Accounting for Finance Lease by the Manufacturer or the Dealer Lessor

This article discusses the accounting treatment for finance lease by the manufacturer or the dealer lessor. It covers the definition of lease, the role of manufacturing entities in leasing, the impact of the new lease accounting standard, and the recognition of income and expenses for lessors. The article also highlights the challenges faced by companies in implementing the new standard.

Running head: CORPORATE ACCOUNTING
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Part A
Accounting for finance lease by the manufacturer or the dealer lessor
Lease finance in Australia is mature product that is been offered as part of the
portfolio as the technique of equipment financing for more than 60 years all over
Australia. Predominant lessor group in Australia are the banks and finance entities.
Over the recent decades the utilization of lease product is impacted by the policies of
government reflected through regulation. It further included the tax benefit status of
transfer and treatment of consumption tax that is GST, as against input tax (Capital-
markets-intelligence.com 2019)
Lease is the contract that outlines terms where one party agrees for renting the
property that is owned by any other party. It provides guarantee for the lessee who is
also known as tenant for using the asset and provides guarantee to the lessor who is
also known as the owner of the property. The owner receives regular payment from
lessee over the term of lease. However, the lessee as well as the lessor both faces the
consequences if any of the parties fails in upholding the contract terms. Leases are
binding as well as legal contracts that expresses terms of the rental agreements. Lessor
in the simple expression is a person who grants the lease. Hence, the lessor is owner of
asset that is leased under the agreement to lessee (Aasb.gov.au 2019)
Manufacturing entities set up the leasing entity for providing support for the sales
finance. Manufacturers produce the goods and have the manufacturing costs related to
sales. While leasing, they do not use the cost of sales as basis for computing terms of
lease. Rather, they compute lease terms based on the normal cash price of asset that is

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the fair value. Difference among the cost of sales for the manufacturer and normal cash
price of the asset is considered as the manufacturer’s sales profit (Joubert, Garvie and
Parle 2017). For the manufacturer or the dealer lessor de-recognition of lease lead to
recognition of the receivable as well as residual value, if any. Here the sum of
receivables is more as compared to the manufacturer’s cost of asset. However, for the
3rd party lessor no sales profit is there to be recognized as price of asset that is used for
determining rental payment is different to the cost of sales (Aasb.gov.au 2019)
In previous period the leases were used to be treated as per the requirement of
AASB 117. However, owing to increasing misstatement regarding treatment of lease in
the financial reports the revised standard AASB 16 is required to be issued. It is
mandatory from 1st January 2019, however still some organizations are there who wants
to shift to the new standard retrospectively. The new standard will increase its focus on
lease accounting and it is expected that the practical as well as commercial implications
will be significant. Practical challenges that will be faced by the companies are in
collecting the data for all of the leases, validating quality data on continuous basis, re-
assessment on regular bass, increase in the scrutiny from the major stakeholders
including banks, investors, suppliers and customers and combining the knowledge
gathered from various sources (Sieverding 2018)
'Leases' refers to accounting for leases except (a) licensing agreements for such
items as, copyrights, patents, recordings, plays, manuscripts, and motion picture films.
(b) Leases applied for exploring and using minerals, oil, natural gas and similar kind of
non-regenerative wealth. Objective of Accounting Standard AASB 16 is – (1) to
measure, recognize, present, and reveal leases in standard way, so that lessors and

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lessees provide information pertinent to the transaction. This helps users of financial
report to understand the effect that lease have on cash flow, financial performance and
financial position of an organization. (2) An organization should take those conditions
and terms of contracts as well as all facts pertaining to this while applying this contract.
A lease is termed as the finance lease while it transmits majority of all the
rewards and risks associated with the ownership of the subjected asset. Further, the
finance lease is a kind of lease under which the finance organization is habitually the
legitimate possessor of the asset for the time span of the lease whereas the lessee has
control over the operation of the asset and some proportion of economic risks in
addition to returns from change in the valuation of primary asset. In the financial
statement the lessor needs to show the primary assets which are under finance lease
as an outstanding value which is equal to the total amount invested in the lease (Wong
and Joshi 2015). The lessor should use the rate of interest which is indirect in the
evaluation of the total amount invested in the lease. In matters pertaining to sublease,
when the rate of interest which is indirect in the evaluation of the total amount invested
in the lease cannot be easily found out, then the intervening lessor uses the rate of
discount which was used for the primary lease to calculate the total investment in the
sublease (Fitó et al.2013).
In the beginning the cost which are direct are added to the original calculation of
the total amount of the money invested in the lease and the earning amount is accepted
when the cost is sustained by dealer or manufacturer lessors. The rate of interest which
is indirect in the lease is explained in a method that the original costs which are direct

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are added mechanically, they are not required to be added one by one (Demir et
al.2014)
At the beginning, the payments for lease are part of the calculation of the total
investment on the lease. The following settlement for the right to use the primary asset
during the course of lease those were not provided at the beginning date they are (a)
payments which are fixed less payable incentives of lease (b) the lease settlement
which are variable which depends on a rate or an index calculated at the starting date
(c) the promise provided by lessee to the lessor on the leftover value, a group pertaining
to 3rd party or the lessee not related to the lessor that is monetarily proficient of carrying
out the duty to fulfil the promise (d) The value at which the primary security can be
bought or sold at of a purchase option if the lessee is fairly sure to exercise that option
and (e) the payment for fine for putting an end to the lease, if the lease agreement
shows that the lessee is putting to use an option to put an end to the lease (Gavana,
Guggiola and Marenzi 2013)
Manufacturer or dealer lessors for its each and every financial leases should
accept the following: (a) the income of the primary asset that is fair value or, if less, the
current amount of the lease payments resulting to the lessor, deducted taking the
interest rate of the market (b) the price of sale is the carrying amount or else the value if
not the same, with that of the primary assets less current price of the residual price
without any financial security and (c) the disparity between the cost of sale and revenue
is the loss or the profit in conformity with its guidelines for complete sale to which AASB
15 pertain to. A dealer or manufacturing lessor should accept selling loss or profit on a

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finance lease at the beginning day, despite of if the lessor hand over the primary asset.
(Lin et el. 2013).
Dealers or manufacturers regularly recommend the alternative of either leasing
or purchasing an asset to consumers. A finance lease of an asset by a dealer or
manufacturer lessor brings the same loss or profit that of the loss or profit arising with a
complete sale of the primary asset, at selling prices which is normal , showing ant trade
rebates or applicable volume (Morales-Díaz and Zamora-Ramírez 2018 ).
Dealers occasionally bid false rate of interest very low so that they can pull in a
lot of consumer. Putting to use such low rate of interest at the beginning of the period
would lead to a lessor allowing an unrestrained part of the total earnings from the deal.
If false rate of interest are bided dealer or manufacturer lessor should stop selling profit
to that which would apply if the interest rate of the market were changed (Barone et al.
2014).
Manufacturers at the beginning day shall acknowledge as a cost of expense to
sustain in relation with getting a finance lease as they are solely linked with to get the
selling profit of the dealer or manufacturer.( Kindleberger 2015). The value sustained by
the dealer or manufacturer lessors pertaining in getting a finance lease are not taken
part of the original direct cost, and hence not a part of the total investment in the lease
(Rai and Sigrin 2013) lessor should acknowledge finance income over the course of
lease, established on a systematic basis showing a steady rate of return on the total
investment of the lessor in the lease. A lessor focuses on assigning finance earning on
a rational and methodical basis over the lease term. Concerning to the time frame a

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lessor should put the lease payments against the gross investment in the lease to lower
the unearned finance income and the principal (Fatima 2016).
A lessor is required to apply the impairment as well as identification requirements
in AASB 9 to the total amount invested in the lease. A lessor should analysis frequently
that part of the residual value of the underlying asset, the realization of which by a
lessor is not assured or is guaranteed solely by a party related to the lessor in
calculating the gross investment in the lease. If there has been decrease in the
approximation of not guaranteed residual value, the lessor should amend the earning
allotment over the lease tenor and admit instantly any decrease with view of money
accumulated.
A lessor who segregates an asset under held for sale (or is a part of it in a
disposal group that groups as held for sale) under a finance lease applying AASB 5
Non-current Assets Held for sale and Discontinued Operations should account for the
asset in compliance with that protocol. A lessor should consider for alteration to a
finance lease as a different lease if both (a) the alteration improves the extent of the
lease by adding the right to use one or more than one primary assets and (b) the
payment for the lease grows by the value equal to the only price for the increase in
scope and any suitable changes in the stand –alone price to show the situation of that
specific deed.
In adjustment for a finance lease which is not considered as a different lease, a
lessor should consider the alterations which are firstly had the lease been grouped as a
new lease from the effective date of the alteration and secondly calculate the recorded

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cost of the primary asset, net of any accumulated depreciation and impairment losses
as the total amount invested in the lease instantly prior the effective date of the lease
modification; or else the lessor should put to use the requirements of AASB 9
(Aasb.gov.au 2019).

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Part B

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Reference
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