Accounting for Leases of Aircraft Fleet Assets in the Global Airline Industry

TRANSPORT

Accounting for Leases of Aircraft FleetAssets in the Global Airline Industry

Introduction 3

General principles for lease accounting 4

Substance over form 4

Risks and rewards approach 5

Classification of leases 6General requirements 6

Key considerations for the passenger airline industry 7

Sales and leaseback transactions 8General requirements 8


Defeasance of lease obligations 10General requirements 10


Disclosures 11

Appendix 1 Definitions of terms under IFRS 13

Appendix 2 Classification of a lease 16

10404-Accounting for Lease of Aircraft Inside 24/5/07 11:55 AM Page 1

2 Account ing for Leases of A i rcraft F leet Assets in the Globa l A i r l ine Industr y


Account ing for Leases of A i rcraft F leet Assets in the Globa l A i r l ine Industr y 3

Introduction

With recent increasing aircraft orders and an upswing in the airlineindustry over 2006, the aircraft leasing industry is booming.

Significant industry restructuring in North America and large aircraft ordersout of Asia and the Middle East requiring financing indicate that there shouldbe ongoing demand in the leasing industry in the near-term future.

Along with this increase in activity, comes the associated accounting issuesregarding lease classification, i.e. whether a lease is treated as an operatinglease or a finance lease and thus whether it is off or on balance sheet.

The extent to which the selection of a particular financing structure ismotivated by a desire to account for a leased asset off balance sheet is amatter for debate. Undoubtedly, some airlines are keen to avail themselvesof structures which give rise to off balance sheet treatments for reasonstypically associated with balance sheet gearing, borrowing ratios, borrowinglimits and covenants. Despite this, it is widely recognised that when lendersand analysts review an airline's financial statements for setting debtcovenants, they focus closely on the extent of long-term operating leasecommitments shown by way of footnote and adjust debt ratios accordingly.

The accounting standard setters have decided it is time to have another look at the fundamental concepts behind lease accounting. The InternationalAccounting Standards Board (IASB) and the United States Financial AccountingStandards Board (FASB) established an international working group inDecember 2006 to jointly fundamentally revisit lease accounting. Theobjective of the joint project is to reconsider the accounting requirements for leasing arrangements. The resulting standard is expected to replace IAS 17 Leases. A discussion paper is expected in the first half of 2008.

The principal objective of this publication is to outline accountingconsiderations for lessees of aircraft under International Financial ReportingStandards (IFRS) based on existing IFRS lease accounting standards as atJanuary 2007. The publication has not sought to specifically address the initialissues being considered in the IASB and FASB working group meetings inthe first half of 2007 given the early stage of the project.



General principlesfor lease accounting

IAS 17 Leases sets out accountingtreatment and disclosure requirements for lessorsand lessees. SIC-27 Evaluating thesubstance of transactions involvingthe legal form of a lease is aninterpretation underlining thesubstance over form principle.

IFRIC 4 Determining whether anArrangement contains a Leaseprovides guidance as to whetherarrangements are or contain leasesthat should be accounted for inaccordance with IAS 17 even thoughthe agreement is not in the legalform of a lease. As per IFRIC 4paragraph 6 the assessment of thesubstance of agreements dependson whether:

• fulfilment of the arrangement isdependent on the use of aspecific asset or assets; and

• the arrangement conveys a right to use the asset(s).

However lease agreements in theairline industry are predominantly in the legal form of a lease.

Substance over form

The IASB Framework for thePreparation and Presentation ofFinancial Statements provides abroad discussion of the basis of

preparing financial statements. Itestablishes a general requirement to account for transactions inaccordance with their substance and economic reality and not merelytheir legal form. The substance oftransactions or other events is notalways consistent with that which isapparent from their legal or contrivedform. For example, accounting for atransaction in the legal form of alease should reflect its economicsubstance; and IAS 17 Leasesapplies when an arrangementconveys a right to use an asset for a specified period of time, regardlessof whether the contract is structuredlegally as a lease.

A lease is an agreement wherebythe lessor conveys to the lessee theright to use an asset for an agreedperiod of time in return for a paymentor series of payments. The definitionof a lease includes contracts that are sometimes referred to as hire or hire-purchase contracts. Whilelegal definitions of a lease, hire orhire-purchase agreements may varybetween different legal jurisdictions,IFRSs focus on the economicsubstance of the agreement.Therefore lease accounting isapplicable to contracts that meet the definition of a lease under IFRSsand that are not exempt from IAS 17,regardless of their legal name ordefinition (IAS 17.4, 17.6). Under IFRS,

each lease is classified as either afinance lease or an operating lease;the classification determines theaccounting treatment to be followedby the lessor and the lessee.

A series of linked transactions thatare in the legal form of a leaseshould be accounted for inaccordance with their economicsubstance. This situation may occur,for example, when a transaction is inthe form of a lease but does nottransfer the right of use of the assetfrom the lessor to the lessee. Thesetransactions may be entered into inorder to generate a tax saving (oftencross-border) or to generate fees.Transactions in the legal form of alease are considered to be 'linked'when the individual transactionscannot be understood withoutreference to the series as a whole.In this case, the series oftransactions should be accounted foras one transaction. Therefore the neteffect of the transaction is accountedfor, rather than accounting separatelyfor each component of thetransaction (SIC-27).

For example, entity P purchased anairplane from entity L and leases itback to L under a finance lease. The payment to L for the airplanehas been paid into a trust accountsecuring lease payments to be madeby entity L for the lease payments.



Entity P is entitled to significant taxdeductions due to accelerated taxdepreciation on the airplane. P hasno residual or credit risks arisingfrom the lease transaction as thelease payment is secured by thetrust accounts. Therefore the risk and rewards of the leased assetshave in substance not beentransferred to P; the reason for thetransaction is merely to achieve a taxbenefit since in substance P pays afee to the lessee to obtain taxbenefits. Therefore the transaction isincluded in the scope of SIC-27Evaluating the Substance ofTransactions Involving the LegalForm of a Lease and the indicatorsmentioned above demonstrate thatthe arrangement may not, insubstance, involve a lease under IAS 17. The accounting should reflectthe substance of the arrangement.

Risks and rewardsapproach

The accounting treatment of a lease under IFRS does not dependon which party has legal ownershipof the leased asset, but rather onwhich party bears the risks andrewards incidental to ownership of the leased asset.

A lease is considered to be a financelease when substantially all of therisks and rewards incidental to

ownership of the leased asset aretransferred from the lessor to thelessee by the agreement. Typicalindicators assessed to determinewhether substantially all of the risksand rewards are transferred include:

• the present value of the minimumlease payments that the lessee isrequired to make relative to thefair value of the leased asset atthe inception of the lease

• the duration of the lease relativeto the economic life of the leased asset

• the existence of a bargainpurchase option for the lessee

• the transfer of ownership of theleased asset to the lessee.

Ultimately, lease classificationdepends on the substance of thetransaction rather than the form of the contract.

The broad objective of the risksand rewards approach is to bring 'in substance purchase transactions'on the balance sheet as financeleases and account for them as if they were purchased assets.

For finance leases, the followingaccounting arises:

• the asset and lease liability areincluded on the balance sheet,typically measured by reference to the present value of theminimum lease payments over the lease term

• the interest and principal inherent in the lease payments are identified, the former beingcharged to the income statement,the latter reducing the lease liability

• the asset is depreciated in linewith policies applied to similarpurchased assets, having regardto the lease term.

The accounting treatment arisingfrom operating leases is entirelydifferent; neither the asset nor the lease liability are included on the balance sheet and the leasepayments are charged evenly to the income statement over the leaseterm. Under an operating lease, bothlessee and lessor treat the lease asan executory contract.



Classification of leases

General requirements

The definitions in IAS 17 are importantin determining classification as afinance lease or as an operatinglease. This classification is the basisfor all subsequent accounting for thelease by both the lessee and lessor.A detailed definition of terms isattached as Appendix 1.

Appendix 2 contains a chart to assistin determining whether substantiallyall the risks and rewards have beentransferred and whether a lease is a finance lease.

Amounts owed by a lessee to a lessor may include charges forrepairs and maintenance or otherservices. Similarly, payments dueunder a lease may include chargesthat represent reimbursements forexpenditures paid by the lessor onbehalf of the lessee (e.g. taxes,insurance). When there are serviceelements or other reimbursementsincluded in a single payment, theseelements must be separated fromthe minimum lease payments thatrelate to the right of use of theleased asset. When calculating thepresent value of minimum leasepayments to evaluate leaseclassification, such service chargesand reimbursements are excluded asthey are not considered part of theminimum lease payments. The



accounting treatment of aircraftmaintenance obligations is anothercomplex area, however it is notincluded in this publication.

Key considerations forthe passenger airlineindustry

In assessing the balance of risks and rewards between the lessor andlessee many lease structures arestraightforward and classifying themas operating or financing leases maybe relatively simple. Many operatingleases are of a conventional nature,designed to provide the airline withthe flexibility to return the aircraft tothe lessor in order to facilitate fleetplanning and optimise aircraftutilisation. Such leases are typicallyrelatively short term (or have periodicbreak points). However, there are arange of other lease structureswhere the balance of risk andrewards between lessor and lesseeis less easy to assess. These mayinclude the length of the lease and/ora desire on the part of the airline tohave an option to acquire the aircrafteither at the end of the lease or atbreak points throughout the lease.

The use of optional lease extensionperiods, with fixed price rentals, is common in the aircraft leasingmarket. Consideration must then begiven to current market conditions and

lessee operating intentions todetermine whether these fixed priceextension periods should be includedwithin the assessment of leaseclassification.

Any assessment of the balance ofrisks and rewards may be complicatedby the fact that the airline has soughtto negotiate some 'upside' in thelease arrangements by obtaining anoption whilst managing the downsiderisk by retaining the flexibility to returnthe aircraft to the lessor at certainpoints during the lease term.

Each transaction has to be judged onits merits, although in cases wherethe option represents a bargainpurchase option, its exercise shouldbe presumed and a finance leasetreatment would be appropriate.Judgement will be required for otherfixed price options, and the extent towhich the option is 'in the money'such as to indicate a finance leasetreatment. The position may also be influenced by the existence oftermination penalties, or otheralternatives to purchase options,which might be triggered if options are not exercised. We do notehowever many leases structured asoperating leases contain market valueoptions to purchase the aircraft atspecific breakpoints. A failure toexercise the option or extend thelease will often result in the payment

of a termination sum. It is possible to envisage circumstances when theprobability of exercise is low and thetermination payment is not prohibitiveand so the lease is classified as anoperating lease. In that eventuality it isconsidered that termination paymentsshould be accrued for over the periodof the lease as this amount forms partof the minimum lease payments.

It is not practicable to put forwardcategorical rules for determining the appropriate classification in suchcircumstances. In practice there canbe a real commercial tension betweenthe lessor and the lessee, as a resultof which the balance of risk andrewards is not always clear cut. This may even be influenced by eachparty's views on prospective marketconditions, aircraft values etc.

The classification of the lease should be determined at inception but should be reviewed at intervalssuch as break points or optionexercise points. Where a decision to extend the period of the lease term results in a reclassification froman operating lease to finance lease,the asset should be capitalised at thepresent value of the minimum lease payments at the market rate at thedate of reclassification.



Sales and leasebacktransactions


The sale and leaseback of aircraft iscommonplace amongst airlines. Theprimary reason for entering into suchtransactions is to realise economicgains, generate cashflows, increasefleet flexibility and alter the balancesheet treatment of the aircraft byleasing back under operating lease.

IAS 17 requires that any profit or loss arising from such transactions is treated as follows:

Sale and finance leaseback

If a sale and leaseback transactionresults in a finance lease, any profitor loss should not be recognisedimmediately through income butshould be deferred and amortisedover the lease term.

Sale and operating leaseback

If a sale and leaseback transactionresults in an operating lease and it is clear that the transaction isestablished at fair value, any profit or loss should be recognisedimmediately. If the sale price isbelow fair value any profit or lossshould be recognised immediatelyexcept if a loss is compensated byfuture rentals at below market price.

Then it should be deferred andamortised in proportion to the rentalpayments over the period for whichthe asset is expected to be used. Ifthe sale price is above the fair value,the excess over fair value should bedeferred and amortised over theperiod for which the asset is expectedto be used. If the fair value at thetime of a sale and leasebacktransaction is less than the carryingamount of the asset, a loss equal tothe amount of the difference betweenthe carrying amount and fair valueshould be recognised immediately.

For finance leases no suchadjustment is necessary unless therehas been an impairment in value, inwhich case, the carrying amount isreduced to the recoverable amount.


Varying financing structures (some ofwhich are tax driven) are put in placeto help airlines finance aircraft ordersfrom manufacturers and refinanceexisting aircraft. These transactionsmay occur prior to or post delivery. If the financing is structured as a sale and leaseback, then the leasearrangement may be classified as afinance or operating lease. The keyaccounting implications include:

• timing of the recognition of gain or loss on sale (i.e. at the point of sale or deferred over the life of the lease)

• whether the aircraft and/or relateddeposits and capitalised costs can be derecognised from thebalance sheet

• whether there is a requirement to consolidate any special purposeleasing entities

• the cashflow disclosures required.

In KPMG's experience there are anumber of issues in analysing andaccounting for lease transactions.These include:

• Has there been a sale of theaircraft? An analysis of whetherthe risks and benefits have beentransferred to the lessor isrequired. One of the primary risksof aircraft financing is who bearsthe residual aircraft value risk.

• At what date was there a sale?This impacts the timing of anyprofit recognition and balancesheet impact. It also affectscashflow statement disclosures,as a sale pre-delivery may removethe final delivery payment to theaircraft manufacturer from anairline's cashflow statement as



it is made by the lessor. If thereis an intention to sell the aircraftprior to delivery, the classificationof the security deposits alsorequires consideration.

• Are the sale proceeds at fairvalue? Aircraft fair values are oftendifficult to determine owing to thesignificant discounts to list pricesgiven to large aircraft orders.Assessments of fair values are often complicated by thecapitalisation of interest costs,hedging gains or losses, and othercosts into the cost of the aircraftby airlines. When these costs aretotalled do they represent anappropriate fair value to be

analysed against the lessor'supfront payment in a sale andleaseback? When the transactioninvolves older aircraft thisdetermination of appropriate fairvalues is more complex as theremay be a lack of recent relevantsales information. Whilst thirdparty 'desktop' valuations are auseful starting point to assess the fair value of an aircraft, otherimportant factors to be consideredinclude an analysis of the natureof costs capitalised into theaircraft value; benchmarking oflease rates; and understanding theeconomic rationale for any gain orloss on disposal.

• Is there a requirement toconsolidate any special purposeleasing entities? SIC-12Consolidation – Special PurposeEntities and IAS 27 Consolidatedand Separate Financial Statementscontain technical guidance inregards to determining whether the special purpose leasing entityis controlled. For example, anassessment needs to be performedon who obtains the benefit ofleasing an aircraft and who has the majority exposure to risk.



Defeasance of leaseobligations


As per IAS 39 Financial Instruments:Recognition and Measurementparagraph 39 derecognition of afinancial liability (e.g. lease liability)occurs when, and only when, it isextinguished, i.e. when the obligationspecified in the contract isdischarged, cancelled or expires. This condition is met when one of the following occurs:

• the debtor discharges the liabilityby paying the creditor, normallywith cash, other financial assets,or goods or services.

• the debtor is legally released from primary responsibility for theliability (or part thereof) either byprocess of law or by the creditor.

As per IAS 32 paragraph 42 financialassets and liabilities should be offsetand the net amount reported in thebalance sheet only if both of thefollowing conditions are met:

• there is a legally enforceable right to set off the recognisedamounts; and

• there is the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.

The extinguishment and set-off ofdebt should be approached withcaution. Where lease structures giverise to a legal defeasance, it may incertain circumstances, be possible toextinguish the debt. It is not possiblefor an entity to extinguish a liabilitythrough an in-substance defeasanceof its debt as the entity is not legallyreleased from the obligation, andtherefore derecognition of the liabilitywould be inappropriate. An entity mayarrange for a third party to assume the

primary responsibility for the obligationfor a fee while continuing to make thecontractual payments on behalf of thethird party. In order for the entity toderecognise its liability, it must obtainlegal release from its creditor wherebythe creditor agrees to accept the thirdparty as the new primary obligor.


Certain aircraft financing structuresgive rise to the defeasance of lease obligation, which is typicallyachieved by:

• a lease assignment

• a payment made to a third partyto assume the airline's obligationto repay the debt element of thelease financing

• equity investors under a leveragedlease agreeing to accept a securityin full settlement of the debt.

Defeasance is a complex issuesubject to different legal interpretationin different jurisdictions and therefore requires review of the specific facts and circumstances of each lease transaction.



Disclosures

As per IAS 17 lessees shall make the following disclosures for financeleases in addition to meeting therequirements of IFRS 7 FinancialInstruments: Disclosures if IFRS 7 is early adopted (otherwise IAS 32Financial Instruments: Disclosure and Presentation):

• for each class of asset, the netcarrying amount at the balancesheet date;

• a reconciliation between the totalfuture minimum lease paymentsat the balance sheet date, andtheir present value;

• the total future minimum leasepayments at the balance sheetdate, and their present value foreach of the following periods:

(i) not later than one year;

(ii) later than one year and notlater than five years; and

(iii) later than five years;

• contingent rents recognised as expense in the period;

• the total future minimum subleasepayments expected to be receivedunder noncancellable subleases atthe balance sheet date; and

• a general description of thelessee's material leasingarrangements including, but notlimited to:

(i) the basis on which contingentrent payable is determined

(ii) the existence and terms ofrenewal or purchase optionsand escalation clauses

(iii) restrictions imposed by lease arrangements, such as those concerningdividends, additional debt and further leasing.

As per IAS 17 lessees shall make the following disclosures for operatingleases in addition to meeting therequirements of IFRS 7 FinancialInstruments: Disclosures if IFRS 7 is early adopted (otherwise IAS 32Financial Instruments: Disclosure and Presentation):

• the total future minimum leasepayments under non-cancellableoperating leases for each of thefollowing periods:

(i) not later than one year

(ii) later than one year and notlater than five years

(iii) later than five years

• the total future minimum subleasepayments expected to be receivedunder noncancellable subleases atthe balance sheet date

• lease and sublease paymentsrecognised as an expense in theperiod, with separate amounts for minimum lease payments,contingent rents, and subleasepayments

• a general description of thelessee's significant leasingarrangements including, but notlimited to:

(i) the basis on which contingentrent payments are determined

(ii) the existence and terms ofrenewal or purchase optionsand escalation clauses

(iii) restrictions imposed by leasearrangements, such as thoseconcerning dividends,additional debt and furtherleasing

• for the purpose of applying therequirements of IAS 17, paymentsand other consideration requiredby an arrangement containing alease are separated into those for the lease and those for otherelements on the basis of theirrelative fair values. If a purchaser



concludes that it is impracticableto separate the payments reliably,in the case of an operating lease ittreats all payments under thearrangement as lease paymentsfor the purposes of complyingwith the disclosure requirementsof IAS 17:

(i) disclose those paymentsseparately from minimumlease payments of otherarrangements that do notinclude payments for non-lease elements

(ii) state that the disclosedpayments also includepayments for non-leaseelements in the arrangement.

Airlines generally split the leasedisclosures between aircraft and non aircraft leases as financialanalysts and debt providers oftenuse these disclosures to determineairline indebtedness after thenotional capitalisation of aircraftoperating lease commitments. As a consequence, the disclosures foraircraft leases need to be clear.



Appendix 1

Definitions of terms under IFRS

A lease is an agreement wherebythe lessor conveys to the lessee inreturn for a payment or series ofpayments the right to use an assetfor an agreed period of time.

A finance lease is a lease thattransfers substantially all the risksand rewards incidental to ownershipof an asset. Title may or may noteventually be transferred.

An operating lease is a lease otherthan a finance lease.

A non-cancellable lease is a leasethat is cancellable only:

a) upon the occurrence of someremote contingency;

b) with the permission of the lessor;

c) if the lessee enters into a new lease for the same or anequivalent asset with the samelessor; or

d) upon payment by the lessee ofsuch an additional amount that, at inception of the lease,continuation of the lease isreasonably certain.

The inception of the lease is theearlier of the date of the leaseagreement and the date ofcommitment by the parties to the

principal provisions of the lease. Asat this date:

a) a lease is classified as either anoperating or a finance lease; and

b) in the case of a finance lease, theamounts to be recognised at thecommencement of the lease termare determined.

The commencement of the leaseterm is the date from which thelessee is entitled to exercise its rightto use the leased asset. It is the date of initial recognition of the lease(i.e. the recognition of the assets,liabilities, income or expenses resultingfrom the lease, as appropriate).

The lease term is the non-cancellableperiod for which the lessee hascontracted to lease the asset togetherwith any further terms for which thelessee has the option to continue tolease the asset, with or withoutfurther payment, when at theinception of the lease it is reasonablycertain that the lessee will exercisethe option.

Minimum lease payments are thepayments over the lease term thatthe lessee is or can be required tomake, excluding contingent rent,costs for services and taxes to bepaid by and reimbursed to the lessor,together with:

(a) for a lessee, any amountsguaranteed by the lessee or by aparty related to the lessee; or

(b) for a lessor, any residual valueguaranteed to the lessor by:

(i) the lessee;

(ii) a party related to the lessee; or

(iii) a third party unrelated to the lessor that is financiallycapable of discharging the obligations under the guarantee.

However, if the lessee has an optionto purchase the asset at a price thatis expected to be sufficiently lowerthan fair value at the date the optionbecomes exercisable, for it to bereasonably certain, at the inceptionof the lease, that the option will beexercised, the minimum leasepayments comprise the minimumpayments payable over the leaseterm to the expected date ofexercise of this purchase option andthe payment required to exercise it.

Fair value is the amount for which an asset could be exchanged, or a liability settled, betweenknowledgeable, willing parties in an arm's length transaction.


Economic life is either:

a) the period over which an assetis expected to be economicallyusable by one or more users; or

b) the number of production orsimilar units expected to beobtained from the asset by one or more users.

Useful life is the estimated remainingperiod, from the commencement ofthe lease term, without limitation by the lease term, over which theeconomic benefits embodied in theasset are expected to be consumedby the entity.

Guaranteed residual value is:

a) for a lessee, that part of theresidual value that isguaranteed by the lessee or bya party related to the lessee(the amount of the guaranteebeing the maximum amountthat could, in any event,become payable); and

b) for a lessor, that part of theresidual value that is guaranteedby the lessee or by a third party unrelated to the lessor that is financially capable of discharging the obligationsunder the guarantee.

Unguaranteed residual value is thatportion of the residual value of theleased asset, the realisation of whichby the lessor is not assured or isguaranteed solely by a party relatedto the lessor.

Initial direct costs are incrementalcosts that are directly attributable tonegotiating and arranging a lease,except for such costs incurred bymanufacturer or dealer lessors.

Gross investment in the lease is the aggregate of:

a) the minimum lease paymentsreceivable by the lessor under afinance lease; and

b) any unguaranteed residual valueaccruing to the lessor.

Net investment in the lease is the gross investment in the leasediscounted at the interest rateimplicit in the lease.

Unearned finance income is thedifference between:

a) the gross investment in the lease; and

b) the net investment in the lease.

The interest rate implicit in the leaseis the discount rate that, at the

inception of the lease, causes the aggregate present value of:

a) the minimum lease payments; and

b) the unguaranteed residual valueto be equal to the sum of:

i. the fair value of the leased asset; and

ii. any initial direct costs of the lessor.

The lessee's incremental borrowingrate of interest is the rate of interestthe lessee would have to pay on a




similar lease or, if that is notdeterminable, the rate that, at theinception of the lease, the lesseewould incur to borrow over a similarterm, and with a similar security, the funds necessary to purchase the asset.

Contingent rent is that portion of the lease payments that is notfixed in amount but is based on the future amount of a factor thatchanges other than with the passageof time (e.g. percentage of futuresales, amount of future use, future price indices, future market rates of interest).

Defeasance is the release of adebtor from the primary obligationfor a debt.

Legal defeasance is a defeasance in which the release of the debtorfrom the primary obligation is either acknowledged formally by thecreditor or by a duly appointedtrustee of the creditor, or establishedby legal judgement.

In-substance defeasance is adefeasance other than a legaldefeasance in which the debtoreffectively achieves release from aprimary obligation for a debt either

by placing in trust assets which areadequate to meet the servicingrequirements (both interest andprincipal) of the debt or by having asuitable entity assume responsibilityfor those servicing requirements.


Appendix 2

Classificaton of a lease

The following chart represents examples of situations in which it could be inferred that substantially all of the risksand rewards of the ownership have been transferred.

Lease agreement

Operate lease Finance lease

The lease transfers ownership of the asset to the lessee by the end of the lease term (‘transfer of ownership’)

The lessee has the option to purchase the asset at a price that is expected to be sufficiently lowerthan the fair value (‘bargain purchase option’)

The lease term is for the major part of the economic life of the asset even if title is not transferred(‘economic life’)

At the inception of the lease the present value of the minimum lease payments amount to at leastsubstantially all of the fair value of the leased asset (‘present value’)

The leased assets are of such a specialised nature that only the lessee can use them withoutminor modification

yes

yes

yes

yes

yes

no

no

no

no

no


KPMG’s Global Airline practice contacts

Martin SheppardAustraliaHead of Aviation+61 2 9335 [email protected]

Dr Ashley SteelUnited KingdomGlobal Chair – Transport+44 20 7311 [email protected]

ArgentinaNorbeto Cors+54 11 4316 [email protected]

BrazilManuel Fernandes+55 21 3231 [email protected]

CanadaSteve Beatty+1 416 777 [email protected]

EgyptHossam Fahmy+20 2 536 [email protected]

FinlandSolveig Tornroos-Huhtamaki+358 9 6939 [email protected]

FrancePhilippe Arnaud+33 1 5377 [email protected]

GermanyUlrich Maas+49 30 2068 [email protected]

Hong KongAndrew Weir+852 2826 [email protected]

HungaryAndrea Sartori+36 1 887 [email protected]

IrelandSean O’Keefe+353 1 410 [email protected]

ItalyMarco Giordano+39 06 80 96 13 [email protected]

JapanToshio Ikeda+81 3 3266 [email protected]

KoreaPeter C Kim+82 2 2112 [email protected]

MexicoHector A Ramirez+52 55 5246 [email protected]

NetherlandsHerman van Meel+31 20 656 [email protected]

New ZealandPaul Herrod+64 9 3675 [email protected]

NorwayAage Seldal+47 5157 [email protected]

PeruJessica Oblitas+51 1 9792 [email protected] Glasspool+7 095 937 [email protected]

SingaporeWah Yeow Tan+65 6213 [email protected]

South AfricaTshidi Mokgabudi+27 11 647 [email protected]

SpainMiguel Angel Ibanez+34 91 5550 [email protected]

SwedenRoland Nilsson+46 8 723 [email protected]

SwitzerlandRoger Neininger+41 1 249 21 [email protected]

TaiwanBeryl Lin+886 2 2715 [email protected]

ThailandJohn Sim+66 2 677 [email protected]

United StatesChris Xystros+1 757 616 [email protected]

kpmg.com.au

© 2007 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated withKPMG International, a Swiss cooperative. All rights reserved. Printed in Australia.

KPMG and the KPMG logo are registeredtrademarks of KPMG International.

Liability limited by a scheme approved underProfessional Standards Legislation.

May 2007. NSW10404IM.

The information contained herein is of a general nature and is not intended to address thecircumstances of any particular individual or entity. Although we endeavour to provide accurate andtimely information, there can be no guarantee that such information is accurate as of the date it isreceived or that it will continue to be accurate in the future. No one should act on such informationwithout appropriate professional advice after a thorough examination of the particular situation.

Accounting for Leases of Aircraft Fleet Assets in the Global Airline Industry

Documents

Transcript of Accounting for Leases of Aircraft Fleet Assets in the Global Airline Industry