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TABLE OF CONTENTS CHAPTER I GENERAL PROVISIONS CHAPTER II CLASSIFICATION OF LEASES CHAPTER III ACCOUNTING TREATMENTS FOR LESSEES IN FINANCE LEASES CHAPTER IV ACCOUNTING TREATMENTS FOR LESSORS IN FINANCE LEASES CHAPTER V ACCOUNTING TREATMENTS FOR LESSEES IN OPERATING LEASES CHAPTER VI ACCOUNTING TREATMENTS FOR LESSORS IN OPERATING LEASES CHAPTER VII SALE AND LEASEBACK TRANSACTIONS CHAPTER VIII PRESENTATION CHAPTER I GENERAL PROVISIONS Article 1. For the purpose of regulating the recognition and measurement of leases, as well as the presentation of relevant information, these Standards are formulated in accordance with the Accounting Standards for Enterprises-Basic Standards. Article 2. The term "lease" refers to an agreement whereby the lessor conveys to the lessee in return for rent the right to use an asset for an agreed period of time. Article 3. The following items shall be governed by other accounting standards: (1) The land use right and buildings rented out by a lessor by way of operating lease shall be governed by the Accounting Standards for Enterprises No. 3-Investment Real Estates; (2) The licensing agreements for such items as films, video recordings, plays, manuscripts, patents and copyrights shall be governed by the Accounting Standards for Enterprises No. 6-Intangible Assets; and (3) The impairment of long-term credits formed by the finance leases of a lessor shall be governed by the Accounting Standards for Enterprises No. 22-Recognition and Measurement of Financial Instruments. CHAPTER II CLASSIFICATION OF LEASES Article 4. A lessee and a lessor should classify a lease as a finance lease or an operating lease on the lease inception date. The inception of the lease refers to the date of lease agreement or the date on which the parties to the lease make commitments to the key terms of lease, whichever is earlier. Article 5. The "finance lease" refers to a lease that transfers in substance all the risks and rewards incident upon the ownership of an asset. The title may or may not eventually be transferred. Article 6. If a lease satisfies one or more of the following criteria, it should be classified as a finance lease: (1) The ownership of the leased asset is transferred to the lessee when the term of lease expires; (2) The lessee has the option to purchase the leased asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, on the lease inception date, it is reasonably certain that the option will be exercised; (3) Even if the ownership of the asset is not transferred, the lease term covers the major part of the useful life of the leased asset; (4) In the case of the lessee, the present value of the minimum lease payments on the lease inception date amounts to substantially all of the fair value of the leased asset on the lease inception date; in the case of the lessor, the present value of the minimum lease receipts on the lease inception date amounts to substantially all of the fair value of the leased asset on the lease inception date; (5) The leased assets are of a specialized nature such that only the lessee can use them without making major modifications. Article 7. The "lease term" refers to the period specified in the lease agreement during which the lease shall not be canceled. Once a lease contract is signed, generally it cannot be canceled except for the following circumstances: (1)With the permission of the lessor; (2) If the lessee enters into a new lease for the same or an equivalent asset with the same lessor; (3) If the lessee makes an additional payment of a sufficiently large amount; (4) Upon the occurrence of some remote contingency. If the lessee has the option to continue to lease the asset for any further periods, with or without further payments, and it is reasonably certain on the lease inception date that the lessee will exercise the option, the lease term should include the renewed period. Article 8. The term "minimum lease payments" refers to the payments for the term of lease that the lessee should, or may be required to, make (i.e. excluding contingent rents and execution costs), plus any residual value guaranteed by the lessee or a party related to the lessee. If the lessee has an option to purchase the leased asset at a price which is expected to be sufficiently lower than the fair value on the date when the option becomes exercisable such that, on the lease inception date, it is reasonably certain to be exercised, the payment required to exercise this purchase option should be included in the minimum lease payments. The term "contingent rent" refers to the portion of the lease payments that is not fixed in amount but is based on a factor other than just the length of time (for example, percentage of sales, amount of usage, price indices). The term "execution costs" refers to costs incurred during the lease term for using the leased asset, for example, fees for technical consultation and services, training, maintenance and insurance. Article 9. The term "minimum lease receipts" refers to the minimum lease payments plus any residual value guaranteed to the lessor by a third party independent from the lessor or the lessee. Article 10. The term "operating lease" refers to a lease other than a finance lease. CHAPTER III ACCOUNTING TREATMENTS FOR LESSEES IN FINANCE LEASES Article 11. On the lease inception date, a lessee usually shall record the leased asset at an amount equal to the the fair value of the leased asset or the present value of the minimum lease payments, whichever is lower, shall recognise a long-term account payable at an amount equal to the amount of the minimum lease payments, and shall treat the difference between the recorded amount of the leased asset and the long-term account payables as unrecognised finance charges. The initial direct costs such as commissions, attorney's fees and traveling expenses, stamp duty directly attributable to the leased item incurred by the lessee during the process of negotiating and securing the leasing agreement should be recorded in the asset value of the current period. The date of beginning of the lease term refers to the date on which the lessee has the right to use the leased asset. Article 12. When a lessee calculates the present value of the minimum lease payments, if it can obtain the lessor's interest rate implicit in the lease, it shall adopt the interest rate implicit in the lease as the discount rate. Otherwise, it shall adopt the interest rate provided in the lease agreement as the discount rate. If the lessee cannot obtain the lessor's interest rate implicit in the lease or if no interest rate is provided in the lease agreement, the lessee shall adopt the borrowing interest rate of the bank for the same period as the discount rate. Article 13. The expression "interest rate implicit in the lease" refers to the discount rate that, on the lease inception date, makes the aggregate present value of the minimum lease payments and the unguaranteed residual value equal to the sum of fair value of the leased asset and any initial direct costs of the lessor. Article 14. The term "guaranteed residue value" refers to, in the case of the lessee, the residual value of the asset which is guaranteed by the lessee or by a third party related to the lessee; and in the case of the lessor, the guaranteed residual value from the standpoint of the lessee plus any residual value of the asset which is guaranteed by a third party independent from the lessor or the lessee. The term "residual value of the asset" refers to the fair value of the leased asset when the term of lease expires as estimated on the lease inception day. The term "unguaranteed residue value" refers to the residual value of the residual value of the leased asset less the guaranteed residual asset of the lessor. Article 15. The unrecognized finance charge shall be amortized to each period during the lease term. The lessee shall adopt the effective interest rate method to calculate and recognize the finance charge in the current period. Article 16. In calculating the depreciation of a leased asset, the lessee should adopt a depreciation policy for leased assets consistent with that for depreciable assets which are owned by the lessee. If there is reasonable certainty that the lessee will obtain ownership of the leased asset when the lease term expires, the leased asset should be fully depreciated over its useful life. If there is no reasonable certainty that the lessee will obtain ownership of the leased asset at the expiry of the lease term, the leased asset should be fully depreciated over the lease term or its useful life, whichever is shorter. Article 17. Contingent rents shall be recognized as an expense in the period in which they are actually incurred. CHAPTER IV ACCOUNTING TREATMENTS FOR LESSORS IN FINANCE LEASES Article 18. On the beginning date of the lease term, a lessor shall recognise the aggregate of the minimum lease receipts on the lease inception date and the initial direct costs as the finance lease receivable, and record the unguaranteed residual value at the same time. The difference between the aggregate of the minimum lease receipts and the initial direct costs, and the aggregate of unguaranteed residual value and their present value shall be recognized as unrealized finance income. Article 19. The unrealized finance income shall be allocated to each period during the lease term. The lessor shall calculate the finance income in the current period by adopting the effective interest rate method. Article 20. The lessor shall, at least at the end of each year, review the unguaranteed residual values. No adjustment should be made where the unguaranteed residual value increases. If there is evidence of a reduction in the unguaranteed residual value, the interest rate implicit in the lease shall be re-calculated and any associated reduction in respect of net investment in the lease shall be recognized as a loss for the current period. The finance incomes for subsequent periods shall be recognized on the basis of the revised net investment in the lease and the recalculated implicit interest rate. The net investment in the lease is the difference between the aggregate of the minimum lease receipts and the unguaranteed residual value in a finance lease and unrealized finance incomes. If the unguaranteed residual value for which a loss is recognized previously is subsequently recovered, the reversal of the loss shall be limited to the amount of the loss recognized, and the interest rate implicit in the lease shall be recalculated. The finance incomes for subsequent periods shall be determined based on the revised net investment in the lease and the re-calculated implicit interest rate. Article 21. Contingent rents shall be recorded in the profits and losses of the period in which they actually arise. CHAPTER V ACCOUNTING TREATMENTS FOR LESSEES IN OPERATING LEASES Article 22. The lease income from operating leases shall be recorded in the asset costs or profits and losses of the current period by using the straight-line method over each period of the lease term, unless there is any more rational method. Article 23. The initial direct costs incurred by a lessee should be recognized as the profits and losses of the current period. Article 24. The contingent rents shall be recorded in the profits and losses of the current period in which they actually arise. CHAPTER VI ACCOUNTING TREATMENTS FOR LESSORS IN OPERATING LEASES Article 25. A lessor shall include assets subject to operating leases in its relevant balance sheet line item according to the nature of the asset. Article 26. The lease income from operating leases shall be recorded in the profits and losses of the current period by using the straight-line method over each period of the lease term, unless there is any more rational method. Article 27. The initial direct costs incurred by a lessor shall be recognized as the profits and losses of the current period. Article 28. The fixed assets subject to operating leases shall be depreciated on a basis consistent with the lessor's normal depreciation policy for similar assets. Other leased assets should be amortized by using a systematic and reasonable method. Article 29. The contingent rents shall be recorded in the profits and losses of the period in which they actually arise. CHAPTER VII SALE AND LEASEBACK TRANSACTIONS Article 30. A lessor and a lessee should recognize a sale and leaseback transaction as a finance lease or an operating lease in accordance with Chapter II of these Standards. Article 31. If a sale and leaseback transaction is determined as a finance lease, any difference between the sales proceeds and the carrying amount of the asset shall be deferred and amortized as an adjustment to depreciation according to the depreciation pattern of the leased asset. Article 32. If a sale and leaseback transaction is determined as an operating lease, any difference between the sales proceeds and the carrying amount of the asset should be deferred and amortized as an adjustment to the lease payments according to the proportion of the lease payments during the lease term. However, if any evidence shows that the sale and leaseback transaction is based on the fair value, the difference between the sales proceeds and the carrying amount of the asset shall be recorded in the profits and losses of the current period. CHAPTER VIII PRESENTATION Article 33. A lessee shall, in its balance sheet, present the differences between the long-term payables less the unrecognized finance charge relating to the finance leases as long-term liabilities, and long-term liabilities due within 1 year, respectively. Article 34. A lessee shall, in its notes, disclose the following information relating to the finance leases: (1) For each class of leased asset, the originally recorded carrying amount at the beginning and end of the period, and the accumulated depreciation; (2) The minimum lease payments for each of the next 3 accounting years subsequent to the balance sheet date and the aggregate minimum lease payments thereafter; and (3) The unamortized balance of unrecognized finance charge and the method used to allocate the unrecognized finance charge. Article 35. A lessor shall, in its balance sheet, present the differences between the finance lease receivables less the unrealized finance income as long-term liabilities. Article 36. A lessor shall, in its notes disclose the following information relating to the finance leases: (1) The minimum lease receipts for each of the next 3 accounting years subsequent to the balance sheet date and the aggregate minimum lease receipts thereafter; and (2) The unamortized balance of unrealized finance income and the method used to allocate the unrealized finance income. Article 37. For an important operating lease, the lessee shall, in its notes, disclose the following information: (1) The minimum lease payment for the irrevocable operating lease for each of the next 3 accounting years subsequent to the balance sheet date; and (2) The aggregate minimum lease payments thereafter for the irrevocable operating lease. Article 38. A lessor shall disclose the carrying amount of each class of leased asset in the operating leases. Article 39. A lessee and a lessor shall disclose each sale and leaseback transaction as well as the significant terms in the contract on the sale and leaseback transaction. |
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