Page 313 - CA Inter Audit PARAM

CA Ravi Taori
• Operating Lease.
An arrangement that does not transfer substantially all the risks and rewards incidental to ownership
qualifies as an Operating Lease. In other words, an operating lease is a lease arrangement “Other than
finance lease”.

QNO-- Main Difference Between Operating Lease & Finance Lease New Course – (M24R/M24E)
ADE.100 Bhaskar CNO – Unique

From a lessee’s perspective, highlight main differences between an operating lease and finance lease
only in relation to accounting treatment and tax benefits.
OR
JK Ltd. has opened a new manufacturing unit and for that they want plant & machinery. Since the capital
outflow will be huge, they are considering of taking it on lease. They have approached several parties
and have shortlisted one of them who is ready to give the plant on lease for 11 years, which is
approximately the estimated economic life of the asset. As per the agreement, JK Ltd. will bear the
insurance and maintenance expenses of the asset. Which kind of lease agreement have JK Ltd. entered
into and what is the ownership status, the accounting treatment and the tax benefits of the same?
Answer Accounting treatment
Operating lease is generally treated like a renting arrangement. Lease payments are treated as operating
expenses and asset does not appear as asset in lessee’s balance sheet. Finance lease is treated like a loan
arrangement Hence, asset ownership is considered of that of lessee and thus appears on the balance sheet
of the lessee.

Tax benefits
Operating lease payment is considered like an expense just as in case of renting. However, no depreciation
can be claimed by lessee. In case of finance lease, lessee can claim both interest and depreciation as it is
treated like a loan.

www.auditguru.in 9.39