1. THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA Thilanka Warnakulasooriya B.Com Special (Col), ACA, MBA Fin ( Col) POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2014/2015 Principles of Financial and Cost Accounting

2. LKAS 17 LEASES

3. Lease. An agreement whereby the lessor conveys to the lessee in return for payment the right to use an asset for an agreed period of time. Finance lease. A lease that transfers substantially all the risks and rewards of ownership of an asset. Title need not necessarily be eventually transferred. Operating lease. A lease that is not a finance lease. Minimum lease payments. The payments over the lease term that are required to be made. For a lessee, this includes any amounts guaranteed to be paid; for a lessor, this includes any residual value guaranteed to the lessor.

4. Finance lease – become an asset Operating lease – rent will be charged to P/L as an expense

5. Finance leases are accounted for by lessees as an asset purchased on credit (a liability). Initially, the liability is recognised at: the fair value of the leased property, or if lower the present value of the minimum lease payments—the implicit interest rate is used as the discount rate Lease payments are apportioned between a reduction in the lease liability and interest expense. 5 Finance leases © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

6. Ex: On1st April 2013 Calton Co Purchased a Machinery under the finance lease agreement with LOLC The lease period is Five years, The fair value of the Machinery was LKR11,500. Lease rentals was 3,034 are payable annually in arrears on 31 March each year. The rate of interest implicit in the lease is 10%. How should the lease be accounted for in the financial statements of Bush for the year end 31 March 2014?

7. Operating leases Rentals are charged to profit or loss on a systematic basis over the period of the lease No balances appear in the statement of financial position other than accruals and prepayments on rented rather than owned assets.

8. Ex: An entity enters into an operating lease arrangement for the use of a piece of machinery for a period of three years. The useful life of the asset is estimated as being around fifteen years. The entity will pay annual rentals of LKR1,000 over the three years. The entity expects the machinery to be used evenly over the three-year period so the annual rental of LKR1,000 should be recognised in each of the three years.