Accounting for leases is problematic and the current standard (IAS 17) Essay

Accounting for leases is problematic and the current standard (IAS 17) does not always reflect the substance of transactions - Essay Example These arrangements have become increasingly unique and complex, both as stand-alone arrangements (i.e., leases only) and as part of more complicated contracts (i.e., power purchase contracts). Such uniqueness and complexity place enormous pressure on companies to capture and report these arrangements in their financial statements in such a way that the financial statement users understand these transactions and their impact on the companies’ balances. With such a demand for transparency and complete financial reporting, the companies and the rest of the business world have focused their attention on the accounting standards for leases as such standards set the tone for how these leases should be accounted for in the financial statements. One such standard formulated for leases is International Accounting Standards 17. International Accounting Standards (IAS) 17, Leases, the accounting standard for leases, was formulated by the IAS Board or IASB to stipulate the proper accounting policies and disclosures applicable to leases. Paragraph 4 of IAS 17 describes a lease as an arrangement or a contract wherein the lessee is given the right by the lessor to use a certain property for a given period of time. In return, under the same arrangement, the lessee will pay the lessor for the use of such property. Lease accounting and the related disclosures, for both the lessor and the lessee, are covered by IAS 17. According to IAS 17, there are two kinds of leases: the finance lease and the operating lease. A finance lease, as defined by IAS 17, is a lease wherein majority of â€Å"all the risks and rewards incidental to ownership of the asset† being leased is transferred by the lessor to the lessee. The substance of this kind of leasing arrangement is that the lessee, according to Alexander, et. al., â€Å"would be in the same position, both economically and in terms of production and