Australian Accounting Standards

There is at present no authoritative accounting standard for public private partnerships. Guidance must be sought from existing standards, particularly Australian Accounting Standard AAS17 "Accounting for Leases"

The Standard requires leases to be classified as either operating or finance leases, sometimes referred to as "capital" leases.

Operating leases are essentially "off balance sheet" whereby the lease payments are expensed as incurred, whereas finance leases require the "leased" property to be recorded as an asset and the lease rentals are capitalised as a liability.

Paragraph 5 of AAS17 defines a finance lease as:

"a lease which effectively transfers from the lessor to the lessee substantially all of the risks and benefits incident to ownership of the leased property."

An operating lease is defined as:

"a lease under which the lessor retains substantially all of the risks and benefits incident to ownership of the leased property."

The standard requires that the economic substance of the transaction be examined, rather than its technical or legal form. The risks and benefits that are either transferred to the lessee or retained by the lessor are described in paragraph 7:

"those (risks) associated with unsatisfactory performance, obsolescence, idle capacity, losses in realisable value and uninsured damage or condemnation of the property; the benefits include those obtainable from use of the property or gains in realisable value"

Paragraph 9 of the standard sets down the criteria for the classification of finance leases:

"The effective passing, from lessor to lessee, of substantially all of the risks and benefits incidental to ownership is normally assumed where the following criteria are satisfied:

the lease is non-cancellable; and

either of the following tests is met:

■ the lease term is for 75% or more of the useful life of the leased property; or

■ the present value, at the beginning of the lease term, of the minimum lease payments equals or exceeds 90% of the fair value of the leased property to the lessor at the inception of the lease"

Accounting Guidance 3 addresses the propensity for lease packagers to structure transactions outside of the technical criteria, for example, by providing a lease term of 74% of useful life.

The Guidance emphasises that the criteria provided in paragraph 9 are "guidelines only and are not part of the accounting standard." Figure 5 below summarises the criteria to be examined when classifying a lease as finance or operating.

Figure 5 Decision criteria for the classification of leases