805 cc101 afm dd 2 valuation of assets under lease

8/12/2019 805 CC101 AFM DD 2 Valuation of Assets Under Lease

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Valuation of Assetsunder

Finance Lease


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Finance lease

Accounting treatment of assets under finance leaseis dealt with in AS-19, Leases.

Lessor :- The one who gives asset on lease.

Lessee :- The one who takes asset on lease.

A lease is an agreement by which the lessorconveys to the lessee to use the asset for a agreedperiod of time, in return for a payment or series ofpayments.


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Finance lease

The lease is known as a finance lease if therisks & rewards arising from ownership of theasset are also transferred.

Risk may include possibility of technologicalobsolescence.

Rewards may include gains from appreciationin value & sub-leasing rights.


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Finance lease

Ownership is not transferred in case of a

lease.

Ownership might get transferred at the end of

lease period if stated so in the lease

agreement.


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Accounting treatment of

leased asset.

In case of a finance lease, even though the

ownership is not transferred, the benefits of

the asset are used by the lessee.

Thus, prudence (substance over form) says

that leased assets should be accounted for

as if they are owned by the lessee.


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leased asset.

Thus, leased asset is recognised as asset inthe balance sheet.

Plus, the lease is also recognised as aliability in balance sheet.

The P & L A/c is debited by the financialcharge (interest) of the lease and also by thedepreciation charged on fixed asset.


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leased asset.

The lease as liability & asset will be shown at

a value:

Whichever is lower:

Fair value of asset

Present value of minimum lease payments

Depreciation is calculated as per the rules ofAS-6.


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leased asset.

Period for which depreciation is charged:

When transfer of When transfer ofOwnership is clear ownership not clear

Useful life whichever is lowerOf the asset - lease term

- useful life of asset


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leased asset.

Present value of minimum lease payments

= Initial Payment + equal lease payments

PVAF yearsinterest


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leased asset.

Position under income tax act:

Depreciation on leased assets is not recognised

The lease rentals are treated as revenue

expenses and allowed in full computation of

taxable income.


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Intangible assets

Intangible assets are non-monetary assets

without physical substance, held for use in

production or supply of goods or services, for

rental to others, or for administrative

purposes.


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Intangible assets

Like:-

Goodwill

Copyrights, patents and other industrial property

rights, service and operating rights. Know-how: design, prototypes, new processes or

systems, recipes, formulae, models.

Licenses and franchises.

Computer software Mastheads and publishing titles

Motion picture films


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Intangible assets

Two types of intangible assets

Intangible assets acquired in a business purchase

(AS-10).

Internally generated intangible assets (AS-26).


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Goodwill

According to AS-10, whenever a business is

acquired for a price which is in excess of fair

value of the net assets of the business taken

over, the excess is termed as goodwill.


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Goodwill

Goodwill arises from:

Business connections

Brands and trade names

Reputation

Quality of employees

Internal systems

Loyalty of customers, etc.


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Other intangible assets

acquired in business purchase

In business acquisition, excess price paid

leads to goodwill intangible.

But, at times part of this excess amount may

be on account of other intangible assets.


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Internally generated intangible

assets

Internally generated intangible assets are thoseexpenditures which are incurred to generate futureeconomic benefits.

Such assets are not shown as intangible assets inthe balance sheet but are understood or implied tobe intangible asset. E.g.: advertising, training, start-up, research & development, etc.

Such expenses are divided into two phases: Research

Development


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assets

Research refers to the original and planned

investigation undertaken with the prospect of

gaining new scientific or technical knowledge.

Development is the process of application of

research findings which actually leads to

producing better materials, products,processes, systems, services, etc.


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assets Intangible asset arising during research is not

recognised in the financial statements.

Intangible asset arising from development should be

recognised if the enterprise can demonstrate all of thefollowing:

Technical feasibility

Intention to use or sell the asset

Technical, financial and other resources to use theasset.

Ability to measure the expenditure incurred on itsdevelopment.

How asset would generate probable future economic

benefits.


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assets

Cost:

Cost of an internally generated intangible asset is

the total of expenditure incurred on it from the

time it is first recognised as an intangible asset.

Amortization

Amortisation is the systematic allocation ofdepreciable amount of an intangible asset over

the useful life of the asset.


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Impairment of Assets

Impairment of assets is dealt with in AS-28,

impairment of asset

Some times the assets of a company become

less useful or productive due reasons like

technical obsolescence, higher competition,

change in consumer preference, lowerdemand, etc.


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In such cases, market value of such assets would

considerably fall in comparison of the NBV.

Thus continuing to record such assets at highvalues is not prudent as it would not reflect the true

and fair financial position of the firm.

Thus it becomes necessary to calculate the

impairment loss.


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An asset is said to be impaired when it is

recorded in the balance sheet at an amount

higher than its recoverable amount.

i.e. carrying amount > recoverable amount.

Recoverable amount refers to

Higher of

Net selling price

Value in use


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Value in use

Present value of estimated future cash flows expected to

arise from the use of the asset and from its disposal at end

of its life.

The impairment loss will be shown as a charge in

P & L A/c.

And asset and its depreciation would now be shown

at the recoverable amount instead of NBV.

805 cc101 afm dd 2 valuation of assets under lease

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