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Editorial Board on Accounts and Audit
  • Condition of Finance lease

    by Gautam on Sunday, October 21, 2018 at 12:33 AM

    Dear Sir, One of Conditions for Finance Lease as per AS-19 is -- If Present Value of Lease Rentals and Residual Value is equal to or Higher than Fair Value of Asset , then it is a Finance Lease. Query- Here Residual Value means Both Guaranteed & Unguaranteed Residual Value OR Any one of them ?? 2) Whether Fair Value of Asset in above condition means Cost of Asset to the Lessor ?? 3) How Rate of Discounting for the Purpose of Present Value of Lease Rental will be considered practically ??

    Replied byEditorial Board Wednesday, October 31, 2018 at 04:33 PM

    As per AS 19, if at the inception of lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset, then the lease is considered as finance lease. Minimum lease payments include only guaranteed residual value. So, while calculating present value of minimum lease payments, only guaranteed residual value of the leased asset should be considered.

    AS 19 defines ‘fair value’ as the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm's length transaction. So, it’s not necessary that the fair value of the leased asset shall be the cost of the asset. You have to determine the fair value.

    For lessor, interest rate implicit in the lease is taken as the discounting rate. For lessee, the rate at which its banker finance the purchase of leased asset over the lease term and with a similar security as given in the case of lease.

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