Financial Accounting II Lecture 29

Present value has been defined in the framework as: A current estimate of the present discounted value of the future net cash flows in the normal course of business.

Time Value of Money Present Value & Future Value

(1 + 0.12)1 Today One Year Later Rs. 100 Rs. 112

Compounding / Future Value Present Value x ( 1 + r ) time 100 x (1+0.12)1 = 112

Discounting / Present Value Future Value x ( 1 + r ) -time 112 x (1+0.12)-1 = 100

PV 1 2 3 4 5 6 7 8 9 10 11 12 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 PV 112,550

NOTE: this is the same slide used as slide 18 in lecture 28 NOTE: this is the same slide used as slide 18 in lecture 28. copy it from there

Future Value x (1+i)-time Present Value Factor Future Value x (1+i)-time Present Value Factor

Interest Rate Implicit in the Lease (IRR) Interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of (a) the minimum lease payments and (b) the Unguaranteed residual value to be equal to the sum of (i) the fair value of the leased asset and (ii) any initial direct costs of the lessor.

Presentation and Disclosure of Finance Leases Cash price of the asset Rs. 771,000. Assets leased on Jul 01, 05 Lease payments: Security deposit Rs. 200,000 Lease rentals include 4 annual installments starting from June 30, 06. IRR 15% p.a. Depreciation to charged at 20% on WDV. Residual value Rs. 200,000. The contract has an option to adjust the security deposit against the residual value.

Recording Recording of asset at the inception of lease July 01, 2005: Dr. Asset Sub. to Fin. Lease 771,000 Cr. Liability Sub. to Fin. Lease 771,000

Recording Transfer to current maturity at the inception of lease July 01, 2005: Dr. Liability Sub. to Fin. Lease 114,350 Cr. Current Maturity of Lease 114,350

Recording Payment of security deposit July 01, 2005 Dr. Security Deposits 200,000 Cr. Bank 200,000

Recording Payment of first rental June 30, 2006: Dr. Current Maturity 114,350 Dr. Financial Charges 85,650 Cr. Bank 200,000

Recording Transfer to current maturity at the inception of lease June 30, 2006: Dr. Liability Sub. to Fin. Lease 131,502 Cr. Current Maturity of Lease 131502

Recording Depreciation June 30, 2006: Dr. Depreciation Exp. 154,200 Cr. Accumulated Dep 154,200

Information to be Disclosed Profit and Loss Account for the Year June 30, 2006: Depreciation Rs. 154,200 Lease finance charges Rs. 85,650

Information to be Disclosed Balance Sheet as at June 30, 2006: Non-current Assets Carrying amount of the Asset Rs. 616,800 “Assets Subject to Finance Lease” Security Deposit Rs. 200,000

Information to be Disclosed Balance Sheet as at June 30, 2006: Current Liabilities Current Maturity of Long Term Liabilities Rs. 131,502

Information to be Disclosed Balance Sheet as at June 30, 2006 (Non Current Liabilities): On the face of the balance sheet, sum of following figures will be shown under “Liabilities Against Asset Subject to Finance Lease” Principal portion of 3rd and 4th Installments (to be paid on June 30, 2008 and 2009 amounting to Rs. 151,228 and 173,920 respectively) Residual value of the asset amounting to Rs. 200,000.

Disclosure Balance Sheet Balance Sheet as at June 30, 2006 (Non Current Liabilities): In the notes to the accounts following information will be disclosed other than the narrative notes reconciliation between the opening and closing balance of the non-current liability disclosure of minimum lease payments payable within; 1 year; 2 to 5 years; and more than 5 years (if required) and a reconciliation of MLP and their Present Values.