1. LEASING OF ASSETS
Tax advantages
Commercial advantages

2. IAS 17 ACCOUNTING FOR LEASES
The international standard recognises
two types of lease:
Finance lease
Operating lease

3. THE NEED FOR AN IAS Leasing represented off balance sheet financing
Accounting treatment not uniform
Distortion of financial reports
Effect on gearing and other ratios
True and fair view
Need to reflect commercial reality

4. FINANCE LEASE
Substantially all the risks and rewards of ownership of an asset transferred to the lessee
Present value of minimum lease payments amounts to at least 90% of the fair value of the assets
Lessee responsible for the upkeep and maintenance of the asset

5. FINANCE LEASE
Long-term - lessee will have use of the asset for the greater part of its useful life
Primary and secondary lease periods
Full lease payments during the primary period
Peppercorn rental in the secondary period

6. FINANCE LEASE
During the primary period the lease cannot be cancelled and is legally binding
Lessor earns profits relating to the asset in the primary period

7. OPERATING LEASE
Lessor retains all risks and rewards of ownership of the asset
IAS 17 defines an operating lease as any lease which is not a finance lease

8. ACCOUNTING TREATMENT BY THE LEASEE
Operating lease
All lease payments charged to income statement as incurred
No recognition in balance sheet

9. ACCOUNTING TREATMENT BY THE LEASEE
Finance lease
capitalise asset and liability in the balance sheet
finance charge and depreciation in the income statement

10. FINANCE LEASE BALANCE SHEET OF LEASEE
PV of minimum lease payments capitalised as a fixed asset, using the discount rate implicit in the lease, and included as
Fixed assets held under finance lease
PV of minimum lease payments capitalised and included as liability under
Creditors due within one year
Creditors due after more than one year
Rental payments split between
repayment of loan (balance sheet)
finance charge (income statement)

11. FINANCE LEASE PROFIT AND LOSS ACCOUNT OF LEASEE
Finance charge to be included as a cost and included as
Interest payable and similar charges
Finance charge to be allocated to accounting periods to give a constant periodic rate of charge on the remaining balance of the outstanding obligation using
actuarial method
sum of the digits method
straight line method
Depreciation to be charged over the shorter of
the lease term
the asset’s useful life

12. FINANCE LEASE EXAMPLE
On 1 January 2000 Paton plc leases an asset from Lloyd plc on a non-cancellable lease contract
Primary term of the lease is 5 years
Rental £2,500 pa payable in advance
Paton plc can extend the lease into a secondary period at a rental of £50 pa
Paton plc is responsible for all maintenance and insurance costs

13. FINANCE LEASE EXAMPLE
The discount rate used by Lloyd plc in calculating the lease payments is 10% (the interest rate implicit in the lease)
The fair value of the asset is £11,000
Paton plc prepares its accounts to 31 December in each year

14. FINANCE LEASE EXAMPLE Discount factor at 10% Time Cash flow PV 1.000
2,500
01/01/00
2,500
01/01/01
2,500
0.909
2,273
01/01/02
2,500
0.826
2,066
01/01/03
2,500
0.751
1,878
01/01/04
2,500
0.683
1,708
10,425
NPV

15. FINANCE LEASE EXAMPLE Fair value of the asset £11,000
Minimum required PV of the lease payments at 90% of fair value £9,900
PV of lease payments £10,425
Finance lease disclosure applicable

16. FINANCE LEASE EXAMPLE Balance sheet will record
asset under finance lease at cost £10,425
depreciated value at end of each year, assuming straight line depreciation over 5 years (the term of the lease)
outstanding liability at each balance sheet date

17. FINANCE LEASE EXAMPLE Income statement will record
annual depreciation charge
finance cost at 10% of outstanding liability

18. Fixed asset and depreciation Profit and Loss Account
FINANCE LEASE EXAMPLE
Fixed asset and depreciation
Profit and Loss Account
Balance Sheet
Fixed asset at cost
10,425
Depreciation 2000
(2,085)
(2,085)
Fixed asset at 31/12/00
8,340
Depreciation 2001
(2,085)
(2,085)
Fixed asset at 31/12/01
6,255
Depreciation 2002
(2,085)
(2,085)
Fixed asset at 31/12/02
4,170
Depreciation 2003
(2,085)
(2,085)
Fixed asset at 31/12/03
2,085
Depreciation 2004
(2,085)
(2,085)
Fixed asset at 31/12/04
Nil

19. FINANCE LEASE EXAMPLE Outstanding liability and finance charge
Liability at 01/01/2000
10,425
Cash payment at 01/01/2000
(2,500)
Balance at 01/01/2000
7,925
Interest year to 31/12/2000 at 10%
792
Balance at 31/12/2000
8,717
Cash payment at 01/01/2001
(2,500)
Balance at 01/01/2001
6,217
Interest year to 31/12/2001 at 10%
622
Balance at 31/12/2001
6,839
Cash payment at 01/01/2002
(2,500)
Balance at 01/01/2002
4,339

20. FINANCE LEASE EXAMPLE Outstanding liability and finance charge
Balance at 01/01/2002
4,339
Interest for year to 31/12/2002 at 10%
434
Balance at 31/12/2002
4,773
Cash payment at 01/01/2003
(2,500)
Balance at 01/01/2003
2,273
Interest for year to 31/12/2003 at 10%
227
Balance at 31/12/2003
2,500
Cash payment at 01/01/2004
(2,500)
Balance at 01/01/2004
Nil

21. Profit and Loss Account to
FINANCE LEASE EXAMPLE
Liability and finance charge
Balance Sheet at
Profit and Loss Account to
31/12/2000
7,925
792
31/12/2001
6,217
622
31/12/2002
4,339
434
31/12/2003
2,273
227
31/12/2004
Nil
Nil

22. ACCOUNTING BY THE LESSOR
Balance sheet
balance due from the lessee should be reported as a debtor
Income statement
total gross earnings should be allocated to accounting periods to give a constant annual return using either
the actuarial method or
the investment period method

23. LEASES - THE MAIN ISSUES
Substance over form
Ratio analysis
Fair value may be an artificial amount
Difficult to classify some leases

24. LEASES - THE ADVANTAGES
100% financing
Conserves lines of credit
Matches cash receipts with payments
Acquisition expenses amortised
May be tax efficient
Convenient
Fixed cost