Hire purchase contracts and Lease in business and how they work Essay

Hire purchase contracts and Lease in business and how they work - Essay Example The intention of this study is an Accounting Standard as a principle that explains the accounting structure, utilizing it as the conceptual foundation for its work. The major role of this Statement is to offer conceptual input into the ASB's job on the growth and review of accounting standards. The study consists of various procedures regarding the â€Å"SSAP 21† (SSAP 21 Accounting for Leases and Hire Purchase Contracts 1997) and its recent amendment. The aim of financial reports is to offer information on the subject of the reporting entity’s fiscal performance and monetary position which is helpful to a large range of users for evaluating the stewardship of the entity’s organization and forming economic decisions. â€Å"Financial statements need to reflect the effects of transactions and other events on the reporting entity’s financial performance and financial position. This involves a high degree of classification and aggregation. Order is imposed on this process by specifying and defining the classes of items—the elements—that encapsulate the key aspects of the effects of those transactions and other events†. An operating lease is a lease that is not a â€Å"finance lease†. Expenses under an operating lease are taken to the statement of comprehensive income on a straight-line basis more than the lease term, unless an additional methodical basis is more suitable. â€Å"SSAP 21; paragraph 17 defines a finance lease as ‘...a lease that transfers substantially all the risks and rewards of ownership of an asset to the lease’. SSAP 21 also defines an operating lease as simply ‘...a lease other than finance lease’†... 8). Findings: The way in which leases are currently differentiated and accounted for; in accordance with SSAP 21 Accounting for hire purchase and lease agreements are dealt with in the provisions offered in SSAP 21 ‘accounting for hire purchase and leases contracts’ and IAS 17 leases. In some examples, a number of lease dealings can form division of a complex contract or which include provisions, options and assurances which could drop within the scope of FRS 5 ‘reporting the matter of dealings’. It must be noted , that where such a lease drops under the range of FRS 5 and SSAP 21, the standards containing more particular provision will be relevant. Operating and Finance Leases An operating lease is a lease that is not a â€Å"finance lease† (Finance Lease 2005). Expenses under an operating lease are taken to the statement of comprehensive income on a straight-line basis more than the lease term, unless an additional methodical basis is more suitable. â€Å"SSAP 21; paragraph 17 defines a finance lease as ‘...a lease that transfers substantially all the risks and rewards of ownership of an asset to the lease’. SSAP 21 also defines an operating lease as simply ‘...a lease other than finance lease’† (Financial Reporting 2011, para. 4). Whether or not a lease passes substantially all the rewards and risks of possession, it will usually be clear in the lease conditions. IAS 17 specifies the direction as to when substantially all the rewards and risks of possession are passed to the lessee: The â€Å"lease transfers† (Gupta 2010) possession to the lessee at the finish of the lease term. The lease tells about a good deal purchase choice at the finish of the lease term. The lease term is for the main division of the asset’s