South African Local Government Association
Schedule 3A public entity i.t.o. the Public Finance Management Act, 1999 and recognised i.t.o. the
Organised Local Government Act, 1997
Annual Financial Statements for the year ended 31 March 2017
Accounting Policies
1.7
Financial instruments (continued)
An operating lease is a lease other than a finance
lease.
Losses and gains relating to a financial instrument
or a component that is a financial liability is
recognised as income or expense in surplus or
deficit.
1.8 Leases
Whether a lease is a finance lease or an
operating lease depends on the substance of the
transaction rather than the form of the contract.
Situations that individually or in combination
would normally lead to a lease being classified as
a finance lease are:
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the lease transfers ownership of the asset
to SALGA by the end of the lease term;
SALGA has the option to purchase the
asset at a price that is expected to be
sufficiently lower than the fair value at
the date the option becomes exercisable
for it to be reasonable certain, at the
inception of the lease, that the option will
be exercised;
the lease term is for the major part of the
economic life of the asset even if title is
not transferred;
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;
the leased assets are of such a specialised
nature that only the lessee can use them
without major modifications;
if SALGA can cancel the lease, the lessor’s
losses associated with the cancellation
are borne by SALGA;
gains or losses from the fluctuation in the
fair value of the residual accrue to SALGA
(for example, in the form of a rent rebate
equalling most of the sales proceeds at
the end of the lease);
the lessee has the ability to continue the
lease for a secondary period at a rent that
is substantially lower than market rent;
and
A lease is classified as a finance lease if
it transfers substantially all the risks and
rewards incidental to ownership.
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Finance leases - where SALGA is the lessee
Finance leases are recognised as assets and
liabilities in the statement of financial position
at amounts equal to the fair value of the leased
property or, if lower, the present value of the
minimum lease payments. The corresponding
liability to the lessor is included in the statement
of financial position as a finance lease obligation.
The discount rate used in calculating the present
value of the minimum lease payments is the
interest rate implicit in the lease.
Minimum lease payments are apportioned
between the finance charge and reduction of
the outstanding liability. The finance charge is
allocated to each period during the lease term so
as to produce a constant periodic reduction of
the remaining balance of the liability.
Subsequent to initial recognition the asset is
accounted for in accordance with the accounting
policy applicable to that asset.
Operating leases