RangajewaHerathB.Sc. Accountancy and Financial Management(Sp.)(USJ)MBA-PIM(USJ)
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Accounting for Leases
Learning Outcomes
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At the end of this chapter, you should be able to:Explain what a lease representsDistinguish between an operating and a finance leaseAccount leases in the books oflessorand lesseeAccount sale and lease back transactions
Lesson Outline
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Accounting for Finance LeasesLessee's BooksAccounting for Operating LeasesLessee's BooksAccounting for Sale and Leaseback
A Lease
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A lease is an agreement wherebylessorconveys to the lessee in return for a payment or series of payments, right to use an asset for an agreed period of time.
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Examples of Situations of finance leases
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The lease transfers ownership to the lessee by the end of the lease term.The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value.The lease term is for the major part of the economic life of the asset even if title is not transferred.At the inception of the lease PV of the MLP amounts to at least substantially all of the fair value of the asset.The asset is of such a specialized nature that only the lessee can use it without major modification.
In the Books of Lessee
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Accounting for Finance Lease
Initial Recognition ofFinance Lease
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Assets and liabilities in the Statement of Financial Position should be recognizedlowerof fair value of the leased property or PV of minimum lease payments (PV of MLP)
What is PV of MLP?
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What is MLP?What discount rate is to be used when calculating PV of MLP?
Subsequent Measurement
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Minimum Lease Payments:apportion between the finance charge and the reduction of the outstanding liability.Finance Charge:allocate to the each period during the lease term so as to produce a constant periodic rate of return on remaining balance of the liability.Actuarial methodSum of years’ digitsStraight line method
Depreciation
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Depreciation policy should be consistent with freehold assets and the depreciation recognized should be allocated in accordance with LKAS16.If there is a reasonable certainty that the ownership will pass to the lessee at the end of the lease term, the period of expected use is the useful life of the asset.If not, depreciated at the shorter of the lease term and its useful life.
In the Books of LesseeShallberecognizedas an expense on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.
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Accounting for Operating Lease
Accounting forSale and Leaseback
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If Fair Value < Carrying Value of the Asset, at the time of sale and leaseback transaction
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Operating Lease:A loss equal to the amount of difference between the carrying value and fair value should be recognized immediately.Finance leases :Such adjustment not necessary unless there had been an impairment in value under LKAS 36.
Summary
Leases aretwofold; Finance and OperatingDealt with the accounting treatment for finance and operating leases in both books of theLessee.Also, accounting treatment for Sale and Lease back transactions were discussed.
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