1.2       Query

Assets bought by a leasing company for the purpose of letting

out-whether ‘Fixed’ or ‘Current’

A public limited company is being established for undertaking leasing of plant, machinery, office equipment etc. The opinion of the Expert Advisory Committee has been sought whether the aforesaid assets bought by the leasing company for letting them out should be classified as ‘Fixed Assets’ or ‘Current Assets’ to fulfill the requirements of the Companies Act, 1956.

 Opinion*                                           December 14, 1983

1.In India it is a common practice that where a contract of lease is in substance a hire-purchase contract, the asset on hire-purchase is shown as an asset in the balance sheet of the hirer or lessee. However, where the lease contract is not in the nature of hire-purchase agreement the asset is shown in the balance sheet of lessor as a fixed asset.

2.The Committee also noted that International Accounting Standard No. 17 on ‘Accounting For Leases’ has classified leases into two categories: Finance lease and Operating lease, as defined in para 2 of the standard as below:

Finance Lease: A lease that transfers substantially all the risks and rewards incident to  ownership of an asset. Title may or may not eventually be transferred.

            Operating Lease: A lease other than a finance lease.

            Paras 48 and 51 of the aforesaid Standard state as below:

‘An asset held under a finance lease should be recorded in the balance sheet not as

 property, plant and equipment but as a receivable, at an amount equal to the net  investment in the lease’.

‘Assets held for operating leases should be recorded as property, plant and equipment in the balance sheet of lessors’.

__________________________________

* The query was referred to the Research Committee of the Institute for its opinion as it was felt that this was of general interest to the members of the profession. The opinion given herein is therefore that of the Research Committee.