lease accounting and its types

Mc 205 corporate accounting

1. Presentation on topic : lease accounting and its types Presented by : Sangeeta Saini M.Com (P) 641

2. 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 .

3. 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.

4. 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.”

5. Accounting standard - 19 AS – 19 is applicable on leases issued by the council of institute of chartered accountants of India . The basic objective of this standard is to prescribe for lessees and lessors , the appropriate accounting policies and disclosures in there financial statements . This standard is applied in accounting for all leases other than : Lease agreement to explore for or use natural resources such 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.

6. 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 consideration Right to use Rent

7. 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.

8. Operating lease is common to the equipment which require expert technical staff for maintenance and are exposed to technological development . e.g.; computer, vehicles, communication systems etc .

9. 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.

10. Most of the leases in India are financial leases that are commonly used for leasing land, building, machinery and fixed equipments, etc.

11. Advantages and Disadvantages of leasing

12. A dvantages of leasing to the lessor

13. Conclusion leasing has become very much popular in India and other countries as its advantages is more than its disadvantages. So we can say that “leasing is beneficial to both , lessee as well as lessor .”

14. Thank you

15. Questions ?