Example on operating lease and

finance lease
COMPANY A takes an asset on lease for a period of 5 years with
rental payment of Rs.5,00,000 per year. Appropriable lease
interest is 6% and assuming the else payments are made at the
end of each year. Salvage value is taken as 0 and useful life is
taken as 5 years. Straight line depreciation method is used

OPERATING LEASE.

year CFO

0 5,00,000

1 5,00,000

2 5,00,000

3 5,00,000

4 5,00,000

5 5,00,000
 Financing lease
PV of the Balance sheet liability=500000(1-(1+r)^-t)/r=Rs.21,06,181.9

year beginning interest expense lease payments principal lease liability book value of the assets
leasehold value amount

0         21,06,181.90 16,84,945.52

1 21,06,181.90 126370.914 500000 373629.086 17,32,552.81 13,86,042.25

2 17,32,552.81 103953.1688 500000 396046.8312 13,36,505.98 10,69,204.79

3 13,36,505.98 80190.35897 500000 419809.641 9,16,696.34 7,33,357.07

4 9,16,696.34 55001.78051 500000 444998.2195 4,71,698.12 3,77,358.50

5 4,71,698.12 28301.88734 500000 471698.1127 0.01 0.01

Impact on income statement (lessee)

Impact on the cash flow (lessee)
year CFO(interest payment) Depreciation total
year CFO(interest CFF(principal amount) 0 0 0 0
payment) 1 126370.914 421236.38 547607.3
0 0   2 103953.1688 421236.38 525189.5
1 126370.914 373629.086 3 80190.35897 421236.38 501426.7
2 103953.1688 396046.8312
4 55001.78051 421236.38 476238.2
3 80190.35897 419809.641
4 55001.78051 444998.2195 5 28301.88734 421236.38 449538.3
5 28301.88734 471698.1127 total     2500000
 Financial statement Impact of lease Accounting

Parameter Finance lease operating lease

Assets Higher Lower
liabilities Higher Lower
net income (in early years) Lower Higher
net income( in later years) Higher Lower
Total net income Same Same
EBIT Higher Lower
cash flow from operations Higher Lower
Cash flow from financing Lower Higher
total cash flow Same Same

Ratio Impa
Parameter finance lease operating
lease

current ratio (CA/Cl) Lower Higher

Working Capital (CA-Cl) Lower Higher
Asset turnover ratio(Revenue/TA) Lower Higher
return on asset(NI/TA) Lower Higher
return on Equity(NI/SE) Lower Higher
debt/assets Higher Lower
debt/equity Higher Lower
Sale type lease

From the view of Lessor

Sales=PV of lease 2106181.9

Payment
COGS=Book value of 1800000
assets
gross profit 306181.9
salvage value 0
PV of salvage value 0
Depreciation 421236.38

Lease amortization schedule

years beginning lease Interest payment Principal ending lease Depreciation
receivable income by lessee repayment receivable S/L method

1 2106181.9 126370.914 500000 373629.086 1732552.814 421236.38

2 1732552.814 103953.1688 500000 396046.8312 1336505.983 421236.38

3 1336505.983 80190.35897 500000 419809.641 916696.3418 421236.38

4 916696.3418 55001.78051 500000 444998.2195 471698.1223 421236.38

5 471698.1223 28301.88734 500000 471698.1127 0.009658165 421236.38

 Impact on
income statement
years Interest income Rental Depreciation I
income interest income
1 126370.914 500000 421236.38 78763.62
2 103953.1688 500000 421236.38 78763.62
3 80190.35897 500000 421236.38 78763.62
4 55001.78051 500000 421236.38 78763.62
5 28301.88734 500000 421236.38 78763.62
total 393818.1097 393818.1

I
mpact on cash flow

year CF operations(DFL) CF investing(DFL) CF operations(OL)

1 126370.914 373629.086 5,00,000
2 103953.1688 396046.8312 5,00,000
3 80190.35897 419809.641 5,00,000
4 55001.78051 444998.2195 5,00,000
5 28301.88734 471698.1127 5,00,000
Total 393818.1097 2106181.89 2500000
Total 2500000 2500000