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Finance Leases

Posted by Rona on March 26, 2012

1. Assets Account should be debited and liability account should be credited with the ?Fair Value? of leased asset. Fair value represents the price at which asset can be purchased on immediate payment.
   If fair value exceeds the ?Present Value of minimum lease payments?, asset and liability should be recognised at such present value. For calculating present value of minimum lease payment , discount rate to be used will be the Interest Rate implicit in the lease. If it is not practicable to determine such rate, lessee?s incremental borrowing rate should be used.
2. Initial direct costs incurred in connection with lease, such as negotiating and securing leasing arrangements should be debited to Assets Account.
3. Lease payments should be allocated between finance charge and reduction of the outstanding liability. The finance charge should be allocated to periods during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.
4. Depreciation on asset should be provided in the usual manner consistent with the depreciation policy the lessee adopts for depreciable assets that are owned. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is the useful life of the asset; otherwise the asset is depreciated over the lease term or its useful life, whichever is shorter.
5. Finance charge and Depreciation will be debited to Profit and Loss Account.
6. Disclosures:

• All disclosures required as per AS ? 6, AS ? 10 and under any applicable statute.
• Assets acquired under finance lease should be segregated from the assets owned.
• Net carrying amount (W.D.V.) of each class of asset at the balance sheet date.
• A reconciliation between the total of minimum lease payments at the balance sheet date and their present value.
• Total of minimum lease payment at the balance sheet date and their present value for each of the following periods:
• Not later than one year, ,ii. later than one year and not later than five years, iii. later than five years.
• Contingent rents recognised as income in Profit and Loss Account.
• The total of future minimum sub ? lease payments expected to be received under non -cancelable sub leases at the balance sheet date.
• A general description of the lessee?s significant leasing arrangements including:
• The basis on which contingent rent payments are determined.
• The existence and terms of renewal or purchase options and escalation clauses and
• Restrictions imposed by lease arrangements such as relating to dividends, additional debt and further leasing.

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