LEASE, BRANCH AND DEPARTMENTAL ACCOUNTS

LEASE ACCOUNTING | IND AS 116

Non Applicability
 Lease agreement to explore natural resources (oil, gas, timber metals and mineral rights)
 Licensing agreements for films, video recording, plays, patents and copyrights,
 Lease agreement to use land
{CMA inter J14, 2 marks}
Non-cancellable lease: is a lease that is cancellable only;
1. Upon the occurrence of some remote contingency; or
2. With the permission of the lessor; or
3. If the lessee enters into a new lease for the same or an equivalent asset with
the same lessor; or
4. Upon payment by the lessee of an additional amount such that, at
inception, continuation of the lease is reasonably certain.

Lease term: the non-cancellable lease period

Minimum Lease Payment (MLP) ₹

Lease rent ××
+ Guaranteed residual value by lessee or by third party ××
- Contingency rent (based on some factor such as sales, ××
usage, price indices, interest rates in the market)
- Cost for service /tax (reimbursed) ××
Minimum Lease Payment (MLP) for Lessee ××
+ Unguaranteed residual value ××
Gross Investment for Lessor
- Net Investment (PV of MLP& Unguaranteed residual ××
value)
Unearned Finance Charges ××
××
Note: In case of lessor; profit = unearned finance charges + [fair value – cost]
{CMA Inter J19, 3 marks}
Types of Leases:
1. Finance leases
2. Operating leases
Finance Lease
 Transfers substantially all risks and rewards incidental to ownership of an asset
to the lessee
 No transfer of legal ownership (may transfer at the end of lease term)
 Lease term covers major part of the asset’s life
Indicators of Finance Lease:
1. Ownership of the asset is transferred to lessee by the end of the lease term
2. Lessee has the option to repurchase at lower than fair value (certainly
exercise the option)
3. The lease term covers major part of the economic life of the asset
4. At the inception of the lease, PV of MLP is at-least equal to fair value of the asset
5. Only the lessee is allowed to use the specially designed assetas per the
requirement of lessee.
Other indicators
6. If the lease is cancelled, the lessee should bear the cancellation charges
7. If P/L on residual value is transferred to lessee by way of adjustment in lease rent
8. If the lessee is allowed to continue the lease for a secondary period at lower rent

Accounting of Finance Lease:

In the books of lessee In the books of lessor

Value of Asset & Liability: Whichever is Recognize receivable equal to net
lower: Fair value at the inception of lease investment Finance income should be
(or) recognized
Present value of MLP from lessee point of in proportion to outstanding balances
view

Note:
1. Discount rate is implicit rate else lessee’s incremental borrowing rate
Implicit rate: discount rate used for finding PV of MLP as per lessor’s point of view
2. Finance charges is to be allocated over the lease term
3. Depreciation for asset taken on finance lease is treated as per AS 10
4. Initial direct costs for finance lease are included in the cost of asset
Disclosure made by the lessee for finance lease:
In addition to the requirement as per AS 10, Disclose
1. Assets under finance lease is segregated from owned asset
2. For each class of assets, the net carrying amount at the balance sheet date;
3. A reconciliation between the total of MLP and its PV at the B/S date.
For the following periods
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
4. Contingent rent: recognized as expenses in the P/L statement
5. The total of future minimum sublease payments expected to be received
under non- cancellable subleases at the B/S date
6. A general description of the lessee’s significant leasing arrangements, such as
a. The basis on which contingent rent payments are determined
b. The existence and terms of renewal or purchase options and escalation clauses
c. Restrictions imposed by lease arrangements,
such as those concerning dividends, additional debt, and further leasing.

Disclosure made by the lessor for finance lease:

1. A reconciliation between the total gross investment and PV of MLP at the
B/S date for the following periods
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
2. Unearned finance income
3. The unguaranteed residual values accruing to the benefit of the lessor
4. The accumulated provision for uncollectible minimum lease payments receivable
5. Contingent rents recognized in the P/L A/c
6. A general description of the significant leasing arrangements of the lessor
7. Accounting policy adopted in respect of initial direct costs
Operating Lease: It doesn’t transfer substantially all the risk and reward incidental to
ownership
Accounting of Operating Lease: Lease rent
In the books of lessor In the books of lessee
An asset in the B/S Lease rent recognized as an expense in
Lease rent recognized as an income in P&L A/c on straight line basis over the
P&L A/c on straight line basis over the lease term
lease term
Unless a different systematic basis is
available
Charge depreciation as per AS 10
Impairment loss as per AS 28

Disclosure by lessee for operating lease:

1. The total of future minimum lease payments under non-cancelable
operating leases for each of the following periods:
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
2. The total of future minimum sublease payments expected to be received
under non- cancelable subleases at the B/S date
3. Lease payments recognized in the statement of profit and loss for the
period, with separate amounts for minimum lease payments and
contingent rents
4. Sub-lease payments received (or receivable) recognized in the statement of
P/L for the period.
5. A general description of the lessee’s significant leasing arrangements including,
but not
limited to, the following:
a. The basis on which contingent rent payments are determined
b. The existence and terms of renewal or purchase options and escalation clauses
and
c. Restrictions imposed by lease arrangements, such as those
concerning dividends, additional debt, and further leasing.
Note: The Level II and Level III non-corporate entities (and SMCs) need not
make disclosures required by (1), (2) & (5) above
Disclosure by lessor for operating lease:
In addition to the requirement as per AS 10, Disclose
1. For each class of assets, the gross carrying amount,
the accumulated depreciation and accumulated impairment losses at the B/S date
and
a. The depreciation recognized in the P/L A/c
b. Impairment losses recognized in the P/L A/c
c. Impairment losses reversed in the P/L A/c

2. The future MLP under non-cancellable operating leases in the

aggregate and for following periods
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
3. Total contingent rents recognized as income in P/L A/c
4. A general description of the lessor’s significant leasing arrangements and
5. Accounting policy adopted in respect of initial direct costs.
 PRACTICAL PROBLEMS

1. Arun Ltd. has taken an equipment on operating lease for the coming 5 years. As
per the agreement with the lessor, it will not make any payment for lease rentals
for the first 2 years, and will have to pay ` 21,00,000 in each of the following 3
years. Advise Arun Ltd. on accounting for the lease rentals in this case.

2. Vishnu Ltd. leased a printing machine from Garur Ltd. for a period of 3 years. The
useful life of the printing machine is known to be of 5 years. It was agreed
between the lessor and lessee that the amount will be paid in 3 instalments and at
the termination of the lessee, Garur Ltd. will take back the said machine. The
following details are available in respect of the machine lessee:

 Cost of the printing machine is ` 15,00,000;

 Unguaranteed residual value at the end of the lease period is ` 2,00,000;
 Fair value of the machine is ` 15,00,000;
 The internal rate of return of the investment is 10%.
You are required to:
(a) State whether the lease is a finance lease or an operating lease?
(b) Ascertain the amount of unearned finance income.
Given: PVF10%, 3 = 0.7513; PVAF10%, 3 = 2.4868.

3. (Q-1 (DEC 2023, SY 2022))