Ppt on royalty

1. NAME: NUMAN ALTAF SHAIKH
DIV: B ROLL NO. : 208
SUB: FINANCIAL ACCOUNTING

2. WHAT IS A ROYALTY?
A royalty is a legally binding payment made to an
individual or company for the ongoing use of their
assets, including copyrighted works, franchises, and
natural resources. An example of royalties would be
payments received by musicians when their original
songs are played on the radio or television, used in
movies, performed at concerts, bars, and
restaurants, or consumed via streaming services. In
most cases, royalties are revenue generators
specifically designed to compensate the owners of
songs or property when they license out their assets
for another party's use.
KEY TAKEAWAYS
A ROYALTY IS AN AMOUNT
PAID BY A THIRD PARTY TO
AN OWNER OF A PRODUCT
OR PATENT FOR THE USE OF
THAT PRODUCT OR PATENT.
THE TERMS OF ROYALTY
PAYMENTS ARE LAID OUT IN
A LICENSING AGREEMENT.
THE ROYALTY RATE OR THE
AMOUNT OF THE ROYALTY IS
TYPICALLY A PERCENTAGE
BASED ON FACTORS SUCH
AS THE EXCLUSIVITY OF
RIGHTS, TECHNOLOGY, AND
THE AVAILABLE
ALTERNATIVES.

3. A lessor is the owner of the asset and a
lessee uses the leased asset by paying
periodically to the lessor. The
accounting and reporting of the lease in
different ways has varying effects on
financial statements and ratios. Leases
are contracts in which the property
asset owner allows another party to
use the property asset in exchange for
something, usually money or other
assets. The two most common types of
leases in accounting are operating and
financing (capital lease) leases.

4. SHORT WORKING
The excess of Minimum Rent over the Actual Royalty is known as short-working.
Therefore short-working will only arise when the Actual royalty is less than the Minimum
Rent. In the above example as given in Minimum Rent. Short-working for the year will be
Rs. 2000 i.e. [M.R. (10,000) Royalty (8,000)]
Recoupment of short Working: When the Royalty agreement contains the clause that
lessee can recover the short working of one year from the excess of Royalty as compared
to Minimum Rent in the coming years, it is known as Recoupment of short working
However, the right of recoupment can be of two types;
1. Fixed Right
2. Floating Right

5. b) Floating Right of Recoupment:
When the lessor promises the lessee to compensate the short working of any
year in the next two or three years. Then the right is said to be floating. For
example, if lessor promises to compensate the (short-working) of any year in
coming 2 years. Then short-working of 3rd year can be recouped in 4th and 5th
year and short-working of 8th year in 9th and 10th year.
a) Fixed Right of Recoupment:
When the lessor promises the lessee to compensate the loss (short working) only
for a fixed time period. The right is said to be fixed. For example. If lessor promises
to compensate the loss only during the first 4 years, the right is said to be fixed and
any unrecouped balance of short-working will be transferred to P & LA/c Any short
working arises in some future years cannot be recouped.

6. TYPES OF LEASE
1) Financial Lease:
Financial leasing is a
contract involving
payment over a longer
period. It is a long- term
lease and the lessee will
be paying much more
than the cost of the
property or equipment
to the lessor in the form
of lease charges. It is
irrevocable. In this type
of leasing the lessee has
to bear all costs and the
lessor does not render
any service.
2) Operating Lease:
In an operating lease,
the lessee uses the
asset for a specific
period. The lessor
bears the risk of
obsolescence and
incidental risks. There
is an option to either
party to terminate the
lease after giving
notice. In this type of
leasing Lessor bears
all expenses.
3) Leveraged and
non-leveraged
leases: In leveraged
and non-leveraged
leases, the value of
the asset leased may
be of a huge amount
which may not be
possible for the
lessor to finance. So,
the lessor involves
one more financier
who will have charge
over the leased
asset.
4) Conveyance type
lease:
In Conveyance type
lease, the lease will
be for a long-
period with a clear
intention of
conveying the
ownership of title
on the lessee.

7. 5) Sale and leaseback: In a
sale and leaseback, a
company owning the asset
sells it to the lessor. The
lessor pays immediately for
the asset but leases the
asset to the seller. Thus, the
seller of the asset becomes
the lessee. The asset
remains with the seller who
is a lessee but the
ownership is with the lessor
who is the buyer. This
arrangement is done so that
the selling company obtains
finance for running the
business along with with the
asset.
6) Full and non pay-
out lease:
A full pay-out lease is
one in which the
lessor recovers the full
value of the leased
asset by way of
leasing. In case of a
non pay-out lease, the
lessor leases out the
same asset over and
over again.
7) Specialized service
lease:
The lessor or the owner
of the asset is a
specialist of the asset
which he is leasing out.
He not only leases out
but also gives
specialized personal
service to the lessee.
Examples are
electronic goods,
automobiles, air-
conditioners, etc.
8) Net and non-net
lease:
In non-net lease, the
lessor is in charge of
maintenance
insurance and other
incidental expenses.
In a net lease, the
lessor is not
concerned with the
above maintenance
expenditure. The
lessor confines only to
financial service.

8. Minimum Rent Or Dead Rent
Minimum Rent is also called 'Dead Rent' or 'Rock Rent' or 'Fixed Rent'. As the name
suggests, this is the minimum amount of rent which the lessee is required to pay to
the lessor whether he has derived any benefit or not out of the right vested to him by
the lessor. Thus, if in any year the actual royalty is less than the minimum rent, the
landlord will claim the minimum rent. But in the years when actual royalty exceeds
Minimum Rent, the landlord will claim the actual royalty. Moreover, Minimum Rent
may be the same for each year or may vary for different years according to the terms
of agreement.
For example:
If X has taken a lease of mine with minimum rent of Rs. 10,000 for a year and with a
rate of royalty at Rs. 2 per tonne of coal extracted. if coal extracted in the first year is
4000 tonnes then Royalty comes to Rs. 8000 i.e. 4000 tonnes X Rs. 2 per tonne but
(x) has to pay Rs. 10,000 as it is the minimum rent decided under the Royalty
agreement. Thus, Minimum Rent will assure a guaranteed income per year to lessor.

9. JOURNAL ENTRIES THE BOOKS OF LESSEE

12. Thank You .