CA. Gopal Ji Agrawal

Transcription

1 CA. Gopal Ji Agrawal

2 1. Scope 2. Key concepts 3. Accounting for leases 4. Other Lease Contracts 4. Disclosure 5. Appendix (s) 6. Questions

3 October 1980 September 1982 IAS 17 Accounting for Leases Exposure Draft E19 Accounting for Leases January 1984 Effective date of IAS 17 (1982) 1994 IAS 17 (1982) was reformatted April 1997 December 1997 January 1999 December 2003 Exposure Draft E56, Leases IAS 17 Leases Effective date of IAS 17 (1997) Leases Revised version of IAS 17 issued by the IASB January 2005 Effective date of IAS 17 (Revised 2003) April 2009 January 2010 January 2019 IAS 17 amended for Annual Improvement to IFRS 2016 about classification of land leases Effective date of the April 2009 revisions to IAS 17, with early application permitted (with disclosure) IAS 17 will be superseded by IFRS 2016 Leases

4 A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time Note: Hire purchase contracts Service contracts without right to use asset

5 CRITERIA IND AS 17 AS 19 Land Covered Not covered Inception v. commencing Explained Used synonymously FL- A & L Recognition & Adjustments IDCs in FL Lessor IDCs in OP Lessor Commencement Adjustments dealt Covered in receivable Implicit interest rate Add to carrying amount & expense over lease term Inception Not dealt Either as expense or allocate over lease term Either as expense or allocate over lease term Appendix 3 interpretations No

6

7 Principles of 5 Elements: Recognition Measurement Classification Disclosures Presentation

8 Lease Receivable de-recognition & impairment - 109; Finance Lease payable De-recognition -109; Derivatives embedded in lease contracts 109; Finance lease Disclosure & Presentation 32, & 107.

9 All leases other than: Lease agreements to explore for or use natural resources, such as minerals, oil, natural gas, non re-generative resources; Licensing agreements for items such as motion picture films, videos, plays, manuscripts, patents and copyrights. For measurement of investment property/biological assets Held by lessees under finance lease; Held by Lessors under operating lease. Intangible assets brands/trademarks are u/std. 17

10

11 A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time Finance lease Operating lease OL is normally for shorter period than economic useful life

12 Finance Lease Transfers substantially all the risks and rewards incidental to ownership of an asset Operating Lease Do not transfer substantially all the risks & rewards incidental to ownership of an asset Substance over Form Title may or may not be eventually transferred

13 Risks Losses from idle capacity Technological obsolescence Variation in economic benefits due to changing economic conditions Rewards Expectation of profitable operation over the asset s economic life Gain from appreciation in value / Residual value

14 No mathematical thresholds for determination. Requires overall analysis of the transaction; At inception of the contract Determination of transfer of risks & rewards from Lessor Lessee. Inception v. Commencement. Substance over Form Note: Different circumstance may VARY the lease for L & L (17.9) Lessor benefits from resp. value guarantee by third party.

15 Illustrative situations (Individual or in combination): Transfer ownership of the asset to the lessee at the end of the lease term; Purchase option of the asset at a price sufficiently lower than the fair value; Lease term is for the major part of the economic life of asset; PV of MPL substantially equal to FV of the asset; Leased assets are of specialized nature.

16 If the lessee can cancel the lease, the Lessors losses associated with the cancellation are borne by the lessee; The lessee bears gains/losses from changes in the fair value of the residual; The lessee has the ability to continue the lease for a secondary period at a rent which is substantially lower than market rent.

17 The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease, it is reasonably certain that the lessee will exercise the option.

18 Non-cancellable lease is cancellable only: Occurrence of some remote contingency; With the permission of the lessor; Lessee enters into a new lease for the same or equal asset; Payment by the lessee of such an additional amount making it non-cancellable at the inception.

19 Payments over the lease term excluding contingent rents, costs for services and the taxes together with: For a lessee, any amount guaranteed by lessee or its related party; or For a lessor, any residual value guaranteed by lessee, its related party or a third party unrelated to lessor capable of discharging the obligation; Lessee making payment for purchasing the asset which price is sufficiently lower than FV at the date of option of purchase.

20

21 Initial Recognition: Recognise finance leases as assets and liabilities in the balance sheet 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 determined at inception; The discount rate for PV of MPL implicit Interest rate if not, incremental borrowing rate; Initial (incremental) direct costs are added to the asset.

22 Subsequent Measurement: MLP shall be apportioned between finance charge at constant periodic rate of return and reduction of outstanding liability; Contingent rents Charged as expenses; Depreciation as per Ind AS 16- PPE, in case of uncertainty to obtain asset at the end of the lease, shorter of the lease term and useful life of the asset.

23 A leased machine from B on terms: a. Ownership transferred - on lease d. Lease Agreement 5 yrs; expiry at 8,900; e. Min. Lease Payment p.a. b. Machine Installation Cost - 5,000; f. First Installment on 01/04/2014; c. Machine Cost 1,09,240; g. Depreciation 25% p.a. (WDV). Installment Opening Balance Interest Amount Principle Amount ,240 86,240 70,314 52, ,074 9,844 7,302 4,404 28,000 15,926 18,156 20,698 23,596 Closing Balance 86,240 70,314 52,158 31,460 7,864 7,864 1,036 7,864 (0)

24 Lease payments to be recognized as an expense on a straight line basis over the lease term, unless another systematic basis is more representative of the time pattern of user benefit irrespective of the payment terms OR Payment to the lessor structured in line with the expected general inflation to compensate for the lessor s expected inflationary cost increases. 33(b)

25 Initial Recognition: Recognize assets -Lease receivable at Net Investment amount; Initial direct costs - Add in lease receivable (except manufacturer or dealers); Net investment = Gross invest discounted at implicit interest rate; Gross Investment = MLP + unguaranteed residual value [FV of the asset + Initial direct costs].

26 Subsequent Measurement: MLP shall be apportioned between finance charge at constant periodic rate of return and reduction of lease receivables; Manufacturer or dealer recognize selling profit or loss sale.

27 Recognize lease assets in BS: Lease income Recognized on straight line basis over lease term OR Unless another systematic base is more representative of the time pattern irrespective of receipts OR Payment to the lessor structured in line with the expected general inflation to compensate for the lessor s expected inflationary cost increases (50)

28 Initial (Incremental) direct costs Add to the carrying amount of lease assets Depreciation on leased assets Per Ind AS 16 or 38 Impairment Per IND AS 36

29 Lessee Finance Lease Included asset costs Operating Lease in Lessor Implicit interest rate Include IDC in lease receivable Silent Add to carrying amt of assets* Exception: Manufacturer or dealer : Recognized in P&L when selling profit is recognized. Note: OL-Lessee paid stamp duty on rent deed? * Expensed over lease term

30 Inflation factor, if leveraged; Foreign currency Monetary items Ind AS 21; Leases linked to Interest Rates & Sales closely related; Leases linked to Sales closely related; Leases linked to Profit not closely related & separately accounted.

31

32 For each class of asset, net carrying amount at the reporting date A reconciliation between the total of MLPs at the reporting date and their present value, including disclosure for each of the following future periods: No later than 1 year; Later than 1 year and not later than 5 years; and Later than 5 years. Contingent rent recognized as expense in the period

33 A general description of the lessee s significant leasing arrangements: Basis of contingent rent Terms of renewal and purchase option & escalation at inception Restrictions imposed by agreement like further leasing etc.

34 Reconciliation between the gross investment, present value of MLP receivable as under: No later than 1 year; Later than 1 year and not later than 5 years; and Later than 5 years. Unearned Finance Income; Unguaranteed Residual Value to Lessor; Accumulated Allowance Uncollectible MLP receivable Contingent Rent recognized as Income.

35

36 Analyse land and buildings individually Land indefinite life always operating lease (unless title passes at the end of the lease term) Buildings apply Ind AS 17 to decide whether finance or operating lease

37 MLP Allocate between land & building in proportion to relative FV of leasehold interest in land and building element; No compensation for consumption of economic benefits inherent in land like building which gets depreciated; If the proportionate amount of land is immaterial, L&B will be treated as single unit for lease classification as finance or operating lease and the economic life of the building is regarded as economic life of the entire leased assets.

38 Accounting treatment of such transaction depends upon the type of lease involved i.e. Finance lease or operating lease Under finance lease: Excess of sale proceeds over carrying amount of assets shall be deferred and amortized over lease term. Under operating lease: Sale price: FV - Recognize profit /loss; <FV Recognise profit/loss unless compensated; >FV - Excess deferred over lease term.

39

40 Exp. Upfront cash payment, reimbursement of relocation, leasehold improvement costs, rent free gestation, reduced rent; Recognition : Integral part of net consideration irrespective of the nature, form or timing of incentives.

41 A transaction or series of structured transactions with an investor like sale and leaseback or lease and sub-lease back to achieve the tax benefits; Issues arising from such transactions for accounting; Series of interdependent transactions Single transaction; Substance over form would prevail; Transactions shall be recognized as per its economic and nature; Number of disclosure are required additionally. Case Study: Airline Industry. substance

42 Without legal form of lease, contracts convey the right to use the assets in return for a payment or series of payment: Outsourcing arrangements; Telecommunication industry providing rights to capacity; Take or Pay agreements (Power house). Exclusions: Leases excluded under IND AS 17; Public to private service concession arrangement.

43 Contractual Relationship YES Specific Asset YES Right to use the Asset YES Lease NO NO NO Not a Lease Installation of routers for internet facility.

44

45 Premium is paid on early redemption of finance lease liability, whether is would be capitalized? Under Operating leases, what would be treatment of sum paid:? Lessor pays to lessee a sum at the inception of lease to get the contract?? Lessor/lessee pays a sum to each other for cancelling the lease?? Lessee makes the prepayment of rental to Lessor?? New lessee pays the existing lessee to vacate property?? Old lessee pays a sum to the new lessee?

46 A lessor pays surrender premium to the existing lessee, whether it would be capitalized or expensed of?? In order to redevelop the property?? In order to lease out the same on more profitable terms? Treatment for lease contracts involving substantial services by lessor? Is re-assessment of classification of leases acquired in Business Combination required?

47 ? Lease payments are adjusted for changes in lessor s cost between the inception and commencement of lease, when the effects of the same are given?? A leases a property from B on 01/01/2015 for 10 years under operating lease. In 2017, B sold the property to C. Old lease is cancelled and a new lease takes place substantially on the same terms & conditions, what would be impact on lessee?? How to classify the a lease agreement bundled together several items of assets like furnished retail outlet?

48 ? If the holding company has the bargain purchase (much lower than fair value) option at the end of the lease instead of the lessee company, would it affect the classification?? Holding company gets incentive at inception of operating lease?? If a property classified under Finance lease is sub-leased to third party, what would be the classification for third party?? What would be depreciation for a lease when renewal option becomes certain after initial recognition?? How a refundable security deposit by lessee be considered?

49 ? When a FL is terminated and replaced with an OL for the same asset, how the transaction would be recognized?? Whether inflation factor would be considered in estimation of residual value?? When Lessor transfer substantial risk and rewards of ownership while lessee MAY NOT. A third party unrelated to lessee guarantee the residual value to lessor?

50 By: CA. Gopal Ji Agrawal