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Lease is an agreement wherebythe lessor conveys to the lessee

in return for a payment orseries of payments the right touse an asset for an agreed

period of time.


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PARTIES IN THE LEASES

LEASOR :

A person or entity who owns property (forexample, real estate or equipment) to which a

lessee receives use and possession in exchange fora payment of funds.

LESSEE :

A person or entity who receives the use andpossession of leased property (e.g., real estate or

equipment) from a leasor in exchange for apayment of funds. The person to whom a lease is

made.


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SCOPE

Applies to leasescommencing on and

from 1st April 2001.

Lease agreements to explore for or use natural resources (oil, gas,timber, metals & other mineral rights)

Licensing agreements for such items as motion picture films, videorecordings, plays, manuscripts, patents & copyrights.

Lease agreements to use lands.

Excludes


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TERMS

ECONOMIC LIFE: It is either

(a) the period over which an asset is expected to

be economically usable by one or more users; or

(b) the number of production or similar units

expected to be obtained from the asset by oneor more users.

USEFUL LIFE : it is either

(a) the period over which the leased asset is expectedto be used by the lessee; or

(b) the number of production or similar units expected

to be obtained from the use of the asset by the lessee.


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RESIDUAL VALUE: It is the estimated fair value of the asset at the

end of the lease term.

GUARANTEED RESIDUAL VALUE: It is

(a) in the case of the lessee, that part of the

residual value which is guaranteed by thelessee or by a party on behalf of the lessee (the

amount of the guarantee being the maximum

amount that could, in any event, become

payable); and

CONT..


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(b) in the case of the lessor, that part of the

residual value which is guaranteed by or on

behalf of the lessee, or by an independent third

party who is financially capable of dischargingthe obligations under the guarantee.

CONT..

UNGUARANTEEDRESIDUAL VALUE:

It is the amount by which the residual value ofthe asset exceeds its guaranteed residual value.


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FINANCIAL LEASE

A finance lease is a lease that transferssubstantially all the risks and rewards incident to

ownership of an asset.

Risks include the possibilities of losses from idlecapacity or technological obsolescence and of

variations in return due to changing economicconditions.

Rewards may be represented by the expectationof profitable operation over the economic life of

the asset and of gain from appreciation in value

or realization of residual value.

TYPES


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Operating Lease is a lease other than a

finance lease which does not transfers

substantially any risk and rewards incident to

ownership of an asset.

Operating Lease is also called Service Lease.

It is generally used for computers, officeequipments, automobiles, trucks, telephones

and other equipments.

OPERATING LEASE


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Lessorslosses

associatedwith

cancellatio

n (if lesseecan cancel

lease)borne by

lessee.

Gains or

losses fromfluctuationin fair value

of residual

fall onlessee.

Lessee can

continue

lease for a

secondaryperiod at a

rentsubstantiall

y lowerthan

marketrent.

The leaseterm is for

the majorpart of the

economic

life of theasset even

if its title isnot

transferred.


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FEATURES OF

OPERATING LEASE

An operating lease is for a shorter period

other than the economic life of the asset.

The lease rentals are not sufficient to

totally amortize the cost of the assets.

Operating leases normally includemaintenance clause requiring the lessor to

maintain the leased asset.


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MODES OF TERMINATING LEASE

The lease is renewed on a perpetual basis or for

a definite period

The asset reverts to the lessor

Above, if the asset reverts to the lessor and the

lessor sells it to a third party

The lessor sells the asset to the lessee

All the above conditions applies only whenboth the parties mutually agree.

The lease is terminated at the end ofthe lease period and any one course

is possible, namely


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ACCOUNTING FOR FINANCE LEASES LESSEES BOOKS

At inception of a finance

lease, lessee should recognize

lease as an asset and aliability on the basis of fair

value or present value ofminimum lease payments .

Liability for a leased assetshould be presented

separately in balance sheet asa current liability or a long-

term liability as case may be.

A finance lease gives rise to

depreciation expense for asset(on the basis of lessees

depreciation policy for owned

assets) as well as a financeexpense for each accounting

period.

If there is no reasonable

certainty that lessee willobtain ownership by end oflease term, asset should be

fully depreciated over leaseterm or its useful life

whichever is shorter.


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ACCOUNTING FOR FINANCE LEASES-LESSOR`S BOOKS

Lessor should

recognize assets

given under afinance lease in

its balance sheetas a receivable atan amount equal

to net investmentin the lease.

Manufacturer or dealerlessor should recognize

transaction sale of leasein profit and loss in

accordance with policyfollowed by enterprise

for outright sales. In case

of artificially low rate of

interest, compute saleprice based on

commercial rates ofinterest initial direct

costs to be expensed.


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ACCOUNTING FOR OPERATING LEASES LESSEES BOOKS

Lease payments (excluding costs

for services such as insurance &

maintenance) under operating

lease should be recognized as an

expense in profit and loss on a

straight line basis over lease

term unless another systematicbasis is more representative of

time pattern of users benefit.


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ACCOUNTING FOR OPERATING

LEASES LESSORS BOOKS Lease income from operating leases should berecognized in profit and loss on a straight linebasis over lease term unless another systematicbasis more representative of time pattern in which

benefit derived from use of leased assetdiminished.

Leased asset to be disclosed under fixed assets.

Depreciation of leased assets should be on a basisconsistent with normal depreciation policy oflessor for similar assets.


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