1. Valuation of Assets under Finance
Lease, Intangible Assets and
Impairment of Assets

2. Lease
 A lease is an agreement whereby the
lessor conveys to the lessee in return
for a payment or series of payments
the right to use an asset for an
agreed period of time.

3. Finance and Operating Lease
 Finance Lease: Lease that transfers
substantially all the risks and rewards
incident to ownership of an asset.
 Operating Lease: A Lease other than
finance lease.

4. AS 19 – Lease - Scope
 Applicable for all leases other than
 Lease agreements to explore for or use
of natural resources, such as oil, gas,
timber, metals and other mineral rights;
 Licensing agreements for items such as
motion picture films, video recordings,
plays, manuscripts, patents and
copyrights; and
 Lease agreements to use lands

5. Accounting for Leases by the lessee
 A finance lease should be reflected in the
balance sheet of a lessee by recording an
asset and a liability at amounts equal at the
inception of the lease to the fair value of
the leased asset net of grants and tax
credits receivable by the lessor; if lower, at
the present value of the minimum lease
payments. The discount factor being the
interest implicit in the lease, if it is
practicable to determine, otherwise the
lessee’s incremental borrowing rate.

6. Accounting for Leases by the lessee
 The rentals should be apportioned
between the finance charge and the
reduction of the outstanding liability.
 The finance charge should be
allocated to the periods of the lease
term so as to produce a constant
periodic rate of interest on the
remaining balance of the liability for
each period.

7. Accounting for Leases by the lessee
 A finance lease gives rise to a depreciation
charge for the asset as well as a finance
charge for each accounting period.
 The depreciation policy for leased assets
should be consistent with that for depreciable
assets which are owned and the depreciation
charge should be calculated on the basis set
out in AS-6. If there is no reasonable
certainty that the lessee will obtain
ownership by the end of the lease term, the
asset should be fully depreciated over the
lease term or its useful life , whichever is
shorter.

8. Operating Lease
 The charge to operating income
under an operating lease should be
the rental expenses for the
accounting period, recognized on a
systematic basis that is
representative of the time pattern of
the user’s benefit.

9. Disclosures
 Amount of assets that are subject to finance
lease at each balance sheet date. Liabilities
related to these leased assets should be
shown separately from other liabilities,
differentiating between the current and the
long-term portions
 Commitment for minimum lease payments
with a term of more than one year should be
disclosed in summary form giving the
amounts and periods in which the payment
would become due.
 Renewal / purchase options and other
contingencies arising from leases

10. Illustration - BHEL
 Assume that BHEL has entered into a
lease agreement for a equipment
costing Rs.750 lakh. The lease is non-
cancelable for a period of 5 yrs. The
annual lease rentals payable amount
to Rs 300/Rs 1000. The economic life
of the equipment is expected to be 8
yrs. BHEL uses WDV and 30% to
depreciate the equipment. The
incremental borrowing rate is 16%.

11. Intangible Assets
 Non-monetary assets without physical
substance, held for use in the production or
supply of goods or services, for rental to
others or for administrative purposes. Can
generate future earnings. Long term assets
classified under Fixed assets. Eg. Brand
names, trademarks, copyrights, customer
lists, computer software, licenses,
formulas, know-how, processes, patents,
goodwill, franchises.

12. Intangible Assets
 The value of intangible asset arises from the
long-term rights, privileges or advantages it
confers on the owner
 Recorded at cost.
 Costs include all costs of acquisition and
expenditures necessary to make the
intangible asset ready for its intended use
(purchase price, legal fees, and other costs
incurred in obtaining the asset)
 Intangible assets acquired at no cost are not
shown on the balance sheet, even though
they may be of considerable value to the
enterprise.

13. Amortization – AS-26
 Amortization – write-off to expense of the
cost of an intangible asset over its useful life,
usually the lower of its legal life and
estimated commercial life.
 AS-26 – the useful life of an intangible asset
will not exceed 10 yrs from the date when it
is available for use, unless the enterprise
establish that it has a longer life.
 IT Rules – 25%WDV for tax purposes for
know-how, patents, copyrights, trademarks,
licenses, franchises or any other business or
commercial rights of similar nature.

14. Intangible Assets
 Patent
 Copyright
 Trademark, Brands
 Franchise, license
 Goodwill
 R&D costs
 Computer software costs
 Deferred charges – preoperating and start-up
costs, share and debenture issue expenses,
company formation expenses, new product
marketing costs, plant rearrangement and
moving costs, items that have debit balances
– other than n fixed assets as “Miscellaneous
expenditure to the extent not written off”,
revenue expenses carried forward “ DREs”.

15. Impairment of Assets
 Asset – a collection of expected
future economic benefits.
 If the value recoverable from future
use of an asset is less than its
carrying amount, there is an
impairment loss, measured as the
difference between the two amounts.

16. AS-28
 If the recoverable amount of an asset
is less than its carrying amount, the
carrying amount of the asset should
be reduced to its recoverable amount.
That reduction is an impairment loss.
 Recoverable amount is the higher of
an asset’s net selling price and its
‘value in use’.

17. AS-28
 Value in use – PV of estimated future cash
flows expected to arise from the continuing
use of an asset and from its disposal at the
end of its useful life and applying
appropriate discount rate.
 Impairment loss – P&L and balance sheet,
depreciation.
 Reversal
 Disclosures