This ppt is covering lease finance in detail, covering advantages & disadvantages. Types of lease. Instead of doing hard work rely on smart work. Time you devote on copy pasting. Channelize that time in understanding topic via reading it.
This ppt is covering lease finance in detail, covering advantages & disadvantages. Types of lease. Instead of doing hard work rely on smart work. Time you devote on copy pasting. Channelize that time in understanding topic via reading it.
ABC is a costing system where indirect costs are assigned to products and services. The system establishes a relationship between overhead costs and production activities by allocating overhead costs to them with high precision. As a result, overhead costs are allocated more accurately based on their relevant activity levels. The system has eliminated the defects of the traditional/absorption costing system. ABC is used both as a planning tool and as a controlling instrument after the production is finished. ABC provides the basis for pricing decisions, inventory valuation, profitability analysis and overhead allocation. The system can effectively be used for both products and services.
Corporate Social Responsibility (CSR) is about how companies manage their business processes to produce an overall positive impact on society. It covers sustainability, social impact and ethics on business interests and objectives. This presentation also gives a balancing view of the commercial interests of businesses and social & environmental obligations of a business enterprise.
The ISO 26000 standard defines CSR as:
an organization's responsibility for the impacts of its decisions and activities on society and the environment, through transparent and ethical behavior that:
- contributes to Sustainable Development, including health and the welfare of society;
- takes into account the expectations of stakeholders;
- is in compliance with applicable law and consistent with international norms of behavior;
- and is integrated throughout the organization and implemented in its relations.
The 6 core subjects listed by ISO 26000 are:
1. Human rights
2. Labor practices
3. The environment
4. Fair operating practices
5. Consumer issues
6. Community involvement and development
The presentation covers all aspects of CSR and provide adequate guidance on the principles and practices of CSR.
Value Analysis (VA) is a tool (technique or method) that is used for improving the value of a product or a process of understanding its constituent components and their associated costs. It aims at finding improvements to the components by reducing their cost and increasing the value of the functions of a product or a service.
A critical advantage to using a VA is its potential for reducing costs, which is a benefit that permeates all advantages of the system.
A VA breaks-down a product or service into components, it enables you to analyze each component on its own, evaluating its features and functions in detail efficiency and effectiveness.
Microfinancing is a type of banking service provided to unemployed or low-income individuals or groups who otherwise would have no other access to financial services. The objective is uplifting the economic activity at the lowest strata of the population. The generation of economic activity would alleviate poverty through the creation of income and employment opportunities.
A VAT audit is the FTA’s assessment of a company about its responsibility as a taxable person. The audit ensures that a company has fully captured the input and output tax on its all vatable transactions. This audit is conducted to ensure that the tax liability is calculated correctly and paid in full within the stipulated timeframe. The FTA also assesses a company whether they are fulfilling all responsibilities that apply to its business as per the VAT law.
The FTA can conduct the audit within 5 years for any business, but in some circumstances, the FTA has the right to extend the time frame for the audit and record-keeping.
VAT Evasion or Fraud: Penalties & Precautions (The UAE Perspective)Ahmad Tariq Bhatti
Tax evasion or fraud refers to a case where a taxable person intentionally defrauds to pay less tax or no tax to the FTA that is lawfully due to him. With tax evasion, the taxpayer intentionally and deliberately misrepresents the tax liability to avoid paying higher taxes to the government. The government loses money as a result of this act. Therefore, the law imposes severe penalties to such taxable persons. The tax fraud necessarily includes an intention to not pay the tax. The FTA has to prove through fraud examination tests or techniques that the person held for tax evasion or fraud has been intentionally involved in this act.fraud
Life-cycle costing is a system that provides an estimate of all the costs and revenues attributable to a cost object (product, service, project or asset) from its development to its discarding or dis-lodging or discontinuing or removing or abandonment from the market.
Life-cycle costing can be applied to products, services, projects, or assets over the entire life-cycle in the market. The objective of life-cycle costing is to maximize returns over the entire life of a product, service, project or asset by minimizing costs and maximizing revenues through the application of planning, management, and controlling techniques.
Budgeting — A Framework for the Budgetary Controls SystemAhmad Tariq Bhatti
A budget is a formal statement of estimated income and expenses based on future plans and objectives. In other words, a budget is a document that management makes to estimate the revenues and expenses for an upcoming period based on their goals for the business.
A budget is basically a financial plan for a given period, normally a year. It greatly enhances the success of business undertaking.
Corporate budgets are essential for operating at cost efficiency. Aside from earmarking resources, a budget can also be helpful in setting goals, measuring outcomes and planning for contingencies.
This is a pictorial depiction of the life in Lahore during the British rule in the subcontinent. This was a time where the camera came into this region. The life and time were captured by many people during this era. We collected some of those pictures and presented them here for you. This presentation will go a long way in understanding the plight of common people especially the people who were living in the city of Lahore and its suburbs.
There is a saying, a picture is worth a thousand words. It is also believed, we are a reflection of the people who lived before us and the people coming after us will be a reflection of ours. It is also said, seeing is believing. These proverbs will come to your mind again and again while seeing this photo album.
The earliest picture starts in 1859 and the last one is around 1950, in this way more than 90 years have been covered. The photos are arranged in chronological order. We have rejected scores of photos only because the references were not available or were doubtful enough to be taken here.
We exercised due care and diligence in reporting the year of the photos, however, any mistake in writing the year of a photo is inadvertently mine, therefore, it should be excused. Any correction suggested by the viewers will be noted for the next editions.
Internal Control Questionnaires for Construction CompaniesAhmad Tariq Bhatti
Risk assessment and plugging them is key to the success of business processes. Construction companies are exposed to many kinds of risks. Correct identification of these risks is necessary for the management of such risks. We have prepared these risk assessment questionnaires from the perspective of construction companies. The coverage of issues is adequate. Hopefully, these questionnaires will be helpful in plugging key risks and drive successful business operations of construction companies. We welcome comments for improvements. Thank you.
Employee Assessment and Evaluation for Continuation of ServiceAhmad Tariq Bhatti
Trust Versus Performance Model explains the employee evaluation on the basis of two factors ie trust and performance. The model helps to retain employees on these two parameters of success.
Internal Controls are defined as a system of well designed procedures by a company’s management and top-level executives, to provide a substantial degree of assurance in achieving business objective, while complying with the policies and laws, safeguarding the assets, maintaining efficiency and effectiveness in regular operations and reliability of financial statements.
Internal Control Questionnaires are preliminary risk assessment procedures for the existence and working of the internal control system. These questionnaires are filled in the presence of the auditor. Ideally, an auditor reads these questions and a relevant area employee replies in yes or no based on his knowledge of the process.
The questionnaire is useful to determine which areas the audit should focus on more as compared to rest ones. When employees answer the questions, the auditor knows whether the company is keeping accurate records overall, and proper system of internal controls. The same area questions may be asked from different employees of the same area in order to keep the risk assessment fool proof.
Dengue or break-bone fever is a mosquito-borne disease that is caused by the biting of Dengue infected mosquito. Symptoms typically begin three to fourteen days after infection. This may include a high fever, headache, vomiting, muscle and joint pains, and a characteristic skin rash.
A customer-centric costing system that bases all cost workings for a product from its market price. The purpose is to reduce cost of a product as low as possible to arrive at a price that would be either equal to or less than that of competitors’ product while delivering the same functionality.
Capital Budgeting is about how one should evaluate the financing options based on the superior financial performance through mathematical techniques. These techniques have been discussed in the presentation in detail.
The European Unemployment Puzzle: implications from population agingGRAPE
We study the link between the evolving age structure of the working population and unemployment. We build a large new Keynesian OLG model with a realistic age structure, labor market frictions, sticky prices, and aggregate shocks. Once calibrated to the European economy, we quantify the extent to which demographic changes over the last three decades have contributed to the decline of the unemployment rate. Our findings yield important implications for the future evolution of unemployment given the anticipated further aging of the working population in Europe. We also quantify the implications for optimal monetary policy: lowering inflation volatility becomes less costly in terms of GDP and unemployment volatility, which hints that optimal monetary policy may be more hawkish in an aging society. Finally, our results also propose a partial reversal of the European-US unemployment puzzle due to the fact that the share of young workers is expected to remain robust in the US.
Turin Startup Ecosystem 2024 - Ricerca sulle Startup e il Sistema dell'Innov...Quotidiano Piemontese
Turin Startup Ecosystem 2024
Una ricerca de il Club degli Investitori, in collaborazione con ToTeM Torino Tech Map e con il supporto della ESCP Business School e di Growth Capital
Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
Poonawalla Fincorp and IndusInd Bank Introduce New Co-Branded Credit Cardnickysharmasucks
The unveiling of the IndusInd Bank Poonawalla Fincorp eLITE RuPay Platinum Credit Card marks a notable milestone in the Indian financial landscape, showcasing a successful partnership between two leading institutions, Poonawalla Fincorp and IndusInd Bank. This co-branded credit card not only offers users a plethora of benefits but also reflects a commitment to innovation and adaptation. With a focus on providing value-driven and customer-centric solutions, this launch represents more than just a new product—it signifies a step towards redefining the banking experience for millions. Promising convenience, rewards, and a touch of luxury in everyday financial transactions, this collaboration aims to cater to the evolving needs of customers and set new standards in the industry.
The Evolution of Non-Banking Financial Companies (NBFCs) in India: Challenges...beulahfernandes8
Role in Financial System
NBFCs are critical in bridging the financial inclusion gap.
They provide specialized financial services that cater to segments often neglected by traditional banks.
Economic Impact
NBFCs contribute significantly to India's GDP.
They support sectors like micro, small, and medium enterprises (MSMEs), housing finance, and personal loans.
US Economic Outlook - Being Decided - M Capital Group August 2021.pdfpchutichetpong
The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
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4. Key Concepts
A lease is an agreement whereby a lessor conveys to a lessee, in return for a
payment or series of payments, the right to use an asset for an agreed period of
time.
A finance lease is an agreement that transfers substantially all risks and rewards
incidental to ownership of an asset. Title may or may not eventually be
transferred.
A non-cancellable lease is a lease that is cancellable only:
Upon the occurrence of some remote contingency,
With the permission of the lessor,
If a lease enters into a new agreement for the same or an equivalent asset
with the same lessor; or
Upon payment by a lessee of such an additional amount that, at inception
of the lease, continuation of the lease is reasonably certain.
The commencement of a lease term is a date from which a lessee is entitled to
exercise the right to use leased assets.
The lease term is a non-cancellable period for which a lessee has signed an
agreement to lease an asset.
Leases 4
5. Key Concepts
Minimum Lease Payments (MLPs) are payments over a lease term that a
lessee is or can be required to make, excluding contingent rents, costs for
services and taxes to be paid by and reimbursed to a lessor together with:
For a lessee, any amounts guaranteed by him or by a party related to
the lessee
For a lessor, any GRV to the lessor by:
The lessee
A party related to the lessee or
3rd party guarantor unrelated to the lessor
Fair Value (FV) is an amount for which an asset could be exchanged, or a
liability settled, between knowledgeable willing parties, in an arm’s length
transaction.
Economic life (EL) is either:
The period over which an asset is expected to be economically usable
by one or more users; or
The number of production or similar units expected to be obtained
from an asset by one or more users.
Leases 5
6. Key Concepts
Unguaranteed residual value (UGRV) is that portion of RV of a leased
asset, realization of which by a lessor is not assured or is guaranteed solely
by a party related to a lessor.
Guaranteed residual value (GRV) is:
For a lessee, that part of RV that is guaranteed by a lessee and
For a lessor, that part of RV that is guaranteed by a lessee or a 3rd
party guarantor
Gross investment in a lease asset is the aggregate of:
MLPs receivable by a lessor under a finance lease, and
Any UGRV accruing to a lessor.
Net investment in a lease asset is gross investment in a lease discounted at
the required interest rate of a lessor.
Initial Direct Costs (IDCs) are costs that are directly attributable to
negotiating and arranging a lease.
Useful life is an estimated remaining period, from commencement of a
lease term, without limitation by a lease term, over which the economic
benefits embodied in an asset are expected to be consumed by an entity.
Leases 6
7. Key Concepts
Unearned Finance Income (U/E-FI) is the difference b/w:
The gross investment in the lease; and
The net investment in the lease.
The Implicit Interest Rate (IIR) in a lease is a discount rate that, at the
inception of a lease, causes aggregate PV of:
The MLPs and
The UGRV to be equal to the sum of;
The FV of the leased asset plus
Any IDCs of the lessor.
Incremental Borrowing Rate (IBR) The rate a lessee would have paid if
he had borrowed funds to purchase an asset
on similar lease
with a similar security
Contingent rent is that portion of lease payments that is not fixed in
amount but is based on the future amount of factor that changes other than
with the passage of time.
Leases 7
8. Classification
There are two main types of leases:
Capital or Financing Lease
Operating Lease
Capital leases are further classified into following types:
1. Financing Lease
2. Leveraged Lease
3. Sales and Lease Back
4. Direct Lease
Leases 8
9. Definitions
FINANCE LEASE
Capitalization Criteria
The criteria about capitalization of leases are given in para 10 of IAS 17 as:
The lease transfers ownership of an asset to a lessee by the end of lease term;
The lessee has the option to purchase the asset at a price that is expected to be
sufficiently lower than the FV at the date the option becomes exercisable for it to
be reasonably certain, at the inception of the lease, that the option will be exercised;
The lease term is for the major part (≥75%)¹ of the economic life of the asset even
if title is not transferred;
At the inception of the lease PV of the MLPs amounts to the FV (≥90%)² of the
leased asset; and
The leased assets are of such a specialized nature that only the lessee can use
without major modification.
Leases 9
10. Definitions
FINANCE LEASES
Additional Capitalization Criteria
Para 11 of IAS 17 gives some more criteria that distinguish capital leases from operating
leases:
If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are
borne by the lessee;
Gains or losses from the fluctuation in FV of RV accrue to the lessee; and
the lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent.
Para 12 IAS 17 still goes on to say that the criteria mentioned in para 10-11 are not final.
For instance, it says, if it is clear from other features that the lease does not transfer
substantially all risks and rewards incidental to ownership, the lease is classified as an
operating lease.
__________
¹,² FASB Statement 13 has quantified the values.
Leases 10
11. Definitions
OPERATING LEASE
An operating lease stands in contrast to a financial lease in almost all aspects. This lease
agreement gives to a lessee only a limited right to use an asset. The lessor is responsible
for upkeep and maintenance of an asset. The lessee is not given BPO at the end of the
lease period. This is similar to renting of assets.
SALE & LEASE BACK
Under this arrangement, an owner of an asset sells the asset to a party (the buyer), who
in turn leases back same asset to the owner in consideration for lease rentals. However,
under this arrangement, assets are not physically exchanged but it all happens in records
books only. Sale and lease back transaction is suitable for those assets, which are not
subject to depreciation but appreciation, for instance, a piece of land in a exotic location.
The advantage of this method is that the lessee can satisfy himself completely regarding
the quality of an asset and after possession of an asset convert the sale into a lease
arrangement. The lessor has two sources of earnings under a sales type lease:
A profit, at the lease inception date,
Interest revenue over the lease term.
Leases 11
12. Definitions
LEVERAGED LEASING
Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. A
lessor borrows a part of purchase cost (say 70%) of an asset from a third party i.e., lender
and the asset so purchased is held as a security against such loan. The lender is paid-off
from lease rentals directly by a lessee and surplus after meeting claims of lender goes to
the lessor. The lessor, the owner of an asset is allowed to record depreciation expense
related with that asset.
DIRECT LEASING
Under direct leasing, a company acquires a right to use an asset from a manufacturer
directly. The ownership of an asset leased-out remains with the manufacturer. Most direct-
financing leases involve banks, which make profits by lending money at an interest rate
specified in their contract with the lessee. These banks do not sell assets of the type being
leased but merely provide finance for assets acquired for a lease. Acquisition of vehicles
from the direct outlets of car manufacturers like Honda, Mercedes, Toyota, BMW, Ford,
Jaguar, etc. is an example of direct leasing.
Leases 12
13. MLPs Calculation –
FASB St. 13
Yes No
Check-out if
the lease
contract
includes BPO
Clause???
Then MLPs shall include the Then MLPs shall include the following:
following: Periodic lease payments over the
Periodic lease payments lease term
up-to the date on which The amount of GRV (if any)
BPO becomes exercisable Any payment required by the lessee
Amount of BPO for failure to renew or extend the
lease at the end of lease term
Leases 13
14. RV Calculation – FASB St. 13
& IAS 17
Equals to EL Less than EL
Check-out if
the lease term
equals to
Economic
Life (EL) of
the asset???
It has RV of a leased asset It has two parts:
only. First, cost pertaining to
Note: The lease contract may remaining useful life of
provide to guarantee all, part an asset
or none of asset’s RV. Second, RV of an asset
Leases 14
15. Discount Rate to be Applied by a
Lessee - FASB St. 13 & IAS 17
Yes No
Check-out if
the lease
contract
provides
interest rate
implicit in it?
IBR shall not be used when:
Implicit rate is known, Use IBR for discounting lease
Implicit rate is less than IBR liability over the lease term, if
That means under these two implicit rate is not
conditions implicit rate shall be determinable. Refer to slide 17
used. Refer to slide 17 for MLP for MLP calculations.
calculations.
Leases 15
16. Depreciation Expense Calculation –
FASB St. 13 & IAS 17
Yes No
Check-out if the
lease contract
transfers
ownership at the
end of lease term
or contains BPO
Clause in it???
Depreciate lease asset Depreciate lease asset over
over the economic life. the lease term.
Leases 16
17. Lessee’s Books Lessor’s Books
Lease Payable Lease Receivable
Lease Receivable/Payable Amount = FV - PV of GRV - PV of UGRV (If any)
[Lease Payable amount represents the PV of MLPs from lessee’s perspective]
Leases 17
19. Implicit Rate versus IBR
FASB Statement 13 requires the lessee to use his IBR in calculating the PV of MLPs unless
(1) the lessee can determine the implicit rate in the lease and (2) the implicit rate is less
than the lessee’s IBR.
IAS 17 para 20, says, the discount rate to be used in calculating the PV of the MLPs is the
interest rate implicit in the lease, if this is practicable to determine, if not, then lessee’s IBR
shall be used. Any IDCs of the lessee shall be added to the amount to be recognized as an
asset.
In practice, the number of instances in which the IBR should apply is small, for the following
reasons:
1. Most lessors disclose the interest rate implicit in their lease agreements.
2. The lessee knows the FV of the asset being leased to him.
3. Leased asset may be subject to high rate of obsolescence, which makes expected RVs
nominal. Thus, the impact on FV of the asset is negligible.
Important note: The calculations for lease receivable amount by a lessor at his required
rate of return on his investment in an asset are done for every lease deal separately. For a
lessee, it becomes implicit interest rate. He has to calculate it or it shall be known to him by
a lessor.
Lease 19
20. An annuity is a series of equal cash f lows occurring at equal intervals over a
period of time.
Ordinary Annuity: If the first cash flow occurs at the end of the first period,
the annuity is called Ordinary Annuity or an Annuity in Arrears.
Annuity Due: If the first cash flow occurs at the beginning of first period. The
annuity is called an Annuity Due or an Annuity in Advance.
PV of MLPs under Ordinary Annuity =
PV of MLPs under Annuity Due = (1+r)
Leases 20
21. Accounting
Date Description Ref. Debit Credit
Finance Lease: Lessor’s Books AED. AED.
1/1/20xx Lease Receivable xxx
Asset xxx
(Lease Receivable recorded at Net Investment in Leased Asset by the lessor)
Cash xxx
Lease Receivable xxx
(On receipt of 1st lease installment)
31/12/20xx Lease Receivable xxx
Interest Income xxx
(On booking interest income earned)
Leases 21
22. Accounting
Date Description Ref. Debit Credit
Finance Lease: Lessee’s Books AED. AED.
1/1/20xx Lease Asset xxx
Lease Payable xxx
[Lease asset and lease liability shall be recorded at lower of : (1) PV of MLPs or (2) FV of asset, at
the inception of the lease]
Lease Payable xxx
Cash xxx
31/12/20xx Interest Expense xxx
Lease Payable xxx
Lease Payable xxx
Cash xxx
Depreciation expense xxx
Accumulated Depreciation xxx
Depreciation of an asset is charged over:
The EL of an asset, if ownership transfers to lessee at the end of lease term or there is a BPO
The term of lease, if title does not transfer or there is no BPO
Leases 22
23. Accounting
Finance or Capital Leases
Financial Statements’ Presentation & Disclosure
Statement of Comprehensive Income
For the financial year ended December 20xx
Lessor’s Perspective Lessee’s Perspective
AED. AED.
Interest Revenue xxx Interest Expense xxx
Depreciation Expense xxx
Important note: For the information to be included in explanatory notes to
the financial statements of lessee and lessor, refer to para 31 and para 47of
IAS 17 respectively.
Leases 23
24. Accounting
Finance or Capital Leases
Financial Statements’ Presentation & Disclosure
Statement of Financial Position
As at December 31, 20xx
Lessor’s Perspective Lessee’s Perspective
ASSETS AED. ASSETS AED.
Lease Receivable xxx Leased Asset xxx
Less: Accumulated Dep. (xxx)
Net Leased Asset xxx
LIABILITIES
Lease Liability xxx
Leases 24
25. Accounting
Date Description Ref. Debit Credit
Operating Lease: Lessor’s Books AED. AED.
1/1/20xx. Cash xxx
Lease Rental Revenue xxx
(Being the revenue earned through leased assets rental)
31/12/20xx Depreciation Expense xxx
Accumulated Depreciation xxx
(Being the depreciation of leased asset recorded)
Operating Lease: Lessee’s Books
Lease Rent Expense xxx
Cash xxx
(Being the lease rent expense paid)
Important note: For the information to be included in explanatory notes to the
financial statements of lessor and lessee, refer to para 56 and para 35 respectively.
Leases 25
26. Accounting
Operating Leases
Financial Statements’ Presentation & Disclosure
Statement of Comprehensive Income
For the financial year ended December 20xx
Lessor’s Perspective Lessee’s Perspective
AED. AED.
Lease Rental Revenue xxx Lease Rental Expense xxx
Depreciation Expense xxx
Important note: For explanatory notes to be included in the financial
statements of lessor and lessee, refer to para 56 and para 35 respectively.
Leases 26
27. Land & Building Lease
When a lease includes both land and buildings, a
company MUST consider land and building parts
separately for their classification as operating or
finance lease. MLPs are allocated between the
land and buildings parts in proportion to the
relative FVs of the leasehold interests in the land
and buildings parts.
Leases 27
28. On January 01, 2008, AAA company leased-out a generator to BBB company .
The terms and conditions of the lease are as given below:
# Description of Terms & Conditions of the lease:
1 Cost to AAA and FV of the generator is AED. 20,000
2 Term of lease, 4 years (covers 67% of EL of the generator)
3 Economic life of the asset, 6 years
4 The lessee has guaranteed 100% RV, at the end of lease term, VIZ estimated at
AED. 3,000
5 Implicit rate of interest used in the lease payments and lessee’s IBR is 12%
6 Annual lease payments to be made at the beginning of each year is (annuity
due) are determined by the lessor as given on next slide.
7 The lease uses straight-line depreciation on the leased asset.
Leases 28
29. Description Amount
AED.
Cost & FV of the generator 20,000
PV of GRV (1,906)
PV of MLPs (≥90% i.e. 90.47%) 18,094
Annual Lease Payment (Recoverable amount / PV factor)
Annual Lease Payment (AED. 18,094 / 3.4018) 5,319
PV of GRV =
PV of GRV = 3,000/(1.12)^4 = 3,000 x 0.6355 = 1,906
The aggregate PV of MLPs to be recovered is ≥90%, therefore, it is a capital lease.
Leases 29
30. Annual Net
Lease Receivable/P Interest Net
Reduction in
Payments ayable Revenue/Ex Receivable/Paya
Year Receivable/Paya
(Annuity outstanding pense for the ble on 31
ble Balance
Due during the year December
Method) year
1 2 3 4 5 6
6-2 3x12% 2-4 3+4
AED. AED. AED. AED. AED.
01/01/08 - - - - 20,000
01/01/08 5,319 14,681 1,762 3,557 16,443
01/01/09 5,319 11,124 1,335 3,984 12,459
01/01/10 5,319 7,140 857 4,462 7,997
01/01/11 5,319 2,678 322 4,997 3,000 (RV)
Total 21,276 4,276 17,000
Leases 30
31. Lessor’s Books [AAA Co. Books] Lessee’s Books [BBB Co. Books]
Description Dr. Cr. Description Dr. Cr.
1 Lease Receivable 20,000 1 Lease Asset- Generator 20,000
Lease Asset - Generator 20,000 Lease Liability 20,000
(To record capital lease on 01/01/08) (To record capital lease on 1/1/08)
2 Cash 5,319 2 Lease Liability 5,319
Lease Receivable 5,319 Cash 5,319
(To record the 1st lease payment on 01/01/2008) (To record lease payment on 1/1/08)
3 Lease Receivable 1,762 3 Interest Expense 1,762
Interest Revenue 1,762 Lease Liability 1,762
(To record interest earned on 31/12/08.) (To record interest expense on 31/12/2008)
4 Depreciation Expense 4,250
Accumulated Depreciation 4,250
To record Depreciation [(20,000-3000)/4 = 4,250 p.a.]
Leases 31
32. Lessor’s Books [AAA Co. Books] Lessee’s Books [BBB Co. Books]
Description Dr. Cr. Description Dr. Cr.
1 Cash 5,319 1 Lease Liability 5,319
Lease Receivable 5,319 Cash 5,319
(To record the last lease payment) (To record lease payment on 01/01/2011)
2 Lease Receivable 322 2 Interest Expense 322
Interest Revenue 322 Lease Liability 322
(To record interest earned on 31/12/11) (To record interest expense on 31/12/2011)
3 Lease Asset – Generator 3,000 3 Depreciation Expense 4,250
Lease Receivable 3,000 Accumulated Depreciation 4,250
(Final Settlement entry 31/12/11) To record Depreciation [(20,000-3000)/4 = 4,250 p.a.]
4 Accumulated Depreciation 17,000
Lease Liability 3,000
Lease Asset 20,000
(Final settlement entry on 31/12/11)
Leases 32
33. Advantages
1. There is no requirement to pay entire amount upfront for an asset acquired
through a lease arrangement. Further, it provides flexible payment plan suiting
best to the businesses according to their income streams and cash flow patterns.
2. The arrangement under leases provide great deal of flexibility in terms of
adopting to rapid changes in technology and capacity needs from lessee’s point
of view. It helps companies to stay competitive in business.
3. Leasing arrangement has resolved critical cash problem for a lessee by providing
100% financing for a leased asset.
4. Leases preserves credit-lines for other business pursuits like purchase of
inventory of raw materials, project finance or other emergency uses.
5. Leasing may help a manufacturer accelerate sales of his products.
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34. Advantages
6. A lessee may avoid many of restrictive covenants that are usually part of long
term contracts for credit-lines. Requirements with respect to, minimum net
working capital, subsequent borrowings, changes in management, mortgages or
pledges on assets, nominees in Board of Directors, and so on are not normally
found in lease contracts.
7. Leasing arrangements help a lessor to prevent dilution of ownership which
otherwise is inherent when equity shares or convertible bonds are issued for
raising the necessary finance for acquisition of assets.
8. The use of sale and lease back arrangements may permit a company to increase
liquidity by converting an existing asset into cash that can be used as a working
capital.
9. Leasing balances usage and cost of an asset. Leasing makes sense when an asset
used creates a return that exceeds its cost. It is said for this point that leases means
good business sense.
Leases 34
35. Advantages
10. Leasing provides fixed rate financing. Leasing is not subject to market fluctuations
and interest rate increases. One can negotiate periodic lease payments and secure a
fixed rate for the term of lease. This makes it much easier to manage project cash
flows and budgets for planning purposes.
11. Leasing provides hedge against inflation. Since lease payments apply to use of an
asset and are not paid for ownership of an asset that depreciates consistently.
Furthermore, cash savings can yield a return that fights inflationary pressures.
12. Leasing conserves working capital. Leasing enables a lessor to save working
capital for his company, since it covers all costs associated with capital asset
purchases like maintenance, insurance, up-keep etc., etc.
13. Leasing may help a lessee to avoid the risk and cost of idle asset after required
utility of an asset is over.
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36. Advantages
14. Lease mode of financing is also compared to security-tied credit. It saves capital
for other needs of a company.
15. In case of operating leases arrangement, the lessee’s Debt to Equity Ratio and
Return on Capital Employed (ROCE) is not increased. This is due to off-
balance sheet financing of the asset.
16. Operating lease provides tax benefits to a lessor. Some leasing companies
transfer tax benefits received from ownership of assets to lessees through
competitive rates and lower execution fees.
17. With a bank loan or direct purchase, a company normally claim depreciation
according to IAS 16 recommendation of useful life of an asset. Depreciation for
an asset can be spread over 5 to 7 years. However, the same asset under a lease
can be expensed-out 100% over the lease term selected by a company. This
could, for instance, write-off an asset over 3 years instead of 5 or 7 years. This
will, eventually, provide bigger tax benefits to the lessee.
Leases 36
37. Disadvantages
1. A company is unable to sell or sub-lease an asset in the event it is no longer
required and cannot upgrade it to a newer or better asset without either
paying-off the remaining contract dues, or paying fines to cancel the contract.
2. A lessee loses certain tax benefits which are available to a lessor (owner)
who uses the assets himself.
3. A lessee has often to bear technological obsolescence since some lease
contracts have non-cancelable clause in them.
4. Early termination of a contract by a lessee may impose severe penalties from
a lessor.
5. Although leasing avoids paying an upfront amount, over a long period of
time, it often works out considerably more expensive than outright purchase.
A company pays cost of asset as well as the leasing companies charges and
other dues incidental to the lease contract.
6. Lessees are responsible for the maintenance and repair of leased asset. Some
leasing companies allow lessee to cover the maintenance and repair costs for
an extra sum in their lease installment.
Leases 37
38. Glossary
1. Lessor may be owner of an asset being leased.
2. Lessee is a party to whom right to use an asset is being transferred.
3. Bargain Purchase Option (BPO) refers to a provision giving the lessee the right to acquire
leased asset at a price so favorable that exercise of the option appears reasonably assured at
the inception of the lease.
4. Bargain Renewal Option (BRO) refers to a provision that gives the lessee a right to renew a
lease at a rental so favorable that exercise of the option appears reasonably assured at the
inception of the lease.
5. Contingent rentals means increase or decrease in lease payments after the inception of a
lease that result from changes in factors on which lease payments are based.
6. Economic Life (E/L) of a leased asset means the remaining usable life of an asset for the
purpose to serve.
7. Fair Value (FV) of a leased asset refers to normal selling price.
8. Inception of Lease Contract refers to date of lease contract.
9. Sublease (S/L) refers to further transfer of the right to use an asset from a lessee to a third
party. It is subject to the contract between first and second party.
10. Lease Term refers to the fixed non-cancellable term of a lease.
Leases 38
39. Glossary
11. Minimum Lease Payments (MLP): Consists of all amounts that a lessee is obligated to pay
under the terms of a lease agreement. It excludes contingent rents, costs for services and taxes
paid by a lessor. These shall be additional payments.
12. Estimated Residual Value (ERV) refers to FV of an asset at the end of the lease term. It has
two parts namely Guaranteed Part and Unguaranteed Part. FV is calculated for two parts
separately and then added to show ERV.
13. Guaranteed Residual Value (GRV) A lessee’s assurance to a lessor that lessor will recover at
least guaranteed amount at the end of the lease term. A lessor usually writes this clause in his
contract in order to cover risk of deterioration of an asset value beyond what is mentioned in a
contract.
14. Unguaranteed Residual Value (UGRV) The portion of a leased asset’s RV at the end of a
lease term that is not guaranteed by a lessee.
15. Initial Direct Costs (IDCs) are costs of legal consultancy, processing of documents,
negotiating the contracts etc., etc.
16. Incremental Borrowing Rate (IBR) refers to a rate that a lessee otherwise had paid to the
borrowed amount to acquire an asset under similar lease arrangement.
17. Implicit Interest Rate (IRR) refers to the discount rate (applied to MLPs & GRV) that causes
the aggregate PV to be equal to FV of leased asset to a lessee.
Leases 39
40. Abbreviations used
# Abbreviation Description
1 BPO Bargain Purchase Option
2 BRO Bargain Renewal Option
3 b/w Between
4 GRV Guaranteed Residual Value
5 EL Economic Life
6 ERV Estimated Residual Value
7 FV Fair Value
8 IBR Incremental Borrowing Rate
9 IIR Implicit Interest Rate
10 IDCs Initial Direct Costs
11 F/Y Final Year
12 MLPs Minimum Lease Payments
13 PV Present Value
14 RV Residual Value
15 S/L Sublease
16 UGRV Unguaranteed Residual Value
17 U/E-FI Unearned Finance Income
Leases 40
42. # Source Entitled/Author
1 IAS 17 Leases
2 SIC-15 Operating leases incentives
3 SIC-27 Evaluating the substance of transactions involving the legal form of a lease
4 SIC-29 Service concession arrangements: Disclosures
5 SIC-32 Intangible assets – Website costs
6 IFRIC 4 Determining whether an arrangement contains a lease
7 IFRIC12 Service concession arrangements
8 FASB St. 13 Leases
9 Intermediate Lanny G. Chasteen, Richard E. Flaherty, Melving C. O’Connor
Accounting 5/e
Leases 42
43. FCMA, FPA, MA (Economics), BSc.
Contact:
At.bhatty@gmail.com
Leases 43