on topic : lease accounting and its types

Presented by : Sangeeta Saini

M.Com (P)

641

Contents Meaning of lease .

Definition of lease.

Accounting standard – 19.

Lease contract and its parties.

Types of lease

Operating lease

Finance lease.

Advantages of leasing.

Disadvantages of leasing.

Conclusion .

MEANING OF LEASE

Lease is an agreement whereby the lessor

conveys to the lessee , in return for rent , the right

to use an asset for agreed period of time . The

lessor remains the owner of the asset , though the

lessee has an unrestricted right to use the

equipment. This lease contract is for specified

period of time and it will contain the amount and

timing of payment to be made by the lessee ,

provision of payment of taxes ,maintenance

expenses and provisions for renewal of the lease or

purchase of the asset at the expiry of the lease

period.

Definition of lease

According to James C Van Horne , “ A contract of lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for agreed period of time in return for the payment of rent.”

AS – 19 is applicable on leases issued by the council ofinstitute of chartered accountants of India . The basicobjective of this standard is to prescribe for lessees andlessors , the appropriate accounting policies and disclosuresin there financial statements . This standard is applied inaccounting for all leases other than :

Lease agreement to explore for or use natural resourcessuch as oil, gas, metals and other mineral rights.

Licensing agreements for items such as motion pictures,film video recording, patent and copyrights.

Lease agreement to use land.

Parties of Contract

Manufacturer/ supplier

Lessor Lessee

Lease contract and its parties

Manufacturer /

Supplier of the

asset (from whom

the leased asset

is purchased)

Lessor or owner of the

asset (who purchase the

asset)

Lessee (who get the right to

use the asset not

ownership)

Contract of sale

Contract of lease

Asset Purchase

consideratio

n

Right

to useRent

Types of lease

Operating lease

Finance lease

Operating lease

It is also known as service lease or cancellable lease. An operating lease is usually characterised by following features:

It is a short term lease. The lease period in such contract is less than the useful life of the asset.

The lease is usually cancellable at short notice by lessee.As a period of an operating lease is less than the useful life of the

asset , it does not necessary to amortize the original cost of the asset .The lessee has the option of renewing the asset lease after the expiry

of lease period.The lessor is generally responsible for maintenance, insurance and

taxes of the asset.

FINANCE LEASE

It is also known as capital lease. A finance lease is usually characterised by following features:

As compared to operating lease, a financial lease is for longer period of time.

It is usually non - Cancellable by the lessee prior to its expiration date.

The present value of the total lease rental payment during the period of lease exceeds or equal to substantially the whole of the fair value of the leased asset.

A financial lease usually provides the lessee an option of renewing the lease for further period.

The lessee is generally responsible for the maintenance ,insurance and taxes of the asset.

Advantages and Disadvantages of leasing

Advantages of leasing to the lessee

Minimum delay

Easy source of finance

Shifting the risk of

obsolescence

Unaffected borrowing capacity

No effect of inflation

Higher costNo alteration or change in asset

Penalties on termination of

lease

Loss of salvage value of the asset

Disadvantages of leasing for

the lessee

Higher profits.

Tax benefits.

Quick returns.

Disadvantages of leasing for the lessor

High risk of obsolescence

Price – level changes

Competitive market

Double taxation

Conclusion

Thank you

Questions ?