805 cc101 afm dd 2 valuation of assets under lease
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8/12/2019 805 CC101 AFM DD 2 Valuation of Assets Under Lease
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Valuation of Assetsunder
Finance Lease
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Finance lease
Accounting treatment of assets under finance leaseis dealt with in AS-19, Leases.
Lessor :- The one who gives asset on lease.
Lessee :- The one who takes asset on lease.
A lease is an agreement by which the lessorconveys to the lessee to use the asset for a agreedperiod of time, in return for a payment or series ofpayments.
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Finance lease
The lease is known as a finance lease if therisks & rewards arising from ownership of theasset are also transferred.
Risk may include possibility of technologicalobsolescence.
Rewards may include gains from appreciationin value & sub-leasing rights.
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Finance lease
Ownership is not transferred in case of a
lease.
Ownership might get transferred at the end of
lease period if stated so in the lease
agreement.
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Accounting treatment of
leased asset.
In case of a finance lease, even though the
ownership is not transferred, the benefits of
the asset are used by the lessee.
Thus, prudence (substance over form) says
that leased assets should be accounted for
as if they are owned by the lessee.
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Accounting treatment of
leased asset.
Thus, leased asset is recognised as asset inthe balance sheet.
Plus, the lease is also recognised as aliability in balance sheet.
The P & L A/c is debited by the financialcharge (interest) of the lease and also by thedepreciation charged on fixed asset.
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Accounting treatment of
leased asset.
The lease as liability & asset will be shown at
a value:
Whichever is lower:
Fair value of asset
Present value of minimum lease payments
Depreciation is calculated as per the rules ofAS-6.
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Accounting treatment of
leased asset.
Period for which depreciation is charged:
When transfer of When transfer ofOwnership is clear ownership not clear
Useful life whichever is lowerOf the asset - lease term
- useful life of asset
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Accounting treatment of
leased asset.
Present value of minimum lease payments
= Initial Payment + equal lease payments
PVAF yearsinterest
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Accounting treatment of
leased asset.
Position under income tax act:
Depreciation on leased assets is not recognised
The lease rentals are treated as revenue
expenses and allowed in full computation of
taxable income.
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Intangible assets
Intangible assets are non-monetary assets
without physical substance, held for use in
production or supply of goods or services, for
rental to others, or for administrative
purposes.
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Intangible assets
Like:-
Goodwill
Copyrights, patents and other industrial property
rights, service and operating rights. Know-how: design, prototypes, new processes or
systems, recipes, formulae, models.
Licenses and franchises.
Computer software Mastheads and publishing titles
Motion picture films
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Intangible assets
Two types of intangible assets
Intangible assets acquired in a business purchase
(AS-10).
Internally generated intangible assets (AS-26).
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Goodwill
According to AS-10, whenever a business is
acquired for a price which is in excess of fair
value of the net assets of the business taken
over, the excess is termed as goodwill.
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Goodwill
Goodwill arises from:
Business connections
Brands and trade names
Reputation
Quality of employees
Internal systems
Loyalty of customers, etc.
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Other intangible assets
acquired in business purchase
In business acquisition, excess price paid
leads to goodwill intangible.
But, at times part of this excess amount may
be on account of other intangible assets.
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Internally generated intangible
assets
Internally generated intangible assets are thoseexpenditures which are incurred to generate futureeconomic benefits.
Such assets are not shown as intangible assets inthe balance sheet but are understood or implied tobe intangible asset. E.g.: advertising, training, start-up, research & development, etc.
Such expenses are divided into two phases: Research
Development
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Internally generated intangible
assets
Research refers to the original and planned
investigation undertaken with the prospect of
gaining new scientific or technical knowledge.
Development is the process of application of
research findings which actually leads to
producing better materials, products,processes, systems, services, etc.
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Internally generated intangible
assets Intangible asset arising during research is not
recognised in the financial statements.
Intangible asset arising from development should be
recognised if the enterprise can demonstrate all of thefollowing:
Technical feasibility
Intention to use or sell the asset
Technical, financial and other resources to use theasset.
Ability to measure the expenditure incurred on itsdevelopment.
How asset would generate probable future economic
benefits.
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Internally generated intangible
assets
Cost:
Cost of an internally generated intangible asset is
the total of expenditure incurred on it from the
time it is first recognised as an intangible asset.
Amortization
Amortisation is the systematic allocation ofdepreciable amount of an intangible asset over
the useful life of the asset.
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Impairment of Assets
Impairment of assets is dealt with in AS-28,
impairment of asset
Some times the assets of a company become
less useful or productive due reasons like
technical obsolescence, higher competition,
change in consumer preference, lowerdemand, etc.
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Impairment of Assets
In such cases, market value of such assets would
considerably fall in comparison of the NBV.
Thus continuing to record such assets at highvalues is not prudent as it would not reflect the true
and fair financial position of the firm.
Thus it becomes necessary to calculate the
impairment loss.
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Impairment of Assets
An asset is said to be impaired when it is
recorded in the balance sheet at an amount
higher than its recoverable amount.
i.e. carrying amount > recoverable amount.
Recoverable amount refers to
Higher of
Net selling price
Value in use
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Impairment of Assets
Value in use
Present value of estimated future cash flows expected to
arise from the use of the asset and from its disposal at end
of its life.
The impairment loss will be shown as a charge in
P & L A/c.
And asset and its depreciation would now be shown
at the recoverable amount instead of NBV.