Exam 13: Audit of Long-Lived Assets and Related Expense Accounts

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Current accounting principles in Australia (AASB 117 Leases) require that leases be capitalised as finance leases if they meet at least one of five conditions:
1 The lease transfers ownership of the asset to the lessee by the end of the lease term.
2 The lessee has the option to purchase the asset at a price that is expected to be sufficientlylower than the fair value at the date the option becomes exercisable for it to be reasonablycertain, at the inception of the lease, that the option will be exercised.
3 The lease term is for the major part of the economic life of the asset even if title is nottransferred.
4 At the inception of the lease the present value of the minimum lease payments amounts to atleast substantially all of the fair value of the leased asset.
5 The leased assets are of such a specialised nature that only the lessee can use them without major modifications.
Capitalised leases are initially recorded at the present value of the future minimum leasepayments. The cost of the asset is amortised in the same way as that of purchased assets. Periodiclease payments include interest expense and reduction of principal. If the lease does not meet oneof the preceding tests, it is accounted for as an operating lease, in which case only rent expense isrecorded with the future obligations disclosed as a note.