(1) This Procedure is applied in the preparation and the presentation of the consolidated financial statements of the group of entities under the control of the University. The financial statements include separate financial statements for the University as an individual entity and the consolidated entity (the “Group”) consisting of the University and its controlled entities. (2) Refer to the Accounting (Financial) Policy. (3) Refer to the Accounting (Financial) Policy. (4) A lease can be either a finance lease or an operating lease. (5) Classification is made at the inception of the lease. The classification of leases is based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. (6) Rewards may be represented by the expectation of profitable operation over the asset's economic life and of gain from appreciation in value or realisation of a residual value. (7) A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. (8) Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. (9) Examples of situations that individually or in combination would normally lead to a lease being classified as a finance lease are: (10) Indicators of situations that individually or in combination could also lead to a lease being classified as a finance lease are: (11) At the commencement of the lease term, finance leases are recognised as assets and liabilities in the balance sheet at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the University's incremental borrowing rate shall be used. Any initial direct costs of the University are added to the amount recognised as an asset. (12) Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent rents shall be charged as expenses in the periods in which they are incurred. (13) A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each reporting period. If there is no reasonable certainty that the University will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life. (14) The University shall recognise assets held under a finance lease in its balance sheet and present them as a receivable at an amount equal to the net investment in the lease, and subsequently recognise finance income based on a pattern reflecting a constant periodic rate of return on that net investment. (15) The University shall recognise lease payments as an expense on a straight-line basis over the lease term. (16) The University shall present assets subject to operating leases in its balance sheet according to the nature of the asset. Lease income from operating leases shall be recognised in the income statement on a straight-line basis over the lease term. (17) Initial direct costs incurred by the University in negotiating and arranging an operating lease shall be added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income. The depreciation policy for depreciable leased assets shall be consistent with the University’s normal depreciation policy for similar assets. (18) A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved. (19) If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount shall not be immediately recognised as income by the University as a seller-lessee. Instead, it shall be deferred and amortised over the lease term. (20) If a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss shall be recognised immediately. If the sale price is below fair value, any profit or loss shall be recognised immediately except that, if the loss is compensated for by future lease payments at below market price, it shall be deferred and amortised in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the excess over fair value shall be deferred and amortised over the period for which the asset is expected to be used. If the fair value at the time of a sale and leaseback transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value shall be recognised immediately.Accounting Procedure - Leases
Section 1 - Background and Purpose
This Procedure deals with leases and its classification as a finance lease or an operating lease, and the accounting treatment of leases based on its classification in the hands of a lessor and a lessee.Part A - Scope
Part B - Policy Statement
Part C - Procedure
Part D - Classification of Leases
Part E - Financial Leases
The University as a Lessee
Measurement
The University as a Lessor
Measurement
Part F - Operating Leases
The University as a Lessee
Measurement
The University as a Lessor
Measurement
Part G - Sale and Leaseback Transactions
Section 2 - Definitions
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