Accounting for Finance Leases by Lessees

This article discusses the accounting standards for finance leases by lessees, including the meaning and classification of leases, accounting principles, sale and leaseback transactions, and disclosure requirements. It also includes a journal entry example and an appendix.

Running head: ACCOUNTING FOR FINANCE LEASES BY LESSEES
Accounting
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ACCOUNTING FOR FINANCE LEASES BY LESSEES
PART A- Essay
PART B- Journal Entry
Appendix

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
Part A
Introduction
In the history of accounting it was recorder numerous alteration regarding the
prescribed standards. The last alteration was done in Financial Accounting Standard
Board 13 noted as the major alteration. The fiscal team termed the change that was
been made by Financial Accounting Standard Board as well as International
Accounting Standard Board so that the balance sheet of a company becomes clear
as well as transparent. The alteration in the standard regarding Lease has put the
major stress on the obligations regarding the off balance sheet.
The individuals who are the users of financial statement rely on the monetary
statement of the company so as to assess the condition, performance as well the
financial position to determine the future prospect of the company. Even banker is
also included by the users so as for decision making either for borrowing money or
renewing a loan, suppliers uses so as they can postpone their credit limit. The
objective of FASB including IASB in respect of alteration of accounting standard so
that it deliver a same framework so that a complete information on accounting is
delivered.

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
Discussion
Meaning of Lease
Lease is termed as a treaty where lessor expresses his or her intentions to the
lessee about returning his payment even the payment series in order to get the right
for using the assets till that time as per the contract.
Classification of Leases
As per IAS 17.4 a lease is classified as a finance lease at the time when all
the risk substantially gets transfer rewarding the incident as ownership.
Other lease is classified as operating lease. These classification of lease is
made as per the inspection. The lease is classified on the nature of the transaction
and not on the form whether it is finance or operating lease.
As per IAS 17, Para 10 the following situation can classify the lease as
finance lease:
 At the end of the term the possession of the asset is being transferred to the
lessee by the lease.
 An option persist in the hand of the lessee of purchasing the asset on a price
that is being expected that it could be reasonably lower than the fair value on
the date from which the option actually converts exercisable. The option is
exercisable or not is decided at the time of inspection.
 The lease is termed on the basis of the assets economic life on the major part
although the right is not being handed over.

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
 At the time of scrutinizing the lease, the current value of the lease that has the
minimum payments of the lease that is considerably from all the fair value of
the asset that has been leased. (Rai and Sigrin, 2013).
 The assets that are being leased are of special nature and only the lessee
can use it without any alteration to the asset.
The other situations can be too termed as finance lease mentions IAS 17.11
 The lessee is subjected to borne the losses of the lessor if the cancellation is
done by lessee.
 Lessee has to bear any change that results to the loss or gain that arises from
the fluctuating of fair value of the salvage.
 The lessee is given the right to carry forward the lease on a rent that too lower
than the market rent. (Rai and Sigrin, 2013).
In the case where leasing is done for both land as well as building. In this the entity
shall classify leasing. As per IAS 17.15A points out that as land has indefinite
economic life. This shall be considered at the time of classifying lease.
As per para 16 of IAS 17, Each and every time it is compulsory in direction to
categorise as well as account for a lease of land including buildings, the lowest lease
payments that is including one lump-sum upfront expenditures are owed stuck
between the land as well as buildings foundations in section to the comparative fair
values of the leasehold benefits in the land component along with buildings
component of the lease at the commencement for inspection of the lease. In case of
a lease of land as well as buildings in which the sum that would originally be
acknowledged for the land component is irrelevant, the land and buildings may be
canned as a solitary unit for the determination of lease cataloguing as well as

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
confidential as either a finance or operating lease. Conversely, discrete dimension of
the land and buildings features is not essential if the lessee's curiosity in both land
and buildings is categorised as an investment property as per IAS 40 as well as the
fair value model is accepted.
Accounting for Lessees.
The subsequent principles ought to be applied in the monetary statements of
lessees:
 As the lease term comes into effect the recording of finance lease shall be
done as it is an asset or a liability on the basis of the minimum fair value along
with the present value that result in the lowest payments of the lease.
 The payment of finance lease shall be allocated among the charge of finance
as well as the decrease of the liability that is being outstanding. The allocation
of the finance charge is to be done on such basis that it produce continuously
produce rate of interest on the value that is been left over.
 The policy regarding depreciation for assets those are classified as finance
lease shall be in consistent form along with the assets that are being owned.
In any case if the uncertainty regarding the ownership of the lease at the end
prevails depreciation shall be less than the term of lease or as on the life of
the asset.
 In case of operating lease, the payment towards these shall be identified
under the income statement as expense as per the term of lease on the
straight line method depreciation till the other way of representing the time
pattern of user`s advantage. (Altamuro, Johnston, Pandit and Zhang, 2014).

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
The incentives regarding the new or renewal contract of operating lease shall be
identified by the lessee on the basis of reduction of the expense of rental over the
term of lease. Regardless, of the nature or form, or the payment schedule of
incentive.
Sale and leaseback transactions
As per IAS 17. 59 Any surplus of profits over the booming sum is delayed and
pay back over the lease period. The sale as well as lease back transaction
resulting in finance lease.
Disclosure that are to be made by lessees under finance leases
The lessee shall disclose the following in their statement:
 Amount of the asset that is to be carried.
 Reconciliation that is done between the total lease payment that is least along
with their present value.
 The sum of least lease expenditures on the balance sheet along with the
present value for:
 The upcoming year
 If it is more than five years
 Combined two to five years
 contingent rent acknowledged as an expenditure
 Total upcoming lowest sublease proceeds under subleases that are not
cancellable.

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
 General explanation of substantial leasing preparations, as well as contingent
rent requirements, regeneration or acquisition alternatives, and limitations
executed on dividends, borrowings, or additional hiring.
Impact on Lessee
There are some companies on which there is critical role of lease in their
operations. As mostly lease transaction, are optional lease and that is on off balance
sheet in current time. Not an important effort is needed under the standard that is
applied on lease for accounting. The fresh standard will necessitate a corporation to
do additional than basically translate its prevailing operating lease obligations
revelation to replicate lease assets as well as liabilities. Its application could outcome
in variations to the policies, procedures, panels as well as IT systems that backing
lease bookkeeping along with probably lease procurement, lease management
including tax. Corporations might also wish to deliberate the insinuations for fiscal
statements as well as metrics as they convert agreements that are, or possibly will
comprise, leases. These actions will necessitate participation from a diversity of
subdivisions crosswise the company. (Hsu, Chao and Huang, 2013).

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
Conclusion
In order to regulate those fluctuations are essential to put on the new
standard, abundant of the initial work will rotate everywhere measuring the state of a
company’s present lease bond data administration that is its schemes, strategies,
procedures as well as controls that together with the figures compulsory for
monetary reporting determinations. Companies that previously having well-prepared
lease supervision as well as accounting utilities may merely essential to appraise
whether their current systems, strategies, procedures and wheels necessitate
alterations to lodge the fluctuations in the innovative standard. Though, whereas
existing schemes such as spreadsheets along with software might comprise some
lease data, they might not have all of the evidence prerequisite to make the controls,
decisions counting on-successful valuations as well as evidence for exposes
essential to obey through the new standard. As such, noteworthy determination
could be mandatory to physically fold misplaced lease data.
Part B
Debit Credit
Particulars Amount (in $) Amount (in $)
30-Jun-15 Impairment Loss Account 1,26,000
Goodwill Account 42,000
Plant Account 30,552.00
Copyright Account 28,146.29
Machinery Account 17,666.29
Inventory Account 7,635.43
(Net assets and goodwill impaired)
30-Jun-15 Income Statement Account 1,26,000
Impairment Loss Account 1,26,000
( Value of impairment loss reflected to the
income statement)
In the books of Gali Limited
Journal Entry as on 30 June 2015
Date

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
Appendix:
Particulars Amount (in $)
Assets' carrying amount (A) 12,15,700
Value-in-use of the division (B) 10,89,700
Actual or real asset values (D) 10,89,700
Loss from Impairment (E) (A) - (D)] 1,26,000
Goodwill 42,000
Impairment loss from subtraction
of goodwill (E) - (F) 84,000
Carrying Value of Plant 8,16,700
Less: Fair Value of Plant 7,86,148
Impairment Loss on Plant (G) 30,552
Impairment Loss from Subtraction
of goodwill & Plant (E) - (F) -(G) 53,448
Particulars Carrying amount (in $) Pro-rata Impairment Loss Allocated (in $) Adjusted Carrying Amount (in $)
Goodwill 42,000 42,000
plant 8,16,700.00 30,552.00 7,86,148.00
Copyrighht 1,88,000.00 53% 28,146.29 1,59,853.71
Machine 1,18,000.00 33% 17,666.29 1,00,333.71
Inventory 51,000.00 14% 7,635.43 43,364.57
Total 3,57,000 100% 1,26,000 10,89,700
Apportionment of Impairment Loss:-

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ACCOUNTING FOR FINANCE LEASES BY LESSEES
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Altamuro, J., Johnston, R., Pandit, S. and Zhang, H., 2014. Operating leases and
credit assessments. Contemporary Accounting Research, 31(2), pp.551-580.
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ACCOUNTING FOR FINANCE LEASES BY LESSEES
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