Page 18 - 6. COMPILER QB - INDAS 116

Relating to the rights transferred to Buyer-lessor (D - E) 6,26,880

At the commencement date, Seller-lessee accounts for the transaction, as follows:
Bank / Cash A/c Dr. 28,00,000
ROU Asset A/c Dr. 6,20,880
To Building 13,00,000

To Financial Liability 14,94,000
To Gain on rights transferred 6,26,880

Q11. (Jan. 21 – 6 Marks)

Coups Limited availed a machine on lease from Ferrari Limited. The terms and conditions of the lease are as
under:
Lease period is 3 years, machine costing Rs. 8,00,000

- Machine has expected useful life of 5 years.
- Machine reverts back to Ferrari Limited on termination of lease.
- The unguaranteed residual value is estimated at Rs. 50,000 at the end of 3rd year.
- 3 equal annual installments are made at the end of each year.
- Implicit Interest Rate (IRP)= 10%.

- Present value of Rs. 1 due at the end of 3rd year at 10% rate of interest is 0.7513.
- Present value of annuity of Rs. 1 due at the end 3rd year at 10% IRP is 2.4868.
You are required to ascertain whether it is Finance Lease or Operating Lease and also calculate Unearned
Finance Income with the relevant context to relevant Ind AS.

SOLUTION
It is assumed that the fair value of the machine on lease is equivalent to the cost of the machine.
(i) A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of

an underlying asset. A lease is classified as an operating lease if it does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset.
(ii) Computation of annual lease payment to the lessor
Rs.
Cost of equipment / fair value 8,00,000
Unguaranteed residual value 50,000
Present value of residual value after third year @ 10% (50,000 x 0.7513) 37,565
Fair value to be recovered from lease payments (8,00,000 – 37,565)
Present value of annuity for three years is 2.4868 7,62,435
Annual lease payment = 7,62,435 / 2.4868
3,06,593

The present value of lease payment i.e., Rs.7,62,435 is more than 95% of the fair market value i.e., Rs. 8,00,000. The
present value of minimum lease payments substantially covers the initial fair value of the leased asset and lease term (i.e.
3 years) covers the major part of the life of asset (i.e. 5 years). Therefore, it constitutes a finance lease.

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