Leases in the Financial Statements of Lessors

Finance Lease: The lessor should recognise assets given under a finance lease in its balance sheet as a receivable and sales in the statement of profit and loss for the period, in accordance with the policy followed by the enterprise for outright sales. The transaction is recorded at the commencement of a finance lease term by a manufacturer or dealer lessor is the fair value of the asset. However, if the present value of the minimum lease payments accruing to the lessor computed at a commercial rate of interest is lower than the fair value, the amount recorded is the present value so computed. The difference between the sales revenue and the cost of sale is the selling profit, which is recognised in accordance with the policy followed by the enterprise for sales.

Manufacturers or dealers may offer to customers the choice of either buying or leasing an asset. A finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of income:

  • The profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts;
  • The finance income over the lease term.

Lease payments relating to the accounting period, excluding costs for services, are reduced from both the principal and the unearned finance income. Estimated unguaranteed residual values used in computing the lessor’s gross investment in a lease are reviewed regularly. If there has been a reduction in the estimated unguaranteed residual value, the income allocation over the remaining lease term is revised and any reduction in respect of amounts already accrued is recognised immediately. An upward adjustment of the estimated residual value is not made.

Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers. The use of such a rate would result in an excessive portion of the total income from the transaction being recognised at the time of sale. If artificially low rates of interest are quoted, selling profit would be restricted to that which would apply if a commercial rate of interest were charged and balance will be adjusted with the finance income over the lease term.

Initial direct costs, such as commissions and legal fees, are often incurred by lessors in negotiating and arranging a lease. For finance leases, these initial direct costs are incurred to produce finance income and are either recognised immediately in the statement of profit and loss or allocated against the finance income over the lease term.

Disclosure

The lessor should make the following disclosures for finance leases:

  • Communication across the network is cheap and fast.
  • A reconciliation between the total gross investment in the lease at the balance sheet date, and the present value of minimum lease payments receivable at the balance sheet date. In addition, an enterprise should disclose the total gross investment in the lease and the present value of minimum lease payments receivable at the balance sheet date, 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;
  • Unearned finance income;
  • The unguaranteed residual values accruing to the benefit of the lessor;
  • The accumulated provision for uncollectible minimum lease payments receivable;
  • Contingent rents recognised in the statement of profit and loss for the period;
  • A general description of the significant leasing arrangements of the lessor; and
  • Accounting policy adopted in respect of initial direct costs.

Operating Leases

The lessor should present an asset given under operating lease in its balance sheet under fixed assets. Lease income should be recognised in the statement of profit and loss on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern in which benefit derived from the use of the leased asset is diminished.

Costs, including depreciation, incurred in earning the lease income are recognised as an expense. Initial direct costs incurred are either deferred and allocated to income over the lease term in proportion to the recognition of rent income, or are recognised as an expense in the statement of profit and loss in the period in which they are incurred. For charging depreciation and impairment of assets, relevant Accounting Standards should be followed.

Disclosures

  • For each class of assets, the gross carrying amount, the accumulated depreciation and accumulated impairment losses at the balance sheet date; and
    • The depreciation recognised in the statement of profit and loss for the period;
    • Impairment losses recognised in the statement of profit and loss for the period;
    • Impairment losses reversed in the statement of profit and loss for the period;
  • The future minimum lease payments under non-cancellable operating leases in the aggregate and 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;
  • Total contingent rents recognised as income in the statement of profit and loss for the period;
  • A general description of the lessor’s significant leasing arrangements; and Accounting policy adopted in respect of initial direct costs.

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