Accounting for arrangements - Part 1

Abstract

Based on the substance over form principle, transactions that in substance transfer the right to use an asset for an agreed period of time, in return for a series of payments, are accounted for as a lease transaction in terms of IAS 17 (AC 105), irrespective of the legal form of the arrangement. The International Financial Reporting Interpretations Committee and the Standards Interpretation Committee have issued two documents that provide more guidance on the application of the substance over form principle in the case of leases, namely: 1. IFRIC 4, Determining whether an Arrangement contains a Lease, and 2. SIC 27, Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRIC 4 poses the question whether all transactions that are in substance leases are accounted for in terms of IAS 17 (completeness of lease transactions). IFRIC 4 therefore requires those who prepare financial statements to consider all supply and service agreements that are legally not leases, in order to determine whether they are in substance lease arrangements. SIC 27, on the other hand, poses the question whether all transactions that take the legal form of a lease are actually, in substance, lease transactions that should be accounted for in terms of IAS 17.