A Proposed Interpretation of IAS 1 Presentation of Financial Statements and IAS 17 Leases.

SIC D27 Issued October 2000.

Final SIC 27 Evaluating the Substance of Transactions in the Legal Form of a Lease was approved by the IASB in December 2001. The text below does not reflect the final approved version.

Draft Interpretations are proposals that are not yet final.

At its meeting in April 2001, IASB concluded that SIC should not issue the proposed Interpretation in its current form. SIC discussed the matter at its May 2001 meeting and continued that discussion at its August 2001 meeting. At the August meeting, SIC completed its discussions of SIC D27, including comments received from the IASB. The SIC reaffirmed its consensus and redrafted the Interpretation to focus on the principles involved. It sent the final draft to the Board in September 2001.

At its meeting in October 2001, the IASB Board considered the revised draft of the proposed Interpretation and concluded that the SIC should do still further work on the document, Specifically, the Board asked SIC to: 1. Delete the guidance on the income statement line items, on the grounds that it was too prescriptive. 2. State conclusions on the accounting treatment for the examples in Appendix B, in particular whether or not the asset would be recognised on the balance sheet. This is the second time that the Board has remanded D27 to the SIC without approval.

Summary of SIC D27

D27 addresses whether a transaction that takes the legal form of a lease of assets from an enterprise and a lease of the same assets back to the same enterprise is a lease under IAS 17.

The draft Interpretation establishes the principle that the accounting should reflect the substance of the transaction. All aspects of a transaction should be evaluated to determine its substance, and whether a series of transactions are linked in such a way that the effect cannot be understood without reference to the series of transactions as a whole and should be accounted for as one transaction. The draft Interpretation identifies the following as examples of indications that the transaction is not a lease:

  • the lease/leaseback transactions are linked together such that, in substance, during the sublease period the enterprise retains control of the underlying asset and enjoys substantially the same rights to its use as before the arrangement, or
  • the transaction has been arranged predominantly for a particular purpose other than leasing (for instance, solely to generate tax benefits that can be shared or increase off-balance-sheet borrowings).
Most of these transactions involve a fee, and the draft Interpretation proposes guidance on whether to recognise fee income when execution of the 'lease' agreement is finalised or to defer all or a portion of it to future periods. There is also guidance on determining whether separate investment account and the sublease payment obligations should be recognised.

Issued for public comment on 20 October 2000. Comment deadline 20 December.

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