ACCOUNTING STANDARD-10 by 97HsPX2D

VIEWS: 5 PAGES: 16

									ACCOUNTING STANDARD-19

       LEASES



                J.P., KAPUR & UBERAI
      SCOPE


•   Applies to leases commencing on and from 1st April 2001.

•   Excludes

─   Lease agreements to explore for or use natural resources (oil, gas,
    timber, metals & other mineral rights)
─   Licensing agreements for such items as motion picture films,
    video recordings, plays, manuscripts, patents & copyrights.
─   Lease agreements to use lands.




                                                J.P., KAPUR & UBERAI
OBJECTIVES


•   Accounting policies & disclosures for
    lessees & lessors


─   Finance Lease

─   Operating Lease

                            J.P., KAPUR & UBERAI
CLASSIFICATION OF LEASES

•   A finance lease is a lease that transfers substantially all
    the risks and rewards incident to ownership of an asset.
    Title may or may not eventually be transferred.

•   An operating lease is a lease other than a finance lease

•   Classification depends on substance of the transaction
    rather than the form of the contract

•   Basic criteria providing guidance in determining whether
    these risks and rewards have been transferred.



                                           J.P., KAPUR & UBERAI
EXAMPLES OF FINANCE LEASES

 Ownership transferred by end of lease term.
 Lease contains bargain purchase option.
 Lease term for major part of asset’s economic
 life.
 Present value of minimum lease payments
 amounts to at least substantial all of asset’s fair
 value.
 Leased asset of specialised nature that only
 lessee can use without major modifications being
 made

                                  J.P., KAPUR & UBERAI
INDICATORS FOR FINANCE LEASES

Lessor’s losses associated with cancellation (if
lessee can cancel lease) borne by lessee.

Gains or losses from fluctuation in fair value of
residual fall on lessee.

Lessee can continue lease for a secondary period
at a rent substantially lower than market rent.

                              J.P., KAPUR & UBERAI
 ILLUSTRATIONS                     FOR          TYPES            OF
 LEASES

ABC   Ltd. uses 3 identical pieces of machinery in its factory. These
were all acquired for use on same date by:

Machine 1 rented from Amir Corporation at a cost of Rs. 10,000 per
month payable in advance and terminable by either party.

Machine  2 rented from Sunny Corporation at a cost of 8 half-yearly
payments in advance of Rs. 60,000.

Machine  3 rented from Ajay Corporation at a cost of 6 half-yearly
payments in advance of Rs. 48,000.

Cash   price of this type of machine is Rs. 320,000 and its estimated life
is 4 years. Are above machines rented by operating or finance leases?
                                                J.P., KAPUR & UBERAI
ILLUSTRATION OF FINANCE LEASE

   A company operates in an industry requiring it to use assets
    which are specifically tailored to their needs. Some of these
    assets will need to be replaced soon, and they are planning to do
    this through a leasing arrangement with a third party.

      Assets will be constructed to their specifications and will be
    leased for a period of 4 years. Under draft contract, minimum
    lease payments will equal 88% of assets’ fair value at inception
    of lease. Their expected useful life is 7 years, although similar
    assets they currently own are being depreciated over 5 years.
    There is no transfer of title and no bargain purchase option in the
    lease.



                                             J.P., KAPUR & UBERAI
    ACCOUNTING FOR FINANCE LEASES
    LESSEE’S BOOKS
   At inception of a finance lease, lessee should recognise lease as an
    asset and a liability on the basis of fair value or present value of
    minimum lease payments .
•   Liability for a leased asset should be presented separately in balance
    sheet as a current liability or a long-term liability as case may be.
•   Lease payments should be apportioned between finance charge and
    reduction of outstanding liability on a basis which produces a
    constant periodic rate of interest on remaining balance of liability for
    each period.
•   A finance lease gives rise to depreciation expense for asset (on the
    basis of lessee’s depreciation policy for owned assets) as well as a
    finance expense for each accounting period.
•   If there is no reasonable certainty that lessee will obtain ownership
    by end of lease term, asset should be fully depreciated over lease
    term or its useful life whichever is shorter.

                                                  J.P., KAPUR & UBERAI
    ACCOUNTING FOR FINANCE
    LEASES-LESSOR`S BOOKS
   Lessor should recognise assets given under a finance lease in its
    balance sheet as a receivable at an amount equal to net investment
    in the lease.
   (MLP+ unguranteed residual value-unearned finance income).
   Recognition of finance income should reflect a constant periodic
    rate of return on net investment of lessor outstanding in respect of
    finance lease.
   Manufacturer or dealer lessor should recognise transaction of sale
    in profit and loss in accordance with policy followed by enterprise
    for outright sales. In case of artificially low rate of interest,
    compute sale price based on commercial rates of intrestinitial
    direct costs to be expensed.


                                              J.P., KAPUR & UBERAI
ACCOUNTING FOR      OPERATING       LEASES
LESSEE’S BOOKS

 Lease payments (excluding costs for
  services    such    as    insurance   &
  maintenance) under operating lease
  should be recognised as an expense in
  profit and loss on a straight line basis
  over lease term unless another
  systematic basis is more representative
  of time pattern of user’s benefit.

                          J.P., KAPUR & UBERAI
ACCOUNTING FOR                OPERATING          LEASES
LESSOR’S BOOKS


 •   Lease income from operating leases should be
     recognised in profit and loss on a straight line basis
     over lease term unless another systematic basis
     more representative of time pattern in which benefit
     derived from use of leased asset diminished.

 •   Leased asset to be disclosed under fixed assets.

 •   Depreciation of leased assets should be on a basis
     consistent with normal depreciation policy of lessor
     for similar assets.
                                      J.P., KAPUR & UBERAI
SALE AND LEASEBACK TRANSACTIONS
RESULTNG IN FINANCE LEASES- SELLER
–LESSEE’S BOOKS



 •   Excess or deficiency of sale proceeds over
     carrying amount should be deferred or amortised
     over lease term, in proportion to depreciation of
     leased asset.




                                     J.P., KAPUR & UBERAI
    SALE AND LEASEBACK TRANSACTIONS
    RESULTNG IN OPERATING LEASES

•   If transaction established at fair value, any profit or loss should be
    recognised immediately.
•   If sale price is below fair value, any profit or loss should be
    recognised immediately except that if loss is compensated by future
    lease payments at below market price, it should be deferred and
    amortized in proportion to lease payments over the period for which
    asset is expected to be used.
•   If sale price is above fair value, the excess over fair value should be
    deferred and amortized over the period for which the asset is
    expected to be used.
•   If fair value at time of a sale and leaseback is less than carrying
    amount of asset, a loss equal to amount of difference between
    carrying amount and fair value should be recognised immediately.


                                                 J.P., KAPUR & UBERAI
  DISCLOSURES FOR FINANCE LEASES
               Lessee                                       Lessor
(a)   Leased assets segregated            (a)   Reconciliation between total gross
                                                investment & present value of MLP
(b)   Net carrying amount                 (b)   Total gross investments & present value
(c)   Reconciliation between total              of MLP under three periodic bands (<1)
      minimum lease payments &                  (>1-5) & (>5 years)
      present value                       (c)   Contingent rents
                                          (d)   Significant leasing arrangements
(d)   Total minimum leae payments &
                                          (e)   Unearned finance income
      present value uner three periodic
                                          (f)   Un-guaranteed residual value accruing
      bands (<1) (>1-5) & (.5 years)            to lessor
(e)   Contingents rents                   (g)   Accumulated             provision      for
(f)   Future     minimum       sublease         uncollectible MLP receivable
      payments expected to be             (h)   Accounting policy of initial direct costs.
      received
(g)   Significant lease arrangements.

                                                      J.P., KAPUR & UBERAI
        DISCLOSURES FOR OPERATING
                 LEASES
                Lessee                                         Lessor
(a)   Total future MLP under three           (a)   Total future MLP under three periodic
      periodic bands (<1) (>1-5) & (>5             bands (<1) (>1-5) & (>5 years)
      years) under non cancellable           (b)   Contingent rents.
      operaing leases.                       (c)   Significant leasing arrangements.
(b)   Total future minimum sublease          (d)   Gross carrying amount accumulated
      payments under non cancellable               depreciation & impairment for each
      sublease.                                    class of assets & depreciation and
                                                   impairment losses recognised/reversed
(c)   Lease payments in P&L – separaely            in P&L.
      for MLP & contingent rents             (e)   Accounting policy of initial direct costs.
(d)   Sublease payments in P&L.
(e)   Significant leasing arrangements
      (contingent     rents determination,
      renewal or purchase & escalation
      terms and restrictions – dividend
      additional debt and sub-leasing).

                                                         J.P., KAPUR & UBERAI

								
To top