1.12 Query: Disclosure of fixed assets given on operating lease.
1.The querist has stated that in case of finance leases, under para 9 of the Guidance Note on Accounting for Leases, issued by the Institute of Chartered Accountants of India, it is stated that assets leased under finance leases should be disclosed as “Assets given on lease” as a separate section under the head “Fixed Assets” in the balance sheet of the lessor. However, in case of operating leases, the relevant prescription at para 17 says that the assets should be treated by the lessor as fixed assets.
2. The querist has further stated that a lessor company which is in the business of giving various types of assets both on financial lease basis and operating lease basis – can it show both the types of assets, i.e., (1) under finance lease basis, and (2) under operating lease basis under the head “Assets given on lease”.
3. According to querist, both the types of assets should be shown under the head “Assets given on lease”. It is so because, the assets under operating lease in any way have been given on lease by the lessor. Therefore, if both the types of assets are shown under the head “Assets given on lease”, it will truly reflect the nature of the assets which are given on lease. Thereby the other class of fixed assets (other than assets given on lease) will be truly reflective of the assets in the own use of the company.
4. The querist has sought the opinion of the Expert Advisory Committee as to whether the assets given on operating lease can also be shown under the head “Assets given on lease” by the lessor?
Opinion September 24, 1996
1. The Committee notes that the ‘Guidance Note on Accounting for Leases (Revised)’ issued by the Institute of Chartered Accountants of India, defines a finance lease and an operating lease as below:
“Finance Lease: A lease under which the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset.
Operating Lease: A lease other than a finance lease.”
2. The Committee further notes that the salient features of a finance lease and an operating lease are given in paras 4 and 5 of the above-mentioned Guidance Note which are reproduced below:
“4. A lease is classified as a finance lease if it secures for the lessor the recovery of his capital outlay plus a return on the funds invested during the lease term. Such a lease is normally non-cancellable and the present value of the minimum lease payments at the inception of the lease exceeds or is equal to substantially the whole of the fair value of the leased asset.
5. A lease is classified as an operating lease if it does not secure for the lessor the recovery of his capital outlay plus a return on the funds invested during the lease term.”
3. On the basis of the above it can be concluded that in the case of an asset given under an operating lease significant risks and rewards incident to ownership are not transferred to the lessee. In other words, in substance as well as in form the assets given under an operating lease belong to the lessor and therefore have to be treated as such in the balance sheet of the lessor. Accordingly, assets given under operating lease are required to be disclosed under normal fixed assets heads in the balance sheet of the lessor.
4. The Committee is, therefore, of the opinion that the fixed assets given under operating lease should be disclosed as suggested in para 17 of the Guidance Note on Accounting for Leases. It may be pointed out that the requirements as laid down in Schedule VI to the Companies Act, 1956, and that of the Guidance Note are the minimum disclosure requirements. However, a company may, if it so desires, separately disclose its fixed assets as those not given on lease and those given on operating lease. The assets given on finance lease in any case should be shown separately. |