Finance Leases: Both the leased asset and the related lease obligation (liability) should be recorded in the balance sheet.
At the inception of a finance lease, such recognition should be at an amount equal to the fair value of the leased asset at the inception of the lease. However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payments from the standpoint of the lessee. In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate should be used.
In the case of finance leases the substance and financial reality are that the lessee acquires
the economic benefits of the use of the leased asset for the major part of its economic life in return for entering into an obligation to pay for that right an amount approximating to the fair value of the asset and the related finance charge.
Initial direct costs are often incurred in connection with specific leasing activities, e.g. in negotiating and securing leasing arrangements. The costs identified as directly attributable to activities performed by the lessee for a finance lease are included as part of the amount recognised as an asset under the finance lease to the extent that they can be directly attributed to the activities performed by the lessee for a finance lease.
Lease payments should be apportioned between the finance charge and the 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.
The depreciable amount of a leased asset is allocated to each accounting period during the period of expected use on a systematic basis 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.
Operating Leases: Rentals payable under an operating lease should be charged as an expense in the statement of profit and loss on a straight-line basis over the lease term, even if the payments are not made on that basis, unless another systematic basis is more representative of the time pattern of the user’s benefit. For example, where the rental payments for an asset are based on the actual usage of that asset, or are revised periodically to reflect the efficiency of the asset or current market rates, the rentals actually payable may be an appropriate measure.
Disclosure Requirements for Lessees. Lessees are required to make the following disclosures for finance leases:
- Assets acquired under finance lease as segregated from assets owned;
- For each class of assets, the net carrying amount at the balance sheet date;
- A reconciliation between the total of future minimum lease payments at the balance sheet date, and their present value; (SMC are exempt from this disclosure requirement)
- The total of future minimum lease payments at the balance sheet date, and their present value, for each of the following periods:
- Not later than one year;
- Later than one year and not later than five years; and
- Later than five years;
(SMCs are exempt from this disclosure requirement)\
- Contigent rents recognized as an expense in the period;
- The total of future minimum sublease payments expected to be received under non-cancellable sub-leases at the balance sheet date (SMCs are exempt from this disclosure requirement); and
- A general description of the lessee’s material leasing arrangements including, but not limited to, the following:
- The basis on which contigent rents are determined;
- The existence and terms of renewal or purchase options and escalation clauses; and
- Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.
(SMCs are exempt from this disclosure requirement)
Note that in addition to the above the disclosure requirements of AS 6 and AS10 apply equally to assets held under finance leases.
Operating leases:
- The total of future minimum lease payments under non-cancellable operating leases for each of the following periods:
- Not later than one year;
- Later than one year and not later than five years;
- Later than five years;
- The total of future minimum sublease payments expected to be received under non-cancellable subleases at the balance sheet date;
- Lease payments recognised in the statement of profit and loss for the period, with separate amounts for minimum lease payments and contingent rents;
- Sub-lease payments received (or receivable) recognised in the statement of profit and loss for the period;
- A general description of the lessee’s significant leasing arrangements including, but not limited to, the following:
- The basis on which contingent rent payments are determined;
- The existence and terms of renewal or purchase options and escalation clauses;
- Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.
