Leases 101

Leasing 101 : 

Leasing 101 This slide-show presents only Basics of leasing as a starting point. Please let me know your questions about leasing. Also, please feel free to ask me about the reference or supporting material (video, webcasts, whitepapers, podcasts). However, I will add all the above to Finance Intranet in due course of time...

What is a Lease : 

What is a Lease A lease is a contract in which the right to use a specified asset is conveyed, for a period of time, in exchange for consideration. IASB update 2-10 Feb, 2010 The lease is a contractual agreement between the lessor and the lessee. The lease gives the lessee the right to use specific Property, Plant & Equipment (PP&E) The lease specifies the duration of the lease and rental payments. Insight: IASB is in process of reforming the rules for Lease Accounting; Proposed model at end of this presentation

Classification of the Leases : 

Classification of the Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. All other leases are classified as operating leases. Classification is made at the inception of the lease. [IAS 17.4] Operating Lease: Value at any time is basically the depreciated value of the asset. Finance or Capital Lease: As defined by FASB, if the asset is ‘ used up ’ by the end of the lease, or if it is virtually sold to the lessee, it is considered closer to financing a sale (a LOAN) than simply renting an asset for the lessee’s temporary use. Accounting for lease: Apply IAS 17, SIC 15 & 27

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Lease Criteria: Does the Lease transfers ownership of the asset to the lessee by the end of the lease term has the option to purchase the asset at a price which is expected to be sufficiently lower than fair value at the date the option becomes exercisable that, at the inception of the lease, it is reasonably certain that the option will be exercised term is for the major part of the economic life of the asset, even if title is not transferred at its inception, determines the present value of the minimum lease payment amounts greater than or at-least substantially equal to the fair value of the leased asset asset is of a specialised nature such that only the lessee can use it without major modifications being made Substance vs Form; A Classic Example: The legal title doesn’t technically pass to Lessee in lease transaction. However the rights to use the property are transferred to Lessee. Classification of the Lease as an Operating or Finance/Capital Lease (depends on the substance of the transaction rather than the form)

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Distinction between Finance & Operating Lease Anyone of the qualifying criteria leads to capitalization of the asset involved!

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` Lease Accounting set for Shake-Up

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Proposed Models for Lessee and Lessor Accounting

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Q1 Q2 Q3 Q4 Questions?

To Be Continued....... : 

To Be Continued.......

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Shama Khalid August 26, 2010