LKAS 17

LEASES

LKAS 17

FINANCE AN ASSET

How to acquire an asset?- Purchase- On Lease Terms

- Operating Leases- Finance Leases

- On Hire Purchase Terms

What are the difference in above methods?

LKAS 17

What is a lease?

LEASE ARRANGEMENTS

A lease is an arrangement whereby the lessor coveys to the lessee in return for a payment or series of payments the right to use an asset for a agreed period of time.

LESSEE

LESSOR

Right to use an asset for a agreed period

Series of payments

LKAS 17

TYPES OF LEASES

LEASE ARRANGEMENTS

FINANCE LEASE OPERATING LEASEIs a lease that transfers substantially all the risks and rewards incidental to ownership of an asset.

Is a lease that does not transfer substantially all the risks and rewards incidental to ownership of an asset.

Important Factor for categorization is :Whether substantially all the risks and rewards incidental

to ownership of an asset is transferred or not.

LKAS 17

CATEGORIZATION OF LEASES

Depends on whether :-The lease transfers ownership of the asset to the lessee by the end of the lease term.-The lease term is for the major part of the economic life of the asset even if title is not transferred.-The present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset.-The leased asset is of such specialized nature that only the lessee can use the asset without major modification.- The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value of the asset.

LKAS 17

By the Lessee e.g.

ACCOUNTING FOR FINANCE LEASES

Lease creditor Sampath Bank PLCType of the asset Motor vehicle – ABC 2525Lease agreement number HOLELE 0123456Cost of the asset Rs. 1,000,000Start date 24th May, 2015No. of rentals 60Monthly rentals Rs.20,000

What are the journal entries to be passed in regard to above for the year ended 31st March,2016?

LKAS 17

-Interest on finance lease needs to be allocated to monthly rentals.

ALLOCATION OF INETEREST

- There are theoretically three methods :- Straight Line Method- Sum of Digit Method- Effective Interest Rate (IRR) Method

Which method is more practically appropriate???

LKAS 17

Following Excel templates are available :

EXCEL TEMPLATES

- Sum of Digit Method- Effective Interest Rate (IRR) Method

Above templates are usable if- payments are made in regular intervals- number of rentals are less than 200

LKAS 17

Balance remaining in the Lease Creditor’s Account shall be divided as follows :

LEASE CREDITOR – CLOSING BALANCE

- Payable within one year- Payable between one year and five year- Payable after five year

LKAS 17

Leased asset is subject to depreciation in line with LKAS 16 as follows :

LEASED ASSET

- Over the period that is consistent with that for the owned asset

- Over the shorter of the lease term and its useful life if

- there is no reasonable certainty that the lessee will obtain the ownership by the end of the lease term

LKAS 17

-Recognition of leased asset

LETS BE TECHNICAL

At the inception of the lease, the lessee shall recognize the leased asset as follows :

- Fair Value of the asset XXXX

- Present Value of the minimum lease payments XXXX

Lower Amount

- How do we explain capitalization of COST of the leased asset does not violate above rule ????

LKAS 17

- Dealing with V.A.T.- V.A.T. included in rentals

- Accounting treatment depends on whether the LESSEE can claim as an input V.A.T.

- If V.A.T. can be claimed,

V.A.T. Control Account Dr XXX Bank Book XXX

- If V.A.T. can not be claimed,Irrecoverable V.A.T. Dr XXX Bank Book XXX

LETS BE TECHNICAL (Con’t)

LKAS 17

- Dealing with V.A.T. (Cont’)- V.A.T. included in cost of the asset

- Accounting treatment depends on whether the FINANCIAL INSTITUTION can claim as an input V.A.T.

- If V.A.T. can be claimed,Just ignore.

- If V.A.T. can not be claimed,Asset Account Dr XXX Lease Creditor XXX

LETS BE TECHNICAL (Cont’)

LKAS 17

Lease payments under an operating lease shall be recognized as an expense on a straight line basis over the lease term unless another systematic basis is more representative of the pattern of the user’s benefits.

Journal entry would be ; Rent expense Dr xxxxx

Bank book xxxx

OPERATING LEASES

LKAS 17

Test your knowledgeRNH Company had a vehicle numbered WPL 1125 as at 31st March,2014. During the audit for the year ended 31st March, 2015 you found the following lease agreement entered into with Sampath Bank.

Customer RNH CompanyVehicle Harrier WPL 1125Cost Rs. 10,000,000Monthly rental Rs.250,000No of rentals 48

What is this transaction?

SALE AND LEASEBACK TRANSACTIONS

This is a LEASE AND SALEBACK TRANSACTION

LKAS 17

How to account for :

SALE AND LEASEBACK TRANSACTIONS (Cont’)

Depends on the NATURE of the sale and leaseback transaction

If it results in a finance lease ; Excess = Sale proceeds – Carrying amount

shall not be recognized immediately instead it shall be deferred and amortized over the lease term.

Why the excess is deferred and amortized without recognizing it as an income???Substance of the transaction is that the lessor provides finance to the lessee with the asset as a security

LKAS 17

How to account for (Cont’) :

SALE AND LEASEBACK TRANSACTIONS (Cont’)

Depends on the NATURE of the sale and leaseback transaction

If it results in an operating lease ;Excess = Sale proceeds – Fair value

should be treated as follows : Rule 1 - Where selling price = Fair value

Rule 2 - Where selling price > Fair valueRule 1 - Where selling price < Fair value

Rule 1 - Where carrying = Fair value

Recognize profit/loss immediately

Defer and amortizedDefer and amortized if it is compensated by future rentals

Write off immediately

LKAS 17

Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 160,000Fair value Rs. 160,000

SALE AND LEASEBACK TRANSACTIONS (Cont’)

Disposal AccountCV 100,000

Cash(Sp) 160,000Profit(P&L) 60,000

160,000

160,000

LKAS 17

Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 160,000Fair value Rs. 140,000

SALE AND LEASEBACK TRANSACTIONS (Cont’)

Disposal AccountCV 100,000

Cash(Sp) 160,000Deferred 20,000

income

160,000

160,000

Profit(P&L) 40,000

LKAS 17

Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 160,000Fair value Rs. 190,000Future rentals will be compensated

SALE AND LEASEBACK TRANSACTIONS (Cont’)

Disposal AccountCV 100,000

Cash(Sp) 160,000Profit(P&L) 90,000

190,000

190,000

Deferred 30,000expense

LKAS 17

Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 60,000Fair value Rs. 90,000

SALE AND LEASEBACK TRANSACTIONS (Cont’)

Disposal AccountCV 100,000

Cash(Sp) 160,000Profit(P&L) 90,000

190,000

190,000

Deferred 30,000expense

LKAS 17

Test Your UnderstandingCarrying value Rs. 100,000Selling price Rs. 60,000Fair value Rs. 90,000

SALE AND LEASEBACK TRANSACTIONS (Cont’)

LKAS 17

SALE AND LEASEBACK TRANSACTIONS (Cont’)

Disposal AccountAsset 90,000Cash(Sp)

60,000

90,000

90,000

Loss(P&L) 30,000

Asset AccountCV 100,000

100,000

100,000

Disposal A/c 90,000Loss(P&L) 10,000

LKAS 17

LEASES

Thank You