Professional Documents
Culture Documents
IAS 17-LEASES
SUBMITTED TO
SIR ATHAR A KHAN
SUBMITTED BY
MUHAMMAD DANISH MUJTABA
FARRUKH ALI UQAILI
IRFAN BHATTI
AVEENASH
CLASS
MBA REGULAR 3 YEARS
SECTION-D
DEFINING LEASING:
Leasing is a process by which a firm can obtain the use of a certain fixed assets for
which it must pay a series of contractual, periodic, tax deductible payments. The
lessee is the receiver of the services or the assets under the lease contract and the
lessor is the owner of the assets. The relationship between the tenant and the landlord
is called a tenancy, and can be for a fixed or an indefinite period of time (called the
term of the lease). The consideration for the lease is called rent. A gross lease is when
the tenant pays a flat rental amount and the landlord pays for all property charges
regularly incurred by the ownership
Similar principles apply to real property as well as to personal property, though the
terminology would be different. Similar principles apply to sub-leasing, that is the
leasing by a tenant in possession to a sub-tenant. The right to sub-lease can be
expressly prohibited by the main lease.
Why leasing?
1. Leasing is the quickest means of obtaining equipment finance without lengthy
and time consuming procedures.
2. Leasing allows conservation of working capital that can be utilized for other
productive business purposes.
3. Fixed and variable rental payments assist in budgeting and ease cash flow.
4. Hedges against inflation as rental payments are made out of future earnings.
5. Lease rentals paid are allowed to be charged as a tax deductible expense in the
profit and loss statement of the lessee.
6. Leasing is acceptable within the Islamic modes of financing as rental
payments are made and interest is not involved.
7. Simplified documentation and personalized service.
8. Lease period can be tailored to match the practical useful life of the
equipment.
9. Up to 90% financing for qualified applicants.
Leasing is not a very old phenomenon in Pakistan, but has gained acceptance very
rapidly. The reasons are: growing awareness, ease in obtaining the facility compared
to conventional forms of financing (bank loans), inherent tax benefits, simple
procedure and flexibility to cater to the needs of the customer. Profit is earned through
the use of the asset, not the ownership. In leasing, the ownership is vested in the
leasing company and in return for rental payments, the 'lessee' has virtually
unrestricted use of the asset. Leasing is a medium to long term hire of assets. It
effectively increases a company's total availability of capital and leaves other sources
of funds available for more profitable usage.
The leasing sector in general has experienced commendable growth over the years
and has adequately proved to be an alternative source of finance. In case of an
expected economic revival, the overall Leasing Sector is likely to regain its initial
momentum particularly in the backdrop of Islamization of the economy effective
fiscal year 2002 - 2003 due to its inherent potential of being in close conformity to
one of the permissible modes of financing under Shariah. However, in order to
improve the near future demand prospects of Leasing Sector in particular, the leasing
companies need to develop innovative products along with encouraging leasing of
plant, machinery and equipment relating to priority sectors of the economy including
energy (CNG), IT (Computer hardware, software and accessories), textiles,
engineering etc subject to their intrinsic value. Agriculture sector is receiving special
focus. The presence of commercial banks and DFI's in the lease market has impacted
the leasing company's margin, but their capability of offering large ticket leasing has
enhanced the acceptability of leasing options.
TYPES OF LEASING:
There are different kinds of lease arrangement. It makes sense to look at each one to
see which is best suited to your business, your particular circumstances and the asset
that you are acquiring.
1. Finance lease.
2. Operating lease.
a) FINANCE LEASE:
Finance leases are most attractive in cases where the lessee wants the tax benefits of
ownership or expects the equipment's residual value to be high. These leases are
structured as equipment financing agreements with residuals up to 10 percent. The
lessee purchases the equipment upon lease termination at a pre-agreed amount. The
term of a finance lease tends to be longer, nearly covering the useful life of the
equipment.
The cornerstone of ORIX business activities, the finance lease, offers one of the most
cost effective tailor made financial packages available in the market. ORIX Corporate
Lease Division offers lease financing options on both medium and long terms basis
for plant and machinery, vehicles and office automation products. We approach each
prospective lessee with individualized care and provide personal service to structure a
lease according to the lessee’s requirements.
The finance lease is founded on the truism that profits are earned through usage and
not through the ownership of an asset. It was this very concept that fuelled modern
lease financing as an alternate method of financing. The corporate lease at ORIX is
designed to give your business an opportunity to acquire movable and immovable
assets without putting a strain on your cash flows.
ORIX has provided comprehensive leasing services to companies across the country
for more than two decades. The company offers a personal touch and customized
approach placing all its patrons on even footing. ORIX provides a wide range of
assets together with attractive and customized repayment terms to all. This sense of
fair play has been one of the foremost reasons behind ORIX’s success.
Our leases are priced competitively with a payment schedule designed specifically for
you. We will give you the choices, convenience and value that you deserve.
Salient Features
• ORIX Corporate Division offers leasing facility for plants and machinery,
vehicles and office products.
• The following are the flexible leasing options tailored to suit the lessees needs:
o Fixed and variable rate (KIBOR based) leases
o Step up and step down leases
o Leases with grace period
o Sale and lease back
• ORIX will have the economic ownership of the asset whereas the lessee will
avail the economic usage.
• Leasing leads to tax savings as lease rentals are allowed to be charged as tax
deductible expense in the profit and loss statement of the lessee.
• Leasing guards against equipment obsolescence.
• Leasing is a hedge against inflation.
• Leasing is acceptable within the Islamic modes of financing as fixed rental
payments are made.
• ORIX branch network makes leasing available throughout Pakistan with
growing presence in all major cities.
b) OPERATING LEASE:
ORIX Operating Lease Division offers the facility of renting the equipment for the
duration it is needed. The operating lease solutions provide full use of an asset while
avoid many risks associated with the ownership of equipment such as depreciation,
obsolescence and asset disposal. An operating lease acts as a true hiring arrangement
where the rental is treated as an expense and allows equipment off balance sheet for
accounting purposes.
Salient Features
• Access to the most modern equipment and technology without the associated
cost of ownership.
• Hedge against equipment obsolescence.
• Hassle-free delivery and start-up of equipment.
• No worry about disposing of equipment.
• Flexible rental payment arrangement.
• Preserve customer credit lines.
• Enhanced ROA & ROE ratios as operating lease is not reflected on balance
sheet.
How Operating Lease Works
Products
• Generators
• Agricultural Equipment
• Vehicle
• Communication Equipment
• Used Rental Equipment also available for sale.
ACCOUNTING TREATMENT OF LEASING IN THE
FINANCIAL STATEMENTS ACCORDING TO IAS 17
OPERATING LEASES:
OPERATING LEASE asset are very difficult in nature from finance lease
assets as the risks and rewards of ownership are not transferred to the lessee.
Therefore the accounting treatment is also very difficult.
b) DISCLOSURE:
For non-cancellable operating leases with term of more than one year ,
commitments should be disclosed in summary form, giving the amounts and
periods in which the payments will become due.
The detailed disclosure requirements for the lessees for the operating lease are
the total of the future minimum lease payments under non-cancellable
operating leases for each of the following periods:
• Not later than one year.
• Later than one year and not later than five years.
• Later than five years.
FINANCE LEASES:
a) INITIAL RECORDING:
At the commencement of the lease term, lessees shall recognise finance leases
as assets and liabilities in their balance sheets at amounts equal to the fair
value of the leased property or, if lower, the present value of the minimum
lease payments, each determined at the inception of the lease.
The discount rate to be used in calculating the present value of the minimum
lease payments is the interest rate implicit in the lease, if this is practicable to
determine; if not, the lessee’s incremental borrowing rate shall be used. Any
initial direct costs of the lessee are added to the amount recognized as an asset.
Minimum lease payments shall be apportioned between the finance charge and
the reduction of the outstanding liability. The finance charge shall be allocated
to each period during the lease term so as to produce a constant periodic rate
of interest on the remaining balance of the liability. Contingent rents shall be
charged as expenses in the periods in which they are incurred.
b) DEPRECIATION
c) DISCLOSURE:
IAS 17 requires the following disclosures by the lessees for the finance leases:
• For each class of asset, the net carrying amount at the balance sheet
date.
• Liability for finance leases split between current liabilities and non-
current liabilities.
• Depreciation charge in the income statement.
• Finance charges in income statement.
A sale and leaseback transaction involves the sale of an asset and the leasing back of
the same asset. The lease payment and the sale price are usually interdependent
because they are negotiated as a package. The accounting treatment of a sale and
leaseback transaction depends upon the type of lease involved.
• No sale is recorded.
• The forwarded funds are treated as a loan secured on the leased
asset.
1. PROPERTY
The landlord hereby leases to Tenant for the term of this agreement
_____________________________________________________________________
City State Zip
And
2. TERM
The term of this lease is for ____________, beginning on ____________, and ending
on __________. At the expiration of said term, the lease will automatically be
renewed for a period of one month unless either party notifies the other of its intention
to terminate the lease at least one month before its expiration date.
(or)
At the expiration of said term, the lease will expire unless the tenant gives a written
notice at least 15 days before the termination date of the lease. Thereafter, the lease
will automatically be renewed for periods of one month until either party notifies the
other of its intention to terminate the lease. The notice of termination will be in
writing and will be effective on the next rental date no less than 30 days after the date
of the notice.
3. RENT
Tenant agrees to pay rent in the amount of __________ per month, each payment due
on the _________ day of each month and to be made at:
_____________________________________________________________________
Address City State Zip
4. UTILITIES/SERVICES
5. DEPOSIT
6. REFUND PROCEDURE
Landlord shall return the entire deposit to Tenant within 15 days after retaking
possession; or shall return so much of the deposit as exceeds any damages done to the
property during the Tenant’s residence, normal wear and tear expected, and any
unpaid rent. If the Landlord returns any amount less than the full deposit, he/she shall
also provide a written itemized list of damages and charges.
Tenant maintains the right to sue Landlord for any portion of the deposit not returned
to him/her which the tenant believes he/she is entitled.
7. INVENTORY CHECKLIST
The Tenant is provided with an Inventory Move-In Checklist attached to this lease.
The Tenant shall note the conditions of each item on the checklist and return a copy to
the Landlord within 10 days after taking possessions. If the Landlord objects to
inclusions of any item, he/she shall notify the Tenant in writing within 10 days. The
Tenant and Landlord shall note the condition of each item on the checklist after the
Tenant returns possession to the Landlord and shall give a copy to the other party.
The Landlord may not retain any portion of the Security Deposit for damages noted in
the Move-Out Checklist to which the Landlord did not object.
A. Tenant shall not sublease nor assign the premises without the written consent of
the Landlord (but this consent shall not be withheld unreasonably).
B. The Landlord may not enter the premises without having given tenant at least 24
hours notice, except in case of emergency. Landlord may enter to inspect, repair, or
show the premises to prospective buyers or tenants if notice is given.
C. Tenant agrees to occupy the premises and shall keep the same good condition, and
shall not make any alternations thereon without the written consent of the landlord.
D. Landlord agrees to regularly maintain the building and grounds in a clean, orderly,
and neat manner. Landlord further agrees not to maintain a public nuisance and not to
conduct business or commercial activities on the premises.
E. Tenant agrees not to use the premises in such a manner as to disturb the peace and
quiet of other tenants in the building. Tenant further agrees not to maintain a public
nuisance and not to conduct business or commercial activities on the premises.
F. Tenant shall, upon termination of this Agreement, vacate and return the swelling in
the same condition that it was received, less reasonable wear and tear, and other
damages beyond the Tenant’s control.
G. Any alternations to this Agreement shall be in writing and signed by all parties.
We, the under-signed, agree to this Lease:
LANDLORD TENANT
_________________________ _________________________
Signature Signature
_________________________ _________________________
Typed Name Typed Name
_________________________ _________________________
Address Address
_________________________ _________________________
Signature Signature
_________________________ _________________________
Typed Name Typed Name
_________________________ _________________________
Address Address