lease accounting and its types
TRANSCRIPT
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on topic : lease accounting and its types
Presented by : Sangeeta Saini
M.Com (P)
641
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Contents Meaning of lease .
Definition of lease.
Accounting standard – 19.
Lease contract and its parties.
Types of lease
Operating lease
Finance lease.
Advantages of leasing.
Disadvantages of leasing.
Conclusion .
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MEANING OF LEASE
Lease is an agreement whereby the lessor
conveys to the lessee , in return for rent , the right
to use an asset for agreed period of time . The
lessor remains the owner of the asset , though the
lessee has an unrestricted right to use the
equipment. This lease contract is for specified
period of time and it will contain the amount and
timing of payment to be made by the lessee ,
provision of payment of taxes ,maintenance
expenses and provisions for renewal of the lease or
purchase of the asset at the expiry of the lease
period.
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Definition of lease
According to James C Van Horne , “ A contract of lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for agreed period of time in return for the payment of rent.”
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AS – 19 is applicable on leases issued by the council ofinstitute of chartered accountants of India . The basicobjective of this standard is to prescribe for lessees andlessors , the appropriate accounting policies and disclosuresin there financial statements . This standard is applied inaccounting for all leases other than :
Lease agreement to explore for or use natural resourcessuch as oil, gas, metals and other mineral rights.
Licensing agreements for items such as motion pictures,film video recording, patent and copyrights.
Lease agreement to use land.
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Parties of Contract
Manufacturer/ supplier
Lessor Lessee
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Lease contract and its parties
Manufacturer /
Supplier of the
asset (from whom
the leased asset
is purchased)
Lessor or owner of the
asset (who purchase the
asset)
Lessee (who get the right to
use the asset not
ownership)
Contract of sale
Contract of lease
Asset Purchase
consideratio
n
Right
to useRent
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Types of lease
Operating lease
Finance lease
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Operating lease
It is also known as service lease or cancellable lease. An operating lease is usually characterised by following features:
It is a short term lease. The lease period in such contract is less than the useful life of the asset.
The lease is usually cancellable at short notice by lessee.As a period of an operating lease is less than the useful life of the
asset , it does not necessary to amortize the original cost of the asset .The lessee has the option of renewing the asset lease after the expiry
of lease period.The lessor is generally responsible for maintenance, insurance and
taxes of the asset.
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FINANCE LEASE
It is also known as capital lease. A finance lease is usually characterised by following features:
As compared to operating lease, a financial lease is for longer period of time.
It is usually non - Cancellable by the lessee prior to its expiration date.
The present value of the total lease rental payment during the period of lease exceeds or equal to substantially the whole of the fair value of the leased asset.
A financial lease usually provides the lessee an option of renewing the lease for further period.
The lessee is generally responsible for the maintenance ,insurance and taxes of the asset.
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Advantages and Disadvantages of leasing
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Advantages of leasing to the lessee
Minimum delay
Easy source of finance
Shifting the risk of
obsolescence
Unaffected borrowing capacity
No effect of inflation
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Higher costNo alteration or change in asset
Penalties on termination of
lease
Loss of salvage value of the asset
Disadvantages of leasing for
the lessee
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Higher profits.
Tax benefits.
Quick returns.
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Disadvantages of leasing for the lessor
High risk of obsolescence
Price – level changes
Competitive market
Double taxation
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Conclusion
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Thank you
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Questions ?