Contracts, leases and licences Anne Harrison. Five topics Clarify definitions of leases Ownership when asset is shared under lease Look at valuation of.

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Presentation transcript:

Contracts, leases and licences Anne Harrison

Five topics Clarify definitions of leases Ownership when asset is shared under lease Look at valuation of items subject to leases When is a contract, lease or licence an asset? Treatment of various permits

Three types of lease Operating Financial Resource

Operating lease - fixed asset One where the legal owner is also the economic owner and accepts the operating risks and receives the economic benefits from the asset by using it in a productive activity which require him as lessor to provide any necessary repair and maintenance for the asset. The asset remains on the balance sheet of the lessor.

Financial lease - fixed asset One where the lessor as legal owner, passes the economic ownership to the lessee who then accepts the operating risks and receives the economic benefits from the asset by using it in a productive activity which requires him as lessee to provide any necessary repair and maintenance…..

Financial lease - cont The asset is recorded on the balance sheet of the lessee but with a loan payable by the lessee to the lessor. Initially the value of thelaon is equal to the net present value of the payments due under the lease and each period the payments ae shown as reducing the outstanding balance of the loan and interest.

More Does not need to be for whole life of asset Give advice on breakdown f payments into loan repayment and interest Financial service may also be provided

Resource lease An agreement whereby the legal owner of a natural resource which has an infinite life makes it available to a lessee in return for a regular payment recorded as property income and described as rent. The resource is recorded on the balance sheet of the lessor. No consumption of fixed capital is recorded for either lessor or lessee.

Shared ownership Financial lease for fixed assets Non-produced assets not subject to depletion –Mobile phone if eventual return to owner –Sale if lease is infinite or renewable for nominal amount –Rent if no change in ownership Non-produced assets subject to depletion - financial lease (least bad option)

Valuation Under operating lease, contract price is market price even if a newly leases identical asset would command a different price Value of asset on balance sheet of owner is encumbered value (net present value of future rentals)

When is a lease an asset? Financial lease - never (may have sale of asset and repayment of loan) Operating (or resource) lease - if prevailing market price is different from market price and if the lessee is able legally and practically to sub-contract a lease, the lease is an asset

Lease as asset - cont Value of lease is unencumbered value less encumbered value Describe as contract, leases and licences (third party property rights, marketable operating leases) In practice only record when it happens

Permits One time extraction of natural resource - sale of asset Permission by government to undertake special activities (taxi, casino) - tax Non-government permit - property income if it is use of an asset, payment for a service otherwise

Permits - cont Government permits can be onsold - treat in parallel manner to tradeable operating leases - difference between selling price and payment to government is an asset for the initial permit holder if it resale is legally and practically possible Third party property rights - tradeable permits

Future provision Goods, eg aircraft options - does not exist Services - footballer asset under contracts, leases and licences (entitlement to future service on nominated legal persons on an exclusive basis)

Loose ends Prepayments - may be acquisition of an asset or of trade credit (for future services) depending on terms of lease Contribution of an asset is treated as financial transaction and acquisition of an asset Lost deposits - payments for goods, services