Leasing

Introduction
Lease is simply define as an agreement whereby one party, who owns the asset called the lessor, hereby transfer the right to use that asset to another party called the lessee, for a stated period of time at an agreed rental. The complication is in whose balance sheet will the asset be recognised, this entail the consideration of substance over form concept.   Barry Elliot el al., (2009). The substance over form concept simply state that financial statement should reflect the economic effect of a transaction rather than its legal form, the International Accounting Standard Board (IASB) framework codifies this principle and requires financial statement to reflect the economic substance of transaction rather than its strict legal form.
As leasing becomes a vital source of finance for an organization and with the massive growth in the leasing industry not only in the UK but worldwide, it is vitally important that user of financial statement are provided with complete information about companies leasing transaction. According to R.Perera the value of lease equipment in 1985 represent more than 20% of capital expenditure in the UK. However, the current leasing accounting standards require companies to classify leases as either finance or operating leases. Operating leases is not recognised on the balance sheet, while finance lease is revealed as company’s liability. The current leasing standard has been criticised by user of financial statement including the chairman of the (IASB). Sir David Tweedie “the current lease accounting standard allowed companies to understate their financial commitment as their lease are kept off balance sheet,’’ this is as a result of the current lease standard based on rule based standard which allow companies to structure their leasing transaction that suit them. For instance, companies can negotiate for 89.99% of the fair value of the asset, which they will classify as an operating lease and are not recognised on their balance...