ACCA Strategic Professional · Strategic Business Reporting (International) · Leases
Lumen Ltd is a lessor. Its finance director proposes reclassifying several new leases as operating leases, though they transfer substantially all risks and rewards, so that profit recognition is deferred and the year's results look smoother ahead of a bonus review. Which response is most consistent with IFRS Accounting Standards and professional ethics?
The proposal should be rejected. IFRS 16 requires lessors to classify leases at inception according to substance, not by choice. Misclassifying finance leases as operating leases to influence bonuses would be biased reporting and would breach the ethical principles of integrity and objectivity, regardless of disclosure or auditor acceptance.
- AReject the proposal: classification must reflect the substance of the lease at inception, and manipulating it to influence bonuses breaches the principle of integrity and objectivityCorrect
- BAccept it, because classification is a free policy choice under IFRS 16
- CAccept it if the auditor does not object
- DAccept it if disclosed in a note, since disclosure cures any misclassification
Explanation
IFRS 16 requires lessors to classify each lease at inception based on substance, namely whether substantially all risks and rewards are transferred; it is not an election. Choosing a classification to manage bonuses is deliberate misstatement and conflicts with integrity and objectivity. Disclosure or auditor silence does not make an incorrect classification acceptable.
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