Accounting for Finance Lease by the Manufacturer or the Dealer Lessor

Running head: CORPORATE ACCOUNTING
Corporate accounting
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1CORPORATE ACCOUNTING
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

2CORPORATE ACCOUNTING
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

3CORPORATE ACCOUNTING
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