accounting methods for leasing business

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Welcome
to a presentation on
Lease Accounting
By
GRK Murty

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What defines Lease Accounting?
• Choice of accounting
method hinges on the
nature of leasing

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Criteria for Classification
• Lease is non-cancelable
• Agreement specifies ownership
transfer
• Contains BPO
• Non-cancelable lease term is equal to
75%of EEL of asset
• PV of minimum lease payments is
equal to or greater than 90% of the
fair value of the asset.

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Operating Lease (At each of the
payment dates) USGAP
• Neither an asset nor an obligation
is recorded
• Lessee
• Prepaid rent
– Cash
• Lessor
• Cash
– Unearned rent

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Operating Lease (At the end of
each year) USGAP
• Lessee
• Rent Expense
– Prepaid rent
• Lessor
• Unearned rent revenue
– Rent revenue
• Depreciation expense
– Accumulated depreciation

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AS - 19
• is not applicable to
– Lease agreements to explore for or
use natural resources
– Licensing agreements for items
such as motion picture films,video
recordings, manuscripts, Patents,
Copy rights
– Lease agreements to use lands

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Operating Lease (AS19)
• Lessee Books
– As Expense in P&l
– On a straight line method
– To disclose total of future
minimum lease payments

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Operating Lease (AS19) :
Lessor
• Asset given on lease to be shown under Fixed assets
• Lease income to be recognized in the P&l on a straight line
basis over the lease term
• Depreciation on a basis consistent with his practice (AS-6)
• Should disclose in balance sheet – gross carrying amt.
• Accumulated depreciation
• Accumulated impairment losses
• Future minimum lease payments under non-cancelable
OLs…

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Finance Lease (IAS)
• Lessee to recognize assets & liabilities in the
balance sheet.
– At the inception of lease
– At amounts equal to their fair value
– Fair value or PV of the minimum lease
payments
• Each payment to be allocated between a
reduction of obligation & finance charge
• Asset is depreciated in a way consistent with
lessee’s practice
• Contingent rentals are generally not included in
the minimum lease payments

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Finance Lease ( Direct
Financing): US GAP
• Lessee
– Leased equipment( PV of LP/FV)
• Lease Payments
– Depreciation Expense
• Accumulated Depreciation
• Lessor
– Lease Receivable( Gross sum of LP)
• Unearned Int
• Inventory of equipment

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Finance Lease ( Sales-Type )
USGAP
• Lessor Recognizes Profit at the inception of
Lease
– Lease Receivable
– Cost of Goods sold( Lessor’s cost of
goods)
• Sales revenue( Present value of the
minimum lease payments)
• Unearned interest revenue
• Inventory of equipment( Lessor’s cost)

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Finance Lease (AS19): Lessee
• Lessee should treat Lease as an asset & liability at
the fair value of leased asset or PV of the minimum
lease payments
• PV of minimum lease payments is calculated by
discounting with interest rate implicit in the lease.
• If not practicable, use lessee’s incremental
borrowing rate.
• Payments should be apportioned between finance
charge and reduction of the outstanding liability.
• Depreciation charge as per AS6

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Finance Lease (AS19): Lessee
• Assets acquired under finance lease to be
shown separately
• Should disclose total the total of minimum
lease payments at the balance sheet date in
the following manner
– Not later than one year
– Later than one year and not later than five years
– Later than five years

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Finance Lease( AS19) : Lessor
• Assets given under finance lease as a
receivable at an amount equal to the net
investment in the lease
• Manufacturer lessor should recognize the
transaction of sale in P&l for the period.
• Should disclose total gross investment in
the lease & the PV of minimum lease
payments receivable at the balance sheet
date

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Sale & Buy back( USGAP)
• Gain- amortized over the lease
time
• Loss- immediately accounted for.

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Sale & Buy back (AS-19)
• Finance Lease
– Excess/ Deficiency of sale proceeds over the
carrying amount should be amortized over the
lease term in proportion to the depreciation of the
leased asset
• Operating Lease
– If transaction transaction is established at fair
value, the profit/Loss to be recognized
immediately
– If the sale price is below fair value- any
Profit/Loss to be recognized immediately
– If sale price is above fair value –excess over fair
value to be amortized over the expected life

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Treatment of Residual value
• Who gets the RV?
• If retained with Lessor, PV of RV
is deducted from FMV
• Lessee-guaranteed RV is included
in the minimum lease payments
• Un-guaranteed RV is not included

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Land
• Infinite
• No depreciation
• USGAP
– Fair Value= Carrying value= Direct
Finance lease
• IAS implies – single lease of land &
buildings be split into two.