IAS 17

IAS 17 was an International Accounting Standard issued by the International Accounting Standards Committee (IASC) and later adopted by the International Accounting Standards Board (IASB), which prescribed the accounting policies and disclosures for leases.^[1] In January 2016, the IASB issued IFRS 16 Leases, which effectively superseded IAS 17 for annual reporting periods beginning on or after 1 January 2019.^[2]

Core Principle: Risks and Rewards

The primary objective of IAS 17 was to classify leases based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee.^[3]

Unlike its successor (IFRS 16), which uses a "right-of-use" model, IAS 17 utilized a dual-model approach for lessees:

Finance Leases

A lease was classified as a finance lease if it transferred substantially all the risks and rewards incidental to ownership.^[4] Indicators that a lease was a finance lease included:^[5]

• The lease transfers ownership of the asset to the lessee by the end of the lease term.
• The lessee has the option to purchase the asset at a price expected to be sufficiently lower than the fair value (bargain purchase option).
• The lease term is for the major part of the economic life of the asset.
• At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.

Operating Leases

A lease was classified as an operating lease if it did not transfer substantially all the risks and rewards incidental to ownership.^[6] These were often treated as "off-balance sheet" financing, where the lessee simply recognized the lease payments as an expense over the lease term, without recognizing an asset or liability on the balance sheet.^[7]

Accounting Treatment

IAS 17 Lessee Accounting Comparison

Feature	Finance Lease	Operating Lease
Balance Sheet	Asset and Liability recognized.	No Asset or Liability (Off-balance sheet).
Income Statement	Depreciation and Interest expense.	Lease expense (usually straight-line).
Measurement	Lower of fair value or present value of minimum lease payments.	Total payments divided over lease term.

Criticism and Replacement

IAS 17 was criticized by investors and regulators because the distinction between finance and operating leases was often seen as arbitrary, allowing companies to hide significant lease obligations off-balance sheet.^[8] This lack of transparency led to the development of IFRS 16, which requires lessees to bring almost all leases onto the balance sheet.^[9]