IAS 17 LEASE Report Final

8/8/2019 IAS 17 LEASE Report Final

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ASSIGNMENT TOPIC

IAS 17-LEASES

SUBMITTED TO

SIR ATHAR A KHAN

SUBMITTED BY

MUHAMMAD DANISH MUJTABAFARRUKH ALI UQAILI

IRFAN BHATTI

AVEENASH

CLASS

MBA REGULAR 3 YEARSSECTION-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. Thelessee is the receiver of the services or the assets under the lease contract and thelessor is the owner of the assets. The relationship between the tenant and the landlordis 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 whenthe tenant pays a flat rental amount and the landlord pays for all property chargesregularly incurred by the ownership

Under normal circumstances, an owner of property is at liberty to do what they wantwith their property, including destroys it or hand over possession of the property to atenant. However, if the owner has surrendered possession to another (ie the tenant)then any interference with the quiet enjoyment of the property by the tenant in lawful

possession is unlawful.

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 theleasing by a tenant in possession to a sub-tenant. The right to sub-lease can beexpressly prohibited by the main lease.

Why leasing?

1. Leasing is the quickest means of obtaining equipment finance without lengthyand 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.

Who can lease?

1. Sole proprietorship concerns.2. Partnership firms.3. Private Limited Companies4. Listed and unlisted local and multinational joint stock companies

Trust.5. Liaison offices of multinationals



Which industries/business sectors use leasing?

1. Manufacturing concerns2. Services3. Construction industry4. Distributors/Traders etc.5. Self employed professionals

6. Transport7. Printing and packaging8. Information Technology

What equipment can be leased?

1. Plant and machinery2. Construction and heavy equipment3. Medical equipment

4. Computers and IT related equipment5. Office equipment6. Commercial and private vehicles

HISTORY OF LEASING IN PAKISTAN:

With the development of Pakistan's economy during the past decade and the privatization, deregulation and other industrial policies of the Government of Pakistan, the economy received a boost after a prolonged period of sluggish economic

activity over the '70s and '80s.

The first leasing company was established in 1985. Thegrowth of the leasing industry in Pakistan initiallylacked momentum due mainly to a general lack of awareness regarding its nature and benefits. From 1985to 1997, 32 leasing companies were incorporated withthe minimum capital of Rs. 100 million. The minimumcapital requirement was raised to Rs. 200.00 million byJune 2000. This lead to mergers and acquisitions,thereby the number of leasing companies is reduced to27. In addition Nine leasing Modarabas & 3 InvestmentBanks are actively involved in leasing business. In the mid-nineties annual averagegrowth was in the range of 30 - 35 percent. The real growth in the leasing came in the

period 1992 - 95, when over 20 leasing companies were set up. In October 1995,leasing companies' paid-up capital was Rs.7.572 billion, with market capitalization of Rs.6.0 billion as on 30-06-2002.

Leasing is not a very old phenomenon in Pakistan, but has gained acceptance veryrapidly. The reasons are: growing awareness, ease in obtaining the facility comparedto conventional forms of financing (bank loans), inherent tax benefits, simple

procedure and flexibility to cater to the needs of the customer. Profit is earned throughthe use of the asset, not the ownership. In leasing, the ownership is vested in theleasing company and in return for rental payments, the 'lessee' has virtuallyunrestricted 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 sourcesof funds available for more profitable usage.

The leasing sector in general has experienced commendable growth over the yearsand has adequately proved to be an alternative source of finance. In case of anexpected economic revival, the overall Leasing Sector is likely to regain its initialmomentum particularly in the backdrop of Islamization of the economy effectivefiscal year 2002 - 2003 due to its inherent potential of being in close conformity toone of the permissible modes of financing under Shariah. However, in order toimprove the near future demand prospects of Leasing Sector in particular, the leasingcompanies need to develop innovative products along with encouraging leasing of

plant, machinery and equipment relating to priority sectors of the economy includingenergy (CNG), IT (Computer hardware, software and accessories), textiles,engineering etc subject to their intrinsic value. Agriculture sector is receiving specialfocus. The presence of commercial banks and DFI's in the lease market has impactedthe leasing company's margin, but their capability of offering large ticket leasing hasenhanced the acceptability of leasing options.

CONSOLIDATED STATISTICS / OVERVIEW OF

LEASING SECTOR IN PAKISTAN

2006 2007 2008

No. of Companies 29 27 25

Paid up Captial 12,185 13,182 17,448

Reserves 8,599 7,877 8,477

Total Equity 20,784 21,059 25,925

Investment in Lease Finance 75,151 72,908 71,597

Investments 21,687 22,817 29,896

Borrowings 78,882 83,196 90,792

Revenues 14,665 15,028 16,907

Operating Expenditure 5,009 5,822 5,779

Financial Charges 7,419 8,467 8,954

Taxation 193 91 411

Net Profit 2,044 636 2,094

Cash Divident 900 961 884

Total Assets 123,501 128,315 136,569

TYPES OF LEASING:



There are different kinds of lease arrangement. It makes sense to look at each one tosee which is best suited to your business, your particular circumstances and the assetthat you are acquiring.

The two main types of leasing are:

1. Finance lease.2. Operating lease.

a) FINANCE LEASE :

A finance lease is a full-payout, noncancellable agreement, in which the lessee isresponsible for maintenance, taxes and insurance.

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. Thelessee purchases the equipment upon lease termination at a pre-agreed amount. Theterm of a finance lease tends to be longer, nearly covering the useful life of theequipment.

ORIX LEASING COMPANY

The cornerstone of ORIX business activities, the finance lease, offers one of the mostcost effective tailor made financial packages available in the market. ORIX CorporateLease 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 alease according to the lessee’s requirements. The finance lease is founded on the truism that profits are earned through usage andnot through the ownership of an asset. It was this very concept that fuelled modernlease financing as an alternate method of financing. The corporate lease at ORIX isdesigned to give your business an opportunity to acquire movable and immovableassets without putting a strain on your cash flows.

How does it work

All you have to do is identify an asset that you need for your business. Subsequent toa feasibility study of your business, ORIX will purchase the asset(s) and provide youwith unlimited usage of the asset for a predetermined repayment period structuredaccording to agreed terms and conditions. An innovative offshoot of the finance leaseallows you to release cash tied up in recently purchased assets through the ‘sale andlease back’ transaction, which increases the working capital available to your

business. ORIX has provided comprehensive leasing services to companies across the countryfor more than two decades. The company offers a personal touch and customizedapproach 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 willavail the economic usage.

• Leasing leads to tax savings as lease rentals are allowed to be charged as taxdeductible 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:

An operating lease is particularly attractive to companies that continually update or replace equipment and want to use equipment without ownership, but also want toreturn equipment at lease-end and avoid technological obsolescence. An operatinglease usually results in the lowest payment of any financing alternative and is anexcellent strategy for bypassing capital budgeting restraints. It typically qualifies for

off-balance sheet treatment and can result in improved Return On Asset (ROA) due toa lower asset base. It can also result in higher reported earnings in the early years of the lease.

ORIX leasing company:

ORIX Operating Lease Division offers the facility of renting the equipment for theduration it is needed. The operating lease solutions provide full use of an asset whileavoid 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

• ORIX provides equipment on short and long term rentals.• The equipments are rented along with entire range of services such as

managing operations, maintenance, repair, replacement, up gradation andlogistics through our experienced asset manager.

• Lease payments are tax deductible thus reducing the rental cost of equipment.• ORIX has the flexibility to adapt its products according to customer

requirements by offering a tailor-made solution.

Benefits of Operating Lease

• Access to the most modern equipment and technology without the associatedcost 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:

a) ACCOUNTING FOR OPERATING LEASES :

OPERATING LEASE asset are very difficult in nature from finance leaseassets as the risks and rewards of ownership are not transferred to the lessee.Therefore the accounting treatment is also very difficult.

• An asset is not recognized in the balance sheet.

• Rentals under operating leases are charged to the income statement onthe straight line basis over the term of lease, unless another systematicand rational basis is more appropriate.

• Any difference between amounts charged and amounts paid will be

prepayments or accruals.

b) DISCLOSURE:

Balance sheet: Obligation under operating lease:

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 arethe total of the future minimum lease payments under non-cancellableoperating 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 leasesas 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 minimumlease payments, each determined at the inception of the lease.The discount rate to be used in calculating the present value of the minimumlease payments is the interest rate implicit in the lease, if this is practicable todetermine; if not, the lessee’s incremental borrowing rate shall be used. Anyinitial direct costs of the lessee are added to the amount recognized as an asset.

Minimum lease payments shall be apportioned between the finance charge andthe 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 rateof interest on the remaining balance of the liability. Contingent rents shall becharged as expenses in the periods in which they are incurred.

b) DEPRECIATION

A finance lease gives rise to depreciation expense for depreciable assets aswell as finance expense for each accounting period. The depreciation policyfor depreciable leased assets shall be consistent with that for depreciable assetsthat are owned, and the depreciation recognised shall be calculated inaccordance with IAS 16 Property, Plant and Equipment and IAS 38

Intangible Asset s. If there is no reasonable certainty that the lessee will obtainownership by the end of the lease term, the asset shall be fully depreciatedover the shorter of the lease term and its useful life.

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 sheetdate.

• Liability for finance leases split between current liabilities and non-current liabilities.

• Depreciation charge in the income statement.

• Finance charges in income statement.

SALE AND LEASEBACK TRANSACTIONS:

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 andleaseback transaction depends upon the type of lease involved.

ACCOUNTING FOR SALE AND LEASEBACK:

Sale and Finance lease back

• No sale is recorded.

• The forwarded funds are treated as a loan secured on the leasedasset.

Sale and operating leaseback:

• A sale is normally recorded.



SAMPLE LEASE OR RENTAL AGREEMENT

By this agreement made at ___________________________________, PA on the __________ day of _______________________, 20____, the Landlord ___________ _______________________________ and the Tenant _________________________ _______________________ agree as follows:

1. PROPERTY

The landlord hereby leases to Tenant for the term of this agreement

a. the property located at: ___________ __________________________ __________________________

No. Street Name Unit No.

_____________________________________________________________________ City State Zip

And

b. the following furniture and appliances on that property: _____________________________________________________________________ _____________________________________________________________________ ____________________________

2. TERM

The term of this lease is for ____________, beginning on ____________, and endingon __________. At the expiration of said term, the lease will automatically berenewed for a period of one month unless either party notifies the other of its intentionto 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 writtennotice at least 15 days before the termination date of the lease. Thereafter, the leasewill automatically be renewed for periods of one month until either party notifies theother of its intention to terminate the lease. The notice of termination will be inwriting and will be effective on the next rental date no less than 30 days after the dateof the notice.

3. RENT

Tenant agrees to pay rent in the amount of __________ per month, each payment dueon the _________ day of each month and to be made at:

_____________________________________________________________________ Address City State Zip



4. UTILITIES/SERVICES

Landlord agrees to provide the utilities and services indicated: __________ electricity __________ gas __________ water

__________ garbage collection __________ snow removal __________ other

5. DEPOSIT

Tenant has paid a deposit of $__________ of which Landlord acknowledges receipt.Upon regaining possession of the property, Landlord shall refund to Tenant the totalamount of the deposit less any damages to the property, normal wear and tear expected, and less any unpaid rent.

6. REFUND PROCEDURE

Forwarding Address—Tenant shall provide Landlord with a forwarding address atwhich the Landlord can send him/her the deposit refund.

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 anyunpaid rent. If the Landlord returns any amount less than the full deposit, he/she shallalso provide a written itemized list of damages and charges.

Tenant maintains the right to sue Landlord for any portion of the deposit not returnedto 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 tothe Landlord within 10 days after taking possessions. If the Landlord objects toinclusions of any item, he/she shall notify the Tenant in writing within 10 days. TheTenant and Landlord shall note the condition of each item on the checklist after theTenant 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 inthe Move-Out Checklist to which the Landlord did not object.

8. THE PARTIES ALSO AGREE

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 24hours 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, andshall 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 toconduct business or commercial activities on the premises.E. Tenant agrees not to use the premises in such a manner as to disturb the peace andquiet of other tenants in the building. Tenant further agrees not to maintain a publicnuisance and not to conduct business or commercial activities on the premises.

F. Tenant shall, upon termination of this Agreement, vacate and return the swelling inthe 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

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IAS 17 LEASE Report Final

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