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Leasing – IAS 17 (Contd.)
Finance Lease – IAS 17

• Lessee should recognize finance lease as asset and liabilities in their balance sheets at amounts equal at the  inception of the lease to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of minimum lease payments the discount factor is the interest rate implicit in the lease.
• Lease payments should be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge should be allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
• If there is no reasonable certainty that the lessee will obtain ownership by the end of lease term, the asset should be fully depreciated over the shorter of lease term or its useful life.

Finance Lease – Disclosures

• Lessee should in addition to meeting the requirements of IAS 32 Financial Instruments: Disclosure and

Presentation, make following disclosures for finance leases:
a. For each class of asset, the net carrying amount at the balance sheet date (fixed assets schedule)
b. Reconciliation between the total of future minimum lease payments at the balance sheet date, and
their present value. In addition, an entity shall disclose the total future minimum lease payments and their present value, for each of the following periods: − Not later than one year,

• Later than one year and not later than five years
• Later than five years

c. Contingent rents recognized as an expense in the period in which they occur.
d. The total of future minimum sublease payments expected to be received under a non-cancelable sublease at the balance sheet date.
e. A general description of the lessee’s material leasing arrangements including but not limited to, the following:
i. The basis on which contingent rent payable is determined;
ii. The existence and terms of renewal or purchase options and escalation clauses
iii. Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and future leasing.
• In addition, the requirements for disclosure in accordance with IAS 16 (Property Plant and Equipment), IAS 36 (Impairment of Assets), IAS 40 (Investment Property) and IAS 41 (Agriculture) apply to lessees for assets leased under finance lease.
Recognition and Disclosure of Leases

• Transfer of ownership at the end of lease term.
• Option to purchase the asset at a price sufficiently lower than the FV of the asset
• Lease term for major part of economic life of asset.
• PV of MLP substantially equals the FV of leased asset.
• Specialized nature of assets

Minimum Lease payments (MLP)
Definitions – IAS 17
• MLP include:

• Initial payment OR down payment
• All lease rentals
• Any amount that is guaranteed to be paid during or at the end of the lease term.

• MLP do not include:

• Contingent rent
• Any processing charges
• Taxes (such as registration fee of vehicles) paid by lessor and recovered from lessee
• Insurance paid by lessor and recovered from lessee

Recognition and Disclosure of Leases

• Present value of minimum lease payments is calculated using the interest rate implicit in the lease. This present value is then compared with the current fair value of the asset.
• This Present Value (PV) should be substantially equal the Fair value (FV) of the asset.
• “Substantially Equal” is not defined anywhere but generally 90% or more is considered to be substantially equal.

Example
Consider the following example:

• An asset costs Rs. 112,550.
• A leasing company is willing to lease it on 12 monthly lease rentals of Rs. 10,000.
• The interest rate implicit in the lease is 1% p.m.
• Present value of these

Recognition and Disclosure of Leases

• In the first month the amount utilized by the lessee is Rs. 112,550. The IRR is 1%.Therefore financial charges for  the first month are 1,126. The remaining amount (10,000 – 1,126 = 8,874) is considered to be a payment towards principal outstanding.
• In the second month the principal outstanding is Rs. 103,676. Therefore financial charges for the month are 1,037. The remaining amount 8,963 is the repayment of principal outstanding. And so on.

Recognition and Disclosure of Leases
• Its accounting will be done as follows:

• The asset will be recorded at its fair value i.e. Rs. 112,550 and depreciated according to company policy,
• A corresponding lease liability will be recorded,
• Every lease payment is split between finance charge and principal amount.

• By the end of the lease term of 12 months a loan repayment of 112,550 and finance charge payment of 7,450 would have been made.