Financial Lease

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sandesh (Querist)
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21 July 2008 If an Operating lease is treated as an Financial lease in the books of accounts, whats the consequences with respect to the Depreciation and Financial Statements ?

CA RAMESH KUMAR AHUJA

CA RAMESH KUMAR AHUJA (Expert)
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22 July 2008 A lease whereby the lessor does not operate the asset he leases, he merely finances it is known as Financial Lease.
On the other hand, any lease where lessor takes a risk other than a plain financial risk is an operating lease.
In the case of a financial lease, the present value of an asset and its associated liabilities is treated as a debt, and the interest on this amount recorded on the statement. The asset itself is depreciated over time, while its liabilities are amortized as the lease is paid.

In the case of an operating lease, payments are simply expensed as they are made.
In case the Operating lease is treated as a Financial Lease the asset is shown as a Fixed asset which is depreciated over time. As a result the Statement of affairs do not reflect the assets correctly.

sandesh

sandesh (Querist)
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22 July 2008 Is there any way we can correct it subsequently ?

CA PRAMOD SARAOGI

CA PRAMOD SARAOGI (Expert)
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22 July 2008 No, a lease is classified as Finance Lease or Operating lease at the inception of the lease. When a lease is classified otherwise later on, one cannot correct it subsequently.

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