Financial Accounting II Lecture 27

Sale and Lease Back Both the lease payments and the sale price are interdependent upon each other because they are negotiated as a package.

Sale and Lease Back As the sale is dependent upon a lease being entertained the apparent profit or loss which is the difference between the carrying value and the sale price, will be recorded on the type of lease being entertained.

Sale and Lease Back (Finance lease) Any profit or excess of sale proceeds over the carrying amount shall not be immediately recognised as income by the seller that is lessee. Instead it shall be deferred and amortised over the lease term (IAS-17 Para 59).

Sale and Lease Back (Operating lease) If the sale price is at fair value profit or loss is recognised immediately.

Sale and Lease Back (Operating lease) If the sale value is below the fair value profit or loss is recognised immediately unless the loss is compensated by future rentals at below market price of commercial rate. In such event the loss is amortised in proportion to lease payments over a period of which the asset is expected to be used.

Sale and Lease Back (Operating lease) If the sale price is above fair value the excess shall be deferred and amortised over the period of which the asset is expected to be used.

Sale and Lease Back (Operating lease) If fair value is less than the carrying amount the loss shall be recognised immediately.

Operating Leases Recording of operating lease in the books of lessee: Asset is not recorded in the books of lessee. Rentals paid are recorded as expense.

Operating Leases – IAS 17 Lease payments under an operating lease should be recognised as an expense in the income statement on a straight line basis over the lease term unless another systematic basis is representative of the time pattern of the user’s benefit.

Operating Lease – Disclosure Lessees should, in addition to the requirements of IAS 32, Financial Instruments: Disclosure and presentation, make the following disclosers for operating leases:

Operating Lease – Disclosure The total of future minimum lease payments under non-cancelable 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;

Operating Lease – Disclosure Although no liability is recorded, but as the agreement is non-cancelable and future payments will become due, a disclosure is given for the future commitments.

Operating Lease – Disclosure b) The total future minimum sublease payments expected to be received under non-cancelable sublease at the balance sheet date;

Operating Lease – Disclosure If the lessee has given the asset on a sublease then there is a committed receivable in the future, which is disclosed in the financial statements.

Operating Lease – Disclosure Lease and sublease payments recognised in income for the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments;

Operating Lease – Disclosure Lease payments are recognized as expense and sublease payments received are recognised as income. A disclosure of both along with any contingent rent recorded in the Profit and Loss is disclosed.

Operating Lease – Disclosure d) A general description of the lessee’s significant leasing arrangements including, but not limited to, the following;

Operating Lease – Disclosure i. The basis on which contingent rent payments are determined; ii. The existence and terms of renewal or purchase options and escalation clauses; and iii. Restrictions imposed by lease agreements, such as those concerning dividends, additional debts, and further leasing.

Lessee also claims depreciation on the leased asset. Finance Lease Lessee records the asset at its fair value and a liability with the same amount. Lessee also claims depreciation on the leased asset. Lease payments are apportioned between principal repayment and markup portion.

Finance Lease – IAS 17 Lessee should recognise finance lease as asset and liabilities in their balance sheets at amounts equal at the inception of the lease to the fair value of the leased property or, if lower, at the present value of the minimum lease payments. In calculating the present value of minimum lease payments the discount factor is the interest rate implicit in the lease.

Finance Lease – IAS 17 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.

Finance Lease – IAS 17 A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for leased asset should be consistent with that for depreciable assets which are owned and the depreciation recognised should be calculated on the basis set out in IAS 16 Property plant and equipment

Finance Lease – IAS 17 If there is no reasonable certainty that the lessee will obtain ownership by the end of lease term, the asset should be fully depreciated over the shorter of lease term or its useful life.