Accounting For Leases
NZ IAS 17 and the concept of accounting for leases has been under scrutiny recently, depicted by the statement, “Accounting for leases under NZ IAS 17 is arbitrary and obscures economic reality”. The following issues will be further examined in the following discussion; whether the current standard faithfully reflects lease arrangements and whether it is or is not consistent with the New Zealand framework.
Where the statement claims ‘NZ IAS is arbitrary’, the issue it raises is whether the standard faithfully reflects lease arrangements. The distinction between operating leases and finance leases that is required by present standards is arbitrary and unsatisfactory. The criteria to distinguish the type of lease (finance or operating) is very subjective, as the accountant has to determine whether significant ‘risks and rewards’ has been transferred, through the lease arrangement. As a result companies are portraying their leases as operating, for which they are not......
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