Research Paper: Accounting for Lease

Topics: Lease, Finance lease, Leasing Pages: 22 (5651 words) Published: February 18, 2014

UNIVERSITY OF NAIROBI
SCHOOL OF BUSINESS
MASTER OF BUSINESS ADMINISTRATION

ADVANCED FINANCIAL ACCOUNTING
DAC 601

TOPIC: ACCOUNTING FOR LEASES

PRESENTED BY:
Mbogo Stella Mumbi……………...……...…………….D61/60246/2013 Albert Kalute Maingi……………...……...…………….D61/62221/2013

PRESENTED TO: DR. KAMASARA

TABLE OF CONTENTS:

1.0: INTRODUCTION……………………………………………………………………….. 3 1.1: Leasing………………………………………………………………………………….. 3 1.2: Definition of Terms…………………………………………………………………….. 3 1.3 Lease Classification………………………………………………………………………5

2.0: HISTORICAL BACKGROUND………………………………………………………… 8

3.0: LITERATURE REVIEW…………………………………………………………...….…. 11

3.1: THEORITICAL EVIDENCE……………………………………………………………11 3.1.1: Accounting Treatment………………………………………………………….....11 3.1.2: Tax Savings………………………………………………………………………..11 3.1.3: Borrowing Capacity…………………………………………………………….....12 3.1.4: Repayment………………………………………..……………………………….12 3.1.5: Risk Sharing……………………………………………………………………….12 3.2: EMPIRICAL EVIDENCE…………………………………………………….………... 13 3.2.1: Survey Evidence…………………………………………………………………..13 3.2.2: Indirect Evidence………………………………………………………………….14 3.2.3: Leasing In Kenya………………………………………………………………….16

4.0: ACCOUNTING TREATMENT……………………………………………………………17

5.0: UNRESOLVED ISSUES…….…………………………………………….………………20

REFERENCES………………………………………………………………………………….21

1.0: INTRODUCTION.

1.1: Leases
Acquisition of assets, particularly expensive capital equipment is a major commitment for many businesses. Rather than pay for the asset outright using cash, businesses choose to use medium term finance for investment in capital assets. Hire Purchase and Leasing offer this solution.

Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. The business customer chooses the equipment he requires and the finance company buys it on behalf of the business.

Leasing
It is a major form of ‘off balance sheet’ financing, though disclosure of leased assets and corresponding obligations in financial statements are now increasingly required internationally.

The fundamental characteristic of a lease is that ownership never passes to the business customer instead, the leasing company claims the capital allowances and passes some of the benefit on to the business customer, by way of reduced rental charges. The business customer can generally deduct the full cost of lease rentals from taxable income, as a trading expense. As in hire purchase, the business customer will normally be responsible for maintenance of the equipment.

1.2: Terms used in leasing

a)Lessor:
This is the person, who under an agreement conveys to another person (the lessee) the right to use in return for rent, an asset for an agreed period of time. b)Lessee:
This is a person, who under an agreement obtains from another person (the lessor) the right to use, in return for rent, an asset for an agreed period of time. c)Non-cancellable lease:
A lease that is cancellable only:
Upon the occurrence of some remote contingency.
With the permission of the lessor.
If the lessee enters into a new lease for the same or any equivalent asset with the same lessor. d)Inception of the lease:
It is the date that the principal provisions of the lease are committed to in writing by the parties. e)Lease term:
The non-cancellable period for which the lessee has contracted to take on lease the asset, together with any further periods for which the lessee has the option to continue the lease of the asset, with or without further payment. Thus, it is the period which the lessee is required or expected to make lease payments and it includes: f)Non-cancellable term of the lease

-Any period for which failure to renew the lease results in a penalty to the lease in an amount, at the inception of the lease -Any period subject to a bargain renewal option or proceeding the...


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