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Lease contracts are those contracts where the property or the asset owners, allows the party to use the asset or the property in exchange of money or kind. The agreement is entered between the two parties, one is the Lessor, and the other is the Lessee, for the right to use an asset by the Lessee in return of some payment, at an agreed price. The lease accounting is subdivided into two parts-financial lease accounting and operating lease accounting.
The Indian Accounting Standard is AS-19, which incorporates the accounting policies applicable to all types of leases, except for those mentioned in the list.
Main Ingredients of Accounting Standard (AS-19) are as follows:
Exceptions to Lease Agreements:
There cannot be lease agreements for the following;
Examples: oil, gas, timber, metals or other minerals rights.
a. Motion pictures films
b. Video recordings
After following the concept of the Mc Gregor, in which there is no classification can be done for the lease accounting, to follow the smart approach of worldwide accounting. The lease accounting is unaffected by the principle into financial lease accounting operating lease accounting.
The other accounting practice followed by the accountants is to do unequal sheet solutions; to their clients, which is called as the synthetic lease, where the Lessor does a financial lease accounting to a Special Purpose Vehicle-SPV, which in turn provides the operating to the Lessee.
Examples of Financial Leases, which are, as follows:
It is a lease in which the assets are transferred to Lessee at the end of the lease term
It means where the lease term is which the Lessee has the option to purchase the assets from the Lessor, at the price which is lower than the fair price, on the date when the option becomes exercisable.
The lease terms become vital as they cover the economic life of the asset even if it is not transferred
The meaning of lease terms is that where, the lease term, in which the current value of or lease payments, is equal to or substantially covers the fair value of the leased asset.
Ultimately, whatever is leased, that is, the leased asset has to be of specialized nature.
Case of Lessee for Financial Lease Accounting
The Lessee will recognize the lease as assets or liability at an equal amount to the fair value of the assets.
The apportionment of the lease payments into the finance charges, and reducing the outstanding liability
The important part is to allocate the finance charges, to the periods during lease terms
Pass the journal entries for the depreciation
Case of Lessor for the Financial Lease Accounting
The Lessor is to record the assets in the books of accounts, at the amount to equal to net investment value.
There has to be a recording of the finance income based on the pattern reflecting the constant rate of return.
The estimated unguaranteed residual value should be used in computing the lessor gross investment value.
This has to be done in case where the estimated unguaranteed residual value has been reduced, check the income allocation over the remaining lease terms.
The initial direct cost associated with the lease to be recognized immediately in the profit or loss account or it can be spread over the lease term.
The financial lease accounting can be described as where the Lessee has designated a lease as a finance lease; it should recognize, that, – there is an ongoing amortization of the right of use asset; that there is a continuing amortization of the interest on the lease liability; that variable lease payments that are not included in the lease liability; that, there is no impairment of the right of use of an asset. These incidents make the lease as a financial lease accounting.
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