  be affected by timing questions (prepayments).

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Guidelines 3

• The recording of ownership of assets under
  financial leases and possibly other contract
  conditions (PPPs and extraction of natural
  resources) must allow for the eventual resumption
  of the residual value of the asset by the legal
  owner.
• Still need to determine how

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Guidelines 4

• Financial leases and contracts for the future
  provision of goods and services may be subject to
  a further contract between the lessee and a third
  party. These contracts may have a market value
  when they are legally and practically tradeable
  and represent assets distinct from the subject of
  the primary contract.

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Guidelines 5

• When issued by government, permissions to engage
  in specific activities are to be recorded as a
  tax.
• When not issued by government, they are fees for
  service or rent
• Permission to use natural resources or another
  asset is itself an asset