LEASE, BRANCH AND DEPARTMENTAL ACCOUNTS

LEASE ACCOUNTING | IND AS 116

Non Applicability
 Lease agreement to explore natural resources (oil, gas, timber metals and mineral rights)
 Licensing agreements for films, video recording, plays, patents and copyrights,
 Lease agreement to use land
{CMA inter J14, 2 marks}
Non-cancellable lease: is a lease that is cancellable only;
1. Upon the occurrence of some remote contingency; or
2. With the permission of the lessor; or
3. If the lessee enters into a new lease for the same or an equivalent asset with the same
lessor; or
4. Upon payment by the lessee of an additional amount such that, at inception,
continuation of the lease is reasonably certain.

Lease term: the non-cancellable lease period

Minimum Lease Payment (MLP) ₹

Lease rent ××
+ Guaranteed residual value by lessee or by third party ××
- Contingency rent (based on some factor such as sales, ××
usage, price indices, interest rates in the market)
- Cost for service /tax (reimbursed) ××
Minimum Lease Payment (MLP) for Lessee ××
+ Unguaranteed residual value ××
Gross Investment for Lessor
- Net Investment (PV of MLP& Unguaranteed residual value) ××
Unearned Finance Charges ××
××
Note: In case of lessor; profit = unearned finance charges + [fair value – cost]
{CMA Inter J19, 3 marks}
Types of Leases:
1. Finance leases
2. Operating leases
Finance Lease
 Transfers substantially all risks and rewards incidental to ownership of an asset to the
lessee
 No transfer of legal ownership (may transfer at the end of lease term)
 Lease term covers major part of the asset’s life
Indicators of Finance Lease:
1. Ownership of the asset is transferred to lessee by the end of the lease term
2. Lessee has the option to repurchase at lower than fair value (certainly exercise the
option)
3. The lease term covers major part of the economic life of the asset
4. At the inception of the lease, PV of MLP is at-least equal to fair value of the asset
5. Only the lessee is allowed to use the specially designed assetas per the requirement of
lessee.
Other indicators
6. If the lease is cancelled, the lessee should bear the cancellation charges
7. If P/L on residual value is transferred to lessee by way of adjustment in lease rent
8. If the lessee is allowed to continue the lease for a secondary period at lower rent

Accounting of Finance Lease:

In the books of lessee In the books of lessor
Value of Asset & Liability: Whichever is lower: Recognize receivable equal to net investment
Fair value at the inception of lease (or) Finance income should be recognized
Present value of MLP from lessee point of view in proportion to outstanding balances

Note:
1. Discount rate is implicit rate else lessee’s incremental borrowing rate
Implicit rate: discount rate used for finding PV of MLP as per lessor’s point of view
2. Finance charges is to be allocated over the lease term
3. Depreciation for asset taken on finance lease is treated as per AS 10
4. Initial direct costs for finance lease are included in the cost of asset
Disclosure made by the lessee for finance lease:
In addition to the requirement as per AS 10, Disclose
1. Assets under finance lease is segregated from owned asset
2. For each class of assets, the net carrying amount at the balance sheet date;
3. A reconciliation between the total of MLP and its PV at the B/S date.
For the following periods
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
4. Contingent rent: recognized as expenses in the P/L statement
5. The total of future minimum sublease payments expected to be received under non-
cancellable subleases at the B/S date
6. A general description of the lessee’s significant leasing arrangements, such as
a. The basis on which contingent rent payments are determined
b. The existence and terms of renewal or purchase options and escalation clauses
c. Restrictions imposed by lease arrangements,
such as those concerning dividends, additional debt, and further leasing.

Disclosure made by the lessor for finance lease:

1. A reconciliation between the total gross investment and PV of MLP at the B/S date
for the following periods
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
2. Unearned finance income
3. The unguaranteed residual values accruing to the benefit of the lessor
4. The accumulated provision for uncollectible minimum lease payments receivable
5. Contingent rents recognized in the P/L A/c
6. A general description of the significant leasing arrangements of the lessor
7. Accounting policy adopted in respect of initial direct costs
Operating Lease: It doesn’t transfer substantially all the risk and reward incidental to ownership
Accounting of Operating Lease: Lease rent
In the books of lessor In the books of lessee
An asset in the B/S Lease rent recognized as an expense in P&L A/c
Lease rent recognized as an income in P&L A/c on straight line basis over the lease term
on straight line basis over the lease term Unless a different systematic basis is available
Charge depreciation as per AS 10
Impairment loss as per AS 28

Disclosure by lessee for operating lease:

1. The total of future minimum lease payments under non-cancelable operating leases for
each of the following periods:
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
2. The total of future minimum sublease payments expected to be received under non-
cancelable subleases at the B/S date
3. Lease payments recognized in the statement of profit and loss for the period, with
separate amounts for minimum lease payments and contingent rents
4. Sub-lease payments received (or receivable) recognized in the statement of P/L for the
period.
5. A general description of the lessee’s significant leasing arrangements including, but not
limited to, the following:
a. The basis on which contingent rent payments are determined
b. The existence and terms of renewal or purchase options and escalation clauses and
c. Restrictions imposed by lease arrangements, such as those concerning dividends,
additional debt, and further leasing.
Note: The Level II and Level III non-corporate entities (and SMCs) need not make
disclosures required by (1), (2) & (5) above

Disclosure by lessor for operating lease:

In addition to the requirement as per AS 10, Disclose
1. For each class of assets, the gross carrying amount,
the accumulated depreciation and accumulated impairment losses at the B/S date and
a. The depreciation recognized in the P/L A/c
b. Impairment losses recognized in the P/L A/c
c. Impairment losses reversed in the P/L A/c
2. The future MLP under non-cancellable operating leases in the aggregate and for
following periods
a. Not later than one year
b. Later than one year and not later than five years
c. Later than five years
3. Total contingent rents recognized as income in P/L A/c
4. A general description of the lessor’s significant leasing arrangements and
5. Accounting policy adopted in respect of initial direct costs.

Sale and Lease Back

1. Finance Lease:
a. Any P/L on sale is deferred
b. Amortized over the lease term in proportion to the depreciation of the leased asset

2. Operating Lease:
𝑺𝑷 = 𝑭𝑽 𝑺𝑷 < 𝐹𝑉 𝑺𝑷 > 𝐹𝑉
SP 9 11 11 9 9 11 12 9
FV 9 11 12 12 12 10 11 8
CV 10 10 10 10 10 10 10 10
P/(L) (1) 1 1 (1) - 0 1 (2)
𝑆𝑃 − 𝐶𝑉 𝐹𝑉 − 𝐶𝑉
Defer - - - - (1) 1 1 1
NC C SP-FV SP-FV SP-FV
{CMA inter D09, 5 marks}
 INSURANCE CLAIM

LOSS OF STOCK
Steps
1. 𝐒𝐭𝐨𝐜𝐤 𝐨𝐧 𝐭𝐡𝐞 𝐝𝐚𝐭𝐞 𝐨𝐟 𝐟𝐢𝐫𝐞 𝐚𝐜𝐜𝐢𝐝𝐞𝐧𝐭
= Opening Stock + Purchases − (Sales − Gross Profit %)

Previous year or years Gross Profit

Gross Profit % = %
Previous year or years Sales

While calculating gross profit %, need to consider

a. abnormal loss &
b. special items sold at different sale price

2. 𝑳𝒐𝒔𝒔 𝒐𝒇 𝒔𝒕𝒐𝒄𝒌 = 𝑆𝑡𝑜𝑐𝑘 𝑜𝑛 𝑡ℎ𝑒 𝑑𝑎𝑡𝑒 𝑜𝑓 𝑓𝑖𝑟𝑒 𝑎𝑐𝑐𝑖𝑑𝑒𝑛𝑡 – 𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒

3. 𝐼𝑛 𝑐𝑎𝑠𝑒 𝑜𝑓 𝒂𝒗𝒆𝒓𝒂𝒈𝒆 𝒄𝒍𝒂𝒖𝒔𝒆, 𝑐𝑙𝑎𝑖𝑚 = 𝐿𝑜𝑠𝑠 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 × ______Policy amount____

Stock on the date of fire

Policy amount Stock value Insurance Claim Average Claim

𝑎 100 80 Full Full Not applicable
𝑏 100 120 Partial Partial Applicable
LOSS OF PROFIT POLICY (consequential loss by fire)

Steps for computation of claim

1 Loss of Profit = Short sales × Gross profit ratio ×××
Short sales = Standard sales – Actual sales
Standard sales = sales during corresponding dislocation period in the PY
Actual sales = sales during dislocation period
Dislocation period = period of sales affected due to fire accident
Indemnity = Policy Period
𝑁𝑒𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 + 𝐼𝑛𝑠𝑢𝑟𝑒𝑑 𝑆𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝐶ℎ𝑎𝑟𝑔𝑒𝑠
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑅𝑎𝑡𝑖𝑜 = × 100
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑦𝑒𝑎𝑟 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟
2 Claim for increased cost of working: Whichever is least
(i) Actual Increased cost ×××
(ii) Increased cost of working × 𝐺𝑃 𝑜𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 ×××
𝐺𝑃 𝑜𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠 + 𝑈𝑛𝑖𝑛𝑠𝑢𝑟𝑒𝑑 𝑆𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝐶ℎ𝑎𝑟𝑔𝑒𝑠
(iii) Saved turnover × Gross Profit Ratio ××× ×××
3 Savings in standard charges if any ×××
Total claim (1+2-3) ×××
4 Claim
(i) 𝑻𝒐𝒕𝒂𝒍 𝒄𝒍𝒂𝒊𝒎: 𝑖𝑓 𝑝𝑜𝑙𝑖𝑐𝑦 𝑎𝑚𝑜𝑢𝑛𝑡 ≥ 𝐺𝑃 𝑜𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
𝐼𝑛𝑠𝑢𝑟𝑎𝑛𝑐𝑒 𝑐𝑙𝑎𝑖𝑚 = 𝐿𝑜𝑠𝑠 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘
(ii) 𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝒄𝒍𝒂𝒖𝒔𝒆: 𝑖𝑓 𝑝𝑜𝑙𝑖𝑐𝑦 𝑎𝑚𝑜𝑢𝑛𝑡 < (𝐺𝑃𝑅 × 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠)
𝑃𝑜𝑙𝑖𝑐𝑦 𝑎𝑚𝑜𝑢𝑛𝑡 ×××
𝐶𝑙𝑎𝑖𝑚 = × 𝑇𝑜𝑡𝑎𝑙 𝑐𝑙𝑎𝑖𝑚
𝐺𝑃 𝑜𝑛 𝑎𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑙𝑒𝑠
Annual sales = 12 months sales immediately preceding to fire accident
Note: sales is adjusted for trend if any
 BRANCH ACCOUNTING

Types of branches and accounting

 Dependent branch: whole of the branch controlled by head office
Accounting for Dependent Branch Cost Price Invoice Price
1 Debtors System √ √
2 Stock and Debtors System √ √
3 Memorandum Trading and P/L System √ √

 Independent branch: Branch maintains independent accounting records

1. Local branch
2. Foreign branch
 Reasons for disagreement of balances between balances in BO as per HO and vice versa
 Goods in
Transit Cash
in Transit
 Proxy Transactions [HO by BO | BO by HO | Depreciation]

HO’s Book BO A’s Book
1 Goods / Cash in transit
Goods / Cash in Transit Dr ×× Or Goods / Cash in Transit Dr ××
To BO A/c ×× To HO A/c ××
Proxy Transaction
[Expenses of BO paid by HO]
2 BO A/c Dr ×× & Expenses A/c Dr ××
To Bank A/c ×× To HO A/c ××
3 [Expenses of HO paid by BO]
Expenses A/c Dr ×× & HO A/c Dr ××
To A A/c ×× To Bank A/c ××

Foreign branch:
Usually accounts maintained independently
in the currency of the country in which they operate and
translated into Reporting Currency
Foreign Currency Translation
Integral Foreign Operation Non-Integral Foreign Operation
1 Revenue Items Rate at the time of transaction Rate at the time of transaction
(or average rate) (or average rate)
2 B/S items
𝑎 Monetary closing rate closing exchange rate
𝑏 Non-monetary [including contingent liability]
-Purchased Rate on the date of purchase
-Revalued Rate on the date of valuation
𝑐 Closing inventory Closing rate
3 Exchange difference Charged to P/L A/c Foreign currency translation reserve

HIRE PURCHASE AND INSTALLMENT PAYMENT SYSTEM

Hire Purchase: Purchase in installment but every installment is hire charges and
ownership is transferred on payment of last installment
Difference between hire purchase system and installment system:

Basis of difference Hire Purchase System Installment System

1. Nature of contract hire later on sales sales at first
2. Transfer of ownership on last installment on sale
3. Default Repossession Legal action
4. Buyer as bailer Yes No
5. Seller’s Risk Up to last installment Nil