FRS 116 Leases – Disclosing Information Related to Finance Leases and Operating Leases
In the world of finance, disclosure is the release of a company’s information which provide extra details about the data on its financial (Also see Introduction to Financial Risk Management) statements. Hence, it is essential for business owners to disclose particulars about the leases they have involved. Apart from the disclosures related to leases, companies should also disclose some other information. This is because although the financial statements have provided the data, some of them require further explanation. Disclosure is one of the requirements in some accounting standards like IFRS and GAAP. To ensure that your company comply with these standards, do not hesitate to hire an accounting firm in Singapore.
The disclosure aims to let the lessors disclose information in those note that can provide a basis for the users of financial statements to examine the impact the leases has brought to the cash flow, financial performance as well as the financial position of the lessor when the readers use the notes with the cash flow statement, balance sheet, as well as the income statement.
To reach the goal mentioned above, FRS 116: Leases has specified some requirements. For a finance lease, a lessor should disclose the selling profit or loss, the finance income it has generated from the net investment in the lease, as well as the income associated with the variable lease payments that the lessor has not included when it measures the net investment of the lease (Also see FRS 116 Leases – Reassessing Lease Liability). On the other hand, for an operating lease, the lessor needs to disclose the lease income and the income related to variable lease payments which are not reliable on any rate or index.
Besides, the lessor needs to disclose extra information regarding its leasing activities. This includes information which would help the users of its financial statements in examining the nature of the leasing activities that the lessor has carried out. Also, the lessor may have to disclose how it handles the risk related to any rights it keeps in those underlying assets. Specifically, the lessor should disclose the risk management strategy that it has taken for its rights on those underlying assets, which includes any method that it has implemented to reduce the risk. Some examples of the methods are residual value guarantee as well as buy-back agreement.
For the disclosure of finance leases, the lessor should explain notable changes that the carrying amount of its net investment in the finance leases (Also see FRS 116 Leases – Recognition Exemptions) has experienced. Also, it needs to disclose a maturity analysis carried out on the lease payments receivable. This analysis should show the undiscounted lease payments the lessee would receive yearly for at least the first 5 years as well as a sum of amount for the remaining years. The lessor should perform reconciliation on the undiscounted lease payments as well as the net investment in the finance lease. This process should help the lessor in determining the unearned finance income associated with lease payments receivable as well as the discounted unguaranteed residual value if there is any.
For the disclosure of operating leases, the lessor should implement the disclosure requirements specified in FRS 16 for the items that fall under the category of property, plant and equipment that are subjected to operating leases. When implementing the disclosure requirements stated above, the lessor needs to separate each type of property, plant and equipment into two categories, which are assets which are subjected to operating leases as well as those that are not.
For assets which are subjected to the operating leases, a lessor should implement the disclosure requirements stated in FRS 36: Impairment of Assets, FRS 38: Intangible Assets, FRS 40: Investment Property, as well as FRS 41: Agriculture. Apart from that, the lessor needs to disclose a maturity analysis carried out on the lease payments receivable. This analysis should show the undiscounted lease payments the lessee would receive yearly for at least the first 5 years as well as a sum of amount for the remaining years.