Chapter 21

LEASES (IAS-17)
Objectives
The objective of this IAS is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosure to apply in relation to leases.
Scope
This Standard shall be applied in accounting for all leases other than:
a) leases to explore for or use minerals, oil, natural gas and similar non-
regenerative resources; and
b) Licensing agreements for such items as motion picture films, video recordings,
plays, manuscripts, patents and copyrights.
However, this Standard shall not be applied as the basis of measurement for:
a) property held by lessees that is accounted for as investment property (see IAS
40 Investment Property);
b) investment property provided by lessors under operating leases (see IAS 40);
c) biological assets held by lessees under finance lease (see IAS 41 Agriculture);
or
d) biological assets provided by lessors under operating leases (see IAS 41)
Definitions
A lease is an agreement whereby the lessor conveys to the lessee in return for a
payment or series of payments the right to use an asset for an agreed period of
time.
A finance lease is a lease that transfers substantially all the risks and rewards
incidental to ownership of an asset. Title may or may not eventually be transferred.
An operating lease is a lease other than a finance lease
A non-cancelable lease is a lease that is cancelable only:
a) upon the occurrence of some remote contingency;
b) with the permission of the lessor;
c) if the lessee enters into a new lease for the same or an equivalent asset with
the same lessor; or
d) upon payment by the lessee of such an additional amount that, at inception
of the lease, continuation of the lease is reasonably certain.
The inception of the lease is the earlier of the date of the lease agreement and the
date of commitment by the parties to the principal provisions of the lease. As at this
date:
a) a lease is classified as either an operating or a finance lease; and
b) in the case of a finance lease, the amounts to be recognized at the
commencement of the lease term are determined.
The commencement of the lease term is the date from which the lessee is entitled to
exercise its right to use the leased asset. It is the date of initial recognition of the
lease (ie the recognition of the assets, liabilities, income or expenses resulting from
the lease, as appropriate).
The lease term is the non-cancelable period for which the lessee has contracted to
lease the asset together with any further terms for which the lessee has the option to
continue to lease the asset, with or without further payment, when at the inception
of the lease it is reasonably certain that the lessee will exercise the option.

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Minimum lease payments are the payments over the lease term that the lessee is or
can be required to make, excluding contingent rent, costs for services and taxes to
be paid by and reimbursed to the lessor, together with:
a) for a lessee, any amounts guaranteed by the lessee or by a party related to
the lessee; or
b) for a lessor, any residual value guaranteed to the lessor by:
i) the lessee;
ii) a party related to the lessee; or
iii) a third party unrelated to the lessor that is financially capable of
discharging the obligations under the guarantee.
However, if the lessee has an option to purchase the asset at a price that is
expected to be sufficiently lower than fair value at the date the option becomes
exercisable for it to be reasonably certain, at the inception of the lease, that the
option will be exercised, the minimum lease payments comprise the minimum
payments payable over the lease term to the expected date of exercise of this
purchase option and the payment required to exercise it.
Fair value is the amount for which an asset could be exchanged, or a liability settled,
between knowledgeable, willing parties in an arm’s length transaction.
Economic life is either:
a) the period over which an asset is expected to be economically usable by
one or more users; or
b) the number of production or similar units expected to be obtained from the
asset by one or more users.
Useful life is the estimated remaining period, from the commencement of the lease
term, without limitation by the lease term, over which the economic benefits
embodied in the asset are expected to be consumed by the entity.
Guaranteed residual value is:
a) for a lessee, that part of the residual value that is guaranteed by the lessee or
by a party related to the lessee (the amount of the guarantee being the
maximum amount that could, in any event, become payable); and
b) for a lessor, that part of the residual value that is guaranteed by the lessee or
by a third party unrelated to the lessor that is financially capable of
discharging the obligations under the guarantee.
Un-guaranteed residual value is that portion of the residual value of the leased
asset, the realization of which by the lessor is not assured or is guaranteed solely by a
party related to the lessor.
Initial direct costs are incremental costs that are directly attributable to negotiating
and arranging a lease, except for such costs incurred by manufacturer or dealer
lessors.
Gross investment in the lease is the aggregate of:
a) the minimum lease payments receivable by the lessor under a finance lease,
and
b) any un-guaranteed residual value accruing to the lessor.
Net investment in the lease is the gross investment in the lease discounted at the
interest rate implicit in the lease.
Unearned finance income is the difference between:
a) the gross investment in the lease, and
b) the net investment in the lease

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The interest rate implicit in the lease is the discount rate that, at the inception of the
lease, causes the aggregate present value of (a) the minimum lease payments and
(b) the un-guaranteed residual value to be equal to the sum of (i) the fair value of
the leased asset and (ii) any initial direct cost of the lessor.
The lessee’s incremental borrowing rate of interest is the rate of interest the lessee
would have to pay on a similar lease or, if that is not determinable, the rate that, at
the inception of the lease, the lessee would incur to borrow over a similar term, and
with a similar security, the funds necessary to purchase the asset.
Contingent rent is that portion of the lease payments that is not fixed in amount but is
based on the future amount of a factor that changes other than with the passage
of time (eg percentage of future sales, amount of future use, future use, future price
indices, future market rate of interest).
Classification of Leases
• The classification of lease is based on the extent to which risk (possibility of
losses from idle capacity or technological obsolescence) and rewards
(variation in rewards) incident to ownership lie with the lessor or the lessee.
• A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incidental to ownership. A lease is classified as an operating lease if it
does not transfer substantially all the risks and rewards incidental to ownership.
• Examples of situations that individually or in combination would normally lead
to lease being classified as a finance lease are: -
a) the lease transfers ownership of the asset to the lessee by the end of the
lease term;
b) the lessee has the option to purchase the asset at a price substantially
lower than the fair value at the date the option becomes exercisable and
it is reasonably certain that the option will be exercised;
c) the lease term is for a major part of the economic life of the asset even if
title is not transferred;
d) at the inception of the lease the present value of minimum lease
payments amounts to at lease substantially all the fair value of the leased
asset; and
e) the leased assets are of such a specialized nature that only the lessee can
use then without major modification
• Further examples that could also lead to a lease being classified as a finance
lease: -
a) if the lessee can cancel the lease, the lessor’s losses associated with the
cancellation are borne by the lessee;
b) gains or losses from the fluctuation in the fair value of the residual accrue
to the lessee; and
c) the lessee has the ability to continue the lease for a secondary period at a
rent that is substantially lower than market rent
• Leases of land and building are classified as operating or finance leases like
leases of other assets.
• The land and building elements of a lease of land and building are considered
separately for the purpose of lease classification and the minimum lease
payments are allocated between the land and the buildings elements in
proportion to the relative fair values of the leasehold interest in the land
element and buildings element of the lease at the inception of the lease. If the
lease payments cannot be allocated reliably between these two elements, the

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 entire lease is classified as a finance lease, unless it is clear that both elements
are operating leases. If the land element of the lease is immaterial then the
whole lease will be classified on the basis of lease of building. Separate
measurement of the land and building elements is not required when the
lessee’s interest in both land and building is classified as an investment property
and fair value model is used (IAS –40).
Leases in the financial Statement of Lessees
Finance Leases
Initial Recognition
At the commencement of the lease term, lessees shall recognize finance
leases as assets and liabilities in their statement of financial position at
amounts equal to the fair value of the leased property or, if lower, the present
value of the minimum lease payments, each determined at the inception of
the lease. The discount rate to be used in calculating the present value of the
minimum lease payments is the interest rate implicit in the lease, if this is
practicable to determine; if not, the lessee’s incremental borrowing rate shall
be used. Any initial direct costs of the lessee are added to the amount
recognized as an asset.
Subsequent Measurement
• Minimum lease payments shall be apportioned between the finance
charge and the reduction of the outstanding liability. The finance
charge shall be allocated to each period during the lease term so as to
produce a constant periodic rate of interest on the remaining balance
of the liability. Contingent rents shall be charged as expenses in the
periods in which they are incurred.
• Finance lease gives rise to depreciation expenses for depreciable assets
as well as finance expense for each accounting period. The
depreciation policy for depreciable leased assets shall be consistent
with that for depreciable assets that are owned, and the depreciation
recognized shall be calculated in accordance with IAS 16 Property,
Plant and Equipment and IAS 38 Intangible Assets. If there is no
reasonable certainty that the lessee will obtain ownership by the end of
the lease term, the asset shall be fully depreciated over the shorter of
the lease term and its useful life.
• Lessees shall, in addition to meeting the requirements of IFRS 7 Financial
Instruments: Disclosure and Presentation, make the following disclosures
for finance leases:
a) For each class of asset, the net carrying amount at the
statement of financial position date.
b) Reconciliation between the total of future minimum lease
payments at the statement of financial position date, and their
present value. In addition, an entity shall disclose the total of
future minimum lease payments at the statement of financial
position date, and their present value, for each of the following
periods:
i) Not later than one year;
ii) Later than one year and not later than five years;
iii) Later than five years.
c) Contingent rents recognized as an expense in the period.

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 d) The total of future minimum sub-lease payments expected to be
received under non-cancelable sub-leases at the statement of
financial position date.
e) A general description of the lessee’s material leasing
arrangements including, but not limited to, the following:
i) the basis on which contingent rent payable is
determined;
ii) the existence and terms of renewal or purchase options
and escalation clauses; and
iii) restrictions imposed by lease arrangements, such as
those concerning dividends, additional debt, and further
leasing.
Operating Leases
• Lease payments under an operating lease shall be recognized as an expense
on a straight-line basis over the lease term unless another systematic basis is
more representative of the time pattern of the user’s benefit.
• Lessees shall, in addition to meeting the requirements of IFRS 7, make the
following disclosures for operating leases:
a) the total of future minimum lease payments under non-cancelable
operating leases for each of the following periods:
i) not later than one year;
ii) later than one year and not later than five years;
iii) later than five years.
b) The total of future minimum sublease payments expected to be
received under non-cancelable subleases at the statement of
financial position date.
c) Lease and sublease payments recognized as an expense in the period,
with separate amounts for minimum lease payments, contingent rents,
and sublease payments.
d) A general description of the lessee’s significant leasing arrangements
including, but not limited to, the following:
i) the basis on which contingent rent payable is determined;
ii) the existence and terms of renewal or purchase options and
escalation clauses; and
iii) restrictions imposed by lease arrangements, such as those
concerning dividends, additional debt and further leasing.
Leases in Financial Statements of Lessors
Finance Leases
Initial Recognition
Lessors shall recognize assets held under a finance lease in their statement of
financial position and present them as a receivable at an amount equal to
the net investment in the lease.
Subsequent Measurement
• The recognition of finance income shall be based on a pattern
reflecting a constant periodic rate of return on the lessor’s net
investment in the finance lease.
• Manufacturer or dealer lessor shall recognize selling profit or loss in the
period, in accordance with the policy followed by the entity for outright

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 sales. If artificially low rates of interest are quoted, selling profit shall be
restricted to that which would apply if a market rate of interest were
charged. Costs incurred by manufacturer or dealer lessors in connection
with negotiating and arranging a lease shall be recognized as an
expense when the selling profit is recognized.
Manufacturer or dealers often offer to customers the choice of either
buying or leasing an asset. A finance lease of an asset by a
manufacturer or dealer lessor gives rise to two types of incomes: -
a) profit or loss equivalent to the profit or loss resulting from an
outright sale of the asset being leased, at normal selling prices,
reflecting an applicable volume or trade discounts; and
b) finance income over the lease term
• Lessors shall, in addition to meeting the requirements in IFRS 7, disclose
the following for finance leases:
a) a reconciliation between the gross investment in the lease at
the statement of financial position date, and the present value
of minimum lease payments receivable at the statement of
financial position date. In addition, an entity shall disclose the
gross investment in the lease and the present value of minimum
lease payments receivable at the statement of financial
position date, for each of the following periods:
i) not later than one year;
ii) later than one year and later than five years;
iii) later than five years.
b) Unearned finance income
c) The un-guaranteed residual values accruing to the benefit of
the lessor
d) The accumulated allowance for un-collectible minimum lease
payments receivable
e) Contingent rents recognized as income in the period
f) A general description of the lessor’s material leasing
arrangements
Operating Leases
• Lessors shall present assets subject to operating lease in their statement
of financial position according to the nature of the asset.
• Lease income from operating leases shall be recognized in income on a
straight-line basis over the lease term, unless another systematic basis is
more representative of the time pattern in which use benefit derived
from the leased asset is diminished.
• Initial direct costs incurred by lessors in negotiating and arranging an
operating lease shall be added to the carrying amount of the leased
asset and recognized as an expense over the lease term on the same
basis as the lease income.
• The depreciation policy for depreciable leased assets shall be consistent
with the lessor’s normal depreciation policy for similar assets, and
depreciation shall be calculated in accordance with IAS 16 and IAS 38.
• Lessors shall, in addition to meeting the requirements of IFRS 7, disclose
the following for operating leases:

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 a) the future minimum lease payments under non-cancelable
operating leases in the aggregate and for each of the following
periods:
i) not later than one year;
ii) later than one year and not later than five years;
iii) later than five years.
b) Total contingent rents recognized as income in the period.
c) A general description of the lessor’s leading arrangements.
Sale and Leaseback Transactions
• If a sale and leaseback transaction results in a finance lease, any excess
of sales proceeds over the carrying amount shall not be immediately
recognized as income by a seller-lessee. Instead, it shall be deferred and
amortized over the lease term.
• If a sale and leaseback transaction is an operating lease, and it is clear
that the transaction is established at fair value, any profit or loss shall be
recognized immediately. If the sale price is below fair value, any profit or
loss shall be recognized immediately except that, if the loss is
compensated for by future lease payments at below market price, it
shall be deferred and amortized in proportion to the lease payments
over the period for which the asset is expected to be used. If the sale
price is above fair value, the excess over fair value shall be deferred and
amortized over the period for which the asset is expected to be used.
• For operating leases, if the fair value at the time of a sale and leaseback
transaction is less than the carrying amount of the asset, a loss equal to
the amount of the difference between the carrying amount and fair
value shall be recognized immediately.
E-1
The lease is initiated on 1/1/05 for equipment with an expected useful life of 3 years.
The equipment reverts back to the lessor on expiration of the lease agreement.
1. The FMV of the equipment is Rs. 135,000.
2. Three payments are due to the lessor in the amount of Rs. 50,000 per year
beginning 12/31/05. An additional sum of Rs. 1,000 is to be paid annually by
the lessee for insurance.
3. Lessee guarantees a Rs. 10,000 residual value on 12/31/07 to the lessor.
4. Irrespective of the Rs. 10,000 residual value guarantee, the leased asset is
expected to have only a Rs.1,000 salvage value on 12/31/07.
5. The lessee’s incremental borrowing rate is 10% (lessor’s implicit rate is
unknown).
Required:
1. Annuity Factor and Present Value of Minimum Lease Payments
2. Repayment Schedule
3. Prepare accounts for
• Lease Liability
• Leased Asset
• Accumulated Depreciation
• Interest
E-2
Accounting for a finance lease, asset ownership transferred to lessee and fair market
value of leased asset lower than present value of minimum lease payments.

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 1. A 3-year lease is initiated on 1/1/05 for equipment with an expected useful life
of 5 years.
2. Three annual lease payments of Rs. 52,000 are required beginning on 1/1/05
(note that the payment at the beginning of the year changes the PV
computation). The lessor pays Rs. 2,000 per year for insurance on the
equipment.
3. The lessee can exercise a bargain purchase option on 12/31/07 for Rs. 10,000.
The expected residual value at 12/31/08 is Rs. 1,000.
4. The lessee’s incremental borrowing rate is 10% (lessor’s implicit rate is
unknown).
5. The fair market value of the property leased is Rs. 140,000.
Required:
1. Present Value of Minimum Lease Payments
2. Interest Rate (by Trial and Error Method)
3. Repayment Schedule
4. Prepare Accounts for :
• Interest
• Leased Liability
E-3
XYZ Inc. is a manufacturer of specialized equipment. Many of its customers do not
have the necessary funds or financing available for outright purchase. Because of
this XYZ offers a leasing alternative. The data relative to a typical lease are as follows:
1. The non-cancelable fixed portion of the lease term is 5 years. The lessee has
the option to renew the lease for an additional 3 years at the same rental. The
estimated useful life of the asset is 10 years. Lessee guarantees a residual
value of Rs. 40,000 at the end of 5 years, but the guarantee lapses if the full 3
renewal periods are exercised.
2. The lessor is to receive equal annual payments over the term of the lease. The
leased property reverts back to the lessor on termination of the lease.
3. The lease is initiated on 1/1/05. Payments are due on 12/31 for the duration of
the lease term.
4. The cost of the equipment to XYZ. Inc. is Rs. 100,000. The lessee incurs cost
associated with the inception of the lease in the amount of Rs. 2,500.
5. The selling price of the equipment for an outright purchase is Rs. 150,000.
6. The equipment is expected to have a residual value of Rs. 15,000 at the end
of 5 years and Rs. 10,000 at the end of 8 years.
7. The lessor desires a return of 12% (the implicit rate).
Required:
a) MLPs.
b) Identify the kind of lease.
c) Gross Investment
d) Cost of Goods Sold
e) Adjusted Selling Price
f) Unearned Finance Income
g) Entries to record the Lease in the lessor’s books at it’s inception and
the end of the first year of lease.
E-4
Emirates Refining needs new equipment to expand its manufacturing operation;
however, it does not have sufficient capital to purchase the asset at this time.
Because of this, Emirates Refining has employed Consolidated Leasing to purchase

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the asset. In turn, Emirates will lease the asset from Consolidated. The following
information applies to the terms of the lease:
1. A 3-year lease is initiated 1/1/05 for equipment costing Rs. 131,858, with an
expected useful life of 5 years. FMV at 1/1/05 of equipment is Rs. 131,858.
2. Three annual payments are due to the lessor beginning 12/31/05. The
property reverts back to the lessor on termination of the lease.
3. The un-guaranteed residual value at the end of year 3 is estimated to be Rs.
10,000.
4. The annual payment are calculated to give the lessor a 10% return (the
implicit rate).
5. The lease payments and un-guaranteed residual value have a PV equal to
Rs. 131,858 (FMV of asset) at the stipulated discount rate.
6. The initial direct cost of the lessor is Rs. 7,500.
Required:
a) The annual payment
b) Unearned Finance Income and Net Investment in the Lease
c) Amortization Schedule
d) The entry made initially to record the Lease
e) Using the amortization schedule made above, the entries that would
be made in each of the indicated years

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PAST PAPERS

Q.1
(a) A lessee enters a leasing arrangement on 31 December 20X3 for a piece of
equipment costing Rs.47,460. The lease requires the payment of an annual
rental of Rs. 13,610 payable in advance. The primary period of the lease is
four years. After the end of primary period, the lessee has the right to extend
the lease indefinitely on payment of a nominal annual rental. The lessee
believes that the equipment will last for four years and will have no scrap
value at the end of that period. The lessee depreciates assets of this type
using the straight line basis. Both the lessor and the lessee have accounting
periods ending on 31 December.
(i) Calculate the IRR of the lease.
(ii) Prepare the note of “Debtors” as it would appear in the accounts of
the lessor. (10)
(b) State the disclosure requirements for Lessees in case of operating leases in
accordance with IAS – 17. (05)

Q.2
(a) An enterprise agrees to enter into a new lease agreement with a new lessor.
The lessor agrees to a rent free period for the first three years as incentive to
the lessee for entering into the new lease. The new lease has a term of 20
years, at a fixed rent of Rs.200,000 per year from year 4 to 20. Determine the
amount of expense to be charged by the lessee for the first three years and
the remaining 17 years. What amount would the lessor recognize as income
from year 1 to year 20? (05)
(b) Give disclosure requirements for the ‘Discontinued Operation’ under IFRS 5.
(05)
(c) Discuss the implication of change in accounting policy in interim financial
reporting requirements. (05)

.Q.3
DJ Products deals in large office machines. It also offers such machines on lease.
One such machine was leased to a customer on July 1, 2004. Its particulars are as
follows:

Purchase cost of DJ Products Rs. 150,000

Useful life 8 years
Lease period 6 years
Unguaranteed residual value Rs. 10,000
Annual rental payable at beginning of each year Rs. 36,500
The customer's incremental borrowing rate is 10% whereas the discounting rate
implicit in the lease is 8%.
The present values of a single payment of Re.1 and the present values of annuities of
Re.1 received at the end of the year are as follows:

Present value of Re.1

Year Single payment Annuities
8% 10% 8% 10%
1 0.926 0.910 0.926 0.910

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 2 0.857 0.826 1.783 1.736
3 0.794 0.751 2.577 2.487
4 0.735 0.683 3.312 3.170
5 0.681 0.621 3.993 3.791
6 0.630 0.564 4.623 4.355
7 0.583 0.513 5.206 4.868
8 0.540 0.467 5.747 5.335
Required:
(a) Compute the following for DJ Products as at July 1, 2004:
(i) Gross investment in the lease;
(ii) Unearned finance income.
(b) Extracts of profit and loss account and balance sheet including notes
thereon, as at June 30, 2005 including all necessary disclosures as required
under IAS-17. (16)

Q.4
Taqi Limited has obtained a fleet of Trucks and Busses under a three years lease
contract from Faraz Leasing Company Limited. Total cost of assets is Rs. 75 million
and the expected economic life is considered to be 15 years. Lease rentals of Rs. 12
million per annum shall be paid at the end of each year. The market rate of return is
10%.
It has been agreed that Taqi Limited will return the assets at the end of the lease
term. According to the terms of the contract, Taqi Limited is required to deposit cash
equivalent to 20% of the total cost of the fleet before taking delivery of assets. The
deposit does not carry any return and will be refunded in full at the end of the lease
term.
Required:
(a) Comment on the accounting treatment of the above arrangement, from the
lessee’s point of view.
(b) Prepare accounting entries in the books of the lessee at the inception of
lease and at the end of each year. (14)

Q.5
Auto Construction Pakistan Limited (ACPL) is engaged in the business of renting of
construction machinery.
On March 15, 2009 ACPL negotiated and finalised an agreement for purchase of
used machinery from Malaysia. The price on FOB basis was agreed at US$ 0.4 million.
The machinery was loaded on the ship on April 1, 2009 and arrived at the company
premises on May 31, 2009. According to the agreement a down payment of 10%
was made on the date of loading. The remaining amount was paid on June 30,
2009. The US$ conversion rates on April 1, May 31 and June 30 were Rs. 80.90, Rs.
81.60 and Rs. 82.70 respectively. A cost of Rs. 4 million was incurred on freight, taxes
and other charges.
Economic life of the machinery is 10 years.
On July 1, 2009, ACPL sold the machinery to Smart Investment Limited for Rs. 40
million and leased it back under the following arrangement:
(i) Lease term of 5 years commencing from July 1, 2009.
(ii) 10 half yearly installments of Rs. 5.50 million each payable in arrears.
(iii) Interest rate implicit in the lease at 12.506% On July 1, 2009 ACPL rented the
machinery to a customer for three years at a half yearly rent of Rs. 5 million
each, payable in advance with 5% annual increase.
Page 11 of 30
Required:
Prepare notes to the financial statements for the year ended December 31, 2009 in
accordance with the requirement of IAS 17 (Leases). (13)

Q.6
Hi-Tech Pakistan Limited (HPL) is a public limited company and deals in medical
equipments. On 1 October 2009 HPL had introduced a Robotic Surgery System for
the first time in Pakistan.
In November 2009, HPL had launched a country wide sales promotion campaign to
introduce the system in various hospitals at a cost of Rs. 16 million whereas
expenditure on training of the technical staff amounted to Rs. 12 million.
On 1 April 2010 HPL signed a lease agreement with Comforts Hospital for sale and 3-
year maintenance of the system. The terms of the agreement are as under:
Lease period 3 years
Initial payment on signing of the agreement Rs. 20 million
6 half yearly installments commencing 30 September 2010 Rs. 25 million
Implicit rate of interest per annum 15.192%
Cost of the system is Rs. 100 million whereas maintenance cost of the system for the
three years was estimated at Rs. 8.4 million. To cash customers, the system is sold at a
mark-up of 25% on cost. HPL expects a gross margin of 30% on such maintenance
contracts, whereas actual costs incurred on the maintenance, during the year
ended 30 September 2011 amounted to Rs. 2.5 million (2010: Rs. 1.7 million).
The hospital was unable to pay the installment due on 31 March 2011 due to
solvency problems. After intense negotiations, HPL and the hospital agreed to a
restructuring arrangement, whereby the hospital would settle its obligation by
paying 4 half yearly installments of Rs. 32 million each, commencing from 30
September 2011.
Required:
Compute the impact of the above transactions on various items forming part of the
statements of comprehensive income and financial position of Hi-Tech Pakistan
Limited for the year ended 30 September 2011 in accordance with International
Financial Reporting Standards. Give comparative figures. (Notes to the financial
statements are not required.) (16 marks)

Q.7
In December 2012, Arabian Automotives Limited (AAL) had launched a campaign
to offer Hybrid Technology cars under a finance lease arrangement.
On 1 January 2013, AAL provided 10 cars to a customer. Details of the lease of each
car are as under:
• Rs. 300,000 was paid on delivery of the car.
• Three equal annual installments of Rs. 580,000 each are payable in arrears.
• Periodic servicing of the car will be free of charge for the entire lease period.
The estimated cost of servicing a car is Rs. 10,000 per year. AAL provides such
services at cost plus 20%.
• Actual servicing cost incurred for the year ended 31 December 2013
amounted to Rs. 11,000
• Implicit rate of return is 12% which is equivalent to market rate of interest.
Ex-factory price fixed by the manufacturer is Rs. 1,800,000. AAL gets 15% discount on
the ex-factory price from the manufacturer. (10)

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Q.8
On 1 April 2014, ISL disposed of its power generation system to Komal Limited (KL) for
a consideration of Rs. 135 million. At the same time, ISL entered into a long-term
agreement with KL whereby the assets were leased back under a 10-year operating
lease. At the time of sale, the fair value and the carrying value of the assets were Rs.
160 million. The lease rentals are Rs. 22 million per annum. The market value of lease
rentals of such type of assets is Rs. 24 million.
Required:
Prepare journal entries to record the above transactions for the year ended 31
March 2015. (04)

Page 13 of 30
SOLUTIONS TO EXAMPLES
E-1
1.) Present value of Minimum Lease Payments

Present value = (Cash flow*Annuity Factor) + (Discount Factor* Guaranteed residual

value)
= (50,000*2.49) + (10,000*0.75)
= 131,842

*Annuity Factor=1-(1+i)n / i
=1-(1+0.1)-3 / 0.1

=2.4869

2.)Repayment Schedule:
Years Installment Interest Principal Balance
Rs. Rs. Rs. Rs.
1/1/05 131,842
31/12/05 50,000 13,184 36,186 95,026
31/12/06 50,000 9,503 40,497 54,529
31/12/07 50,000 5,453 44,529 10,000

3.)
Leased Liability a/c
Rs. Rs.
Bank (31/12/05) 36,816 Leased Asset (1/1/05) 131,842
c/d 95,026
131,842 131,842
b/f (1/1/06) 95,026
Bank 40,497
c/d 54,529
95,026 95,026
b/f 54,529
Bank 44,529
Bank 9,000
Asset 1,000
54,529 54,529

Leased Asset a/c

Rs. Rs.
Leased liability (1/1/5) 131,842 c/d 131,842
131,842 131,842

b/f (1/1/06) 131,842 c/d 131,842

131,842 131,842

b/f 131,842 Accumulated Depr 130,842

Leased Liab 1,000
131,842 131,842

Accumulated Depreciation a/c

Page 14 of 30
 Rs. Rs.
Depreciation 43,614
c/d 43,614
43,614 43,614
b/f (1/1/06) 43,614
c/d 43,614
43,614 43,614
b/f 43,614
c/d 87,228 Depreciation 43,614
87,228 87,228
b/f 87,228
Leased Asset 130,842 Depreciation 43,614
130,842 130,842

Interest a/c
Rs. Rs.
Bank (31/12/05) 13,184 P & L 13,184
13,184 13,184

Bank (31/12/06) 9,503 P & L 9,503

9,503 9,503

Bank 5,471 P & L 5,471

5,471 5,471

E-2
1.) Present value of Minimum Lease Payments

Minimum Lease Rentals=Rs.52,000-Rs.2000

=Rs.50,000

It is noteworthy that since the lessor pays Rs.2,000 a year for insurance, this payment
is treated as executory costs and hence excluded from the calculation of the
present value of annual payments.

P.V of MLP = 50,000 + (1.735*50,000) + (10,000*Discount Factor (D.F))

= 50,000 + 86,775 +10,000 x (1+0.1) -3
= 144,290

Annuity Factor =1-(1+i)-n / i

(used in the above calculation) = 1-(1.1)-2 / 0.1
=1.7355

2.) Calculation of the Interest Rate by Trial and Error Method

Let rate of interest = 15%

PV of MLP’s @ 15%= 50,000 + (Annuity Factor*50,000) + (D.F*10,000)

= 50,000 + (1.625*50,000) + (0.65*10,000)
=137,860

Difference=Rs.140,000-Rs.137,860

Page 15 of 30
 =Rs.2,140

NPV1
Rate = R1 + (R2 − R1 )
NPV1 − NPV2

= 10 + 4290/(4290+2140)*5

= 13.335%

3.) Repayment Schedule:

4.)
The Leased Obligation is recorded at the lower of the FV or the PV of MLP’s.
In this case FV is lower.

Balance at
Date Installments Interest Principle the end of
period
1/1/05 140,000
1/1/05 50,000 0 50,000 90,000
1/1/06 50,000 12,000 38,000 52,000
1/1/07 50,000 6,934 43,066 8,934
31/12/08 10,000 1,066 8,934 -

4.)
Interest Expense a/c
‘05 Rs. ‘05 Rs.
Interest Payable a/c 12,000 P & L 12,000
12,000 12,000
‘06 ‘06
Interest Payable 6,934 P & L 6,934
6,934 6,934
‘07 ‘07
Lease Liability 1,066 P & L 1,066
1,066 1,066

Leased Liability a/c

Rs. Rs.
1/1/05 1/1/05
Bank 50,000 Leased Asset 140,000
c/d 90,000
140,000 140,000
1/1/06
1/1/06 b/d 90,000
Bank 38,000
c/d 52,000
90,000 90,000
1/1/07

Page 16 of 30
1/1/07 b/d 52,000
Bank 43,066 Interest Expense 1,066
Bank(for the bargain 10,000
purchase option)
53,066 53,066

E-3

(a) The first step is to calculate the annual payment due to the lessor.

PV of MLP’s=Net Selling price – PV of the residual value

Or in this case,
Rs.150,000- ( 0.40388*x10,000) = 4.96764**x MLP
Rs.145,961.20 / 4.96764 = MLP
Rs.29,382.40 = MLP
*0.40388 is the present value of an amount of Re.1 due in 8 periods at a 12% interest
rate
** 4.96764 is the present value of an annuity of Re.1 for 8 periods at a 12% interest
rate

(b) The lease classification

In this example the lease term is 8 yrs while the estimated useful life of the asset is
10yrs.Thus this lease qualifies as something other than an operating lease.( Note that
it also meets the FMV versus PV criterion because the PV of the MLP’s of
Rs.145,961.20, which is 97% of the FMV=Rs.150,000, could be considered to be equal
to substantially all of the fair value of the leased asset.) Now it can be any of the
three categories of Finance Lease for the lessor namely direct financing, sales type
lease or leveraged lease. Since the FMV and the cost are not equal, this is Sales type
lease.

Calculations required to record the entries in the Lessor’s books

(c) The Gross investment =MLP’s +Un.GRV

=(Rs.29,382.40 x 8) + Rs.10,000
=Rs.245,059.20

(d) The Cost of Goods Sold = Historical Cost of the inventory + Initial direct costs –PV
of the UnGRV
= Rs.100,000+Rs.2,500-Rs.4,038.80
= Rs.98,461.20
It is noteworthy that the initial direct costs have to be credited somewhere usually
the Accounts Payable or Cash. The inventory account is credited for the carrying
value of the asset, in this case Rs.100,000.

(e) The Adjusted Selling Price= PV of MLP’s

= 15000-4038
=Rs.145,961.20 ( see above calculation)

(f)The Unearned Finance Income= Gross Investment(i.e. lease receivable)-PV of the

components making

Page 17 of 30
 the gross investment.

The Present Value of these items is Rs.150,000 [(Rs.29,382.40 x 4.96764) + (Rs.10,000 x

0.40388)].
UFI =245059.20 – 1,50,000

(g) Therefore the entry necessary to record the lease is

Rs. Rs.

Lease Receivable 245,059.20

Cost of goods sold 98,461.20
Inventory 100,000.00
Sales 145,961.20
Unearned Finance Income 95,059.20
Accounts payable( initial direct costs) 2,500.00

The next step in accounting for a sales-type lease is to determine proper handling of
the payment. Both principal and the interest are included in each payment.
According to IAS 17, interest is recognized on a basis such that a constant periodic
rate of return is earned over the term of the lease. This will require setting up an
amortization schedule as illustrated below:

Date or year Cash Interest Reduction in Balance of

ended payment (Rs.) (Rs.) principal Net
(Rs.) Investment
(Rs.)
1/1/05 - - - 150,000.00
12/31/05 29,382.40 18,000.00 11,382.40 138,617.00
12/31/06 29,382.40 16,634.11 12,748.29 125,869.31
12/31/07 29,382.40 15,104.32 14,278.08 111,591.23
12/31/08 29,382.40 13,390.95 15,991.45 95,599.78
12/31/09 29,382.40 11,471.97 17,910.43 77,689.35
12/31/10 29,382.40 9,322.72 20,059.68 57,629.67
12/31/11 29,382.40 6,915.56 22,466.84 35,162.83
12/31/12 29,382.40 4,219.57 24,162.83 10,000.00
235,059.20 95,059.20 140,000.00

The entries below illustrate the proper treatment to record the receipt of the lease
payment and the amortization of the unearned finance income of the year ended
12/31/05.

Cash 29,382.40
Lease receivable 29,382.40

Unearned finance income 18,000.00

Interest revenue 18,000.00

It is noteworthy:

Page 18 of 30
 • There is explicit entry to recognize the principal reduction. This is done
automatically when the net investment is reduced by decreasing the lease
receivable(gross investment) by Rs.29,382.40 and the unearned finance
income account by only Rs.18,000.00.

• The Rs.18,000.00 is 12% ( implicit rate ) of the net investment. The entries are to
be made over the life of the asset .At the end of the lease term ,12/31/12, the
asset is returned to the lessor and the following entry is required:

Asset 10,000
Lease Receivable 10,000

( If the estimated residual value has changed during the lease term, the
accounting computations would have also changed to reflect this).

E-4

(a) Annual Payment

PV of Residual Value 10,000 x 0.7513=Rs.7,513*
PV of lease payments Selling Price –PV of Residual Value
= Rs.131,858 – Rs.7,513=Rs.124,345
Annual Payment =Rs.124,345 / 2.4869**=Rs.50,000

*0.7513 is the PV of an amount due in 3 periods at 10%

**2.4869 is the PV of an ordinary annuity of Re.1 per period for 3 periods, at 10%
interest.

As with any lease transaction, the first step must be to classify the lease
appropriately. In this case, the PV of the lease payments ( Rs.124,345) is equal to
94% of the FMV
( Rs.131,858), thus could be considered as equal to substantially all of the FMV of
the leased asset.

(b) Now we determine the unearned interest and the net investment in lease.
Rs.
Gross Investment in lease [(3 x 50,000) + 10,000] 160,000
Cost of leased property 131,858
Unearned Finance Income 28,142

The unamortized initial direct costs are to be added to the gross investment in the
lease, and the unearned finance income is to be deducted to arrive at the Net
Investment in the lease. The Net Investment in the lease for this example is
determined as follows:

Rs.
Gross Investment in lease 160,000
Add: Unamortized initial direct costs 7,500

Less:
Unearned Finance Income 28,142

Page 19 of 30
 Net Investment in Lease 139,358

(c) Amortization Schedule:

Note:
The Net Investment in the lease ( Gross Investment – Unearned Finance Income)
has been increased by the amount of initial direct costs. Therefore, the implicit
rate is no longer 10%.We must recompute the implicit rate, which is really the
result of an internal rate of return calculation. We know that the lease payments
are to be Rs.50,000 per annum and that a residual value of Rs.10,000 is available
at the end of the lease term. In return for these payments(inflows) we are giving
up equipment (outflow) and incurring initial direct costs (outflows), with a net
investment of Rs.139,358 (Rs.131,858 + Rs.7,500). The only way to obtain the new
implicit rate is through a trial balance and error calculation as set up below.

50,000 1 + 50,000 2 + 50,000 3 + 10,000 = Rs.139,358

(1+ i) (1+i) (1+i) (1+i)

Where i= implicit rate of interest

In this case , the implicit rate is equal to 7.008 %. Thus, the amortization table
would be set up as follows:

(a) (b) (c) (d) (e) (f)

Lease Reduction PV x Reduction Reduction PVI net
payments in Implicit in initial in PVI net investment
Rs. unearned rate direct investment in lease
interest Rs. costs (a - b + d) (f)(n+1)=(f)n-
Rs. (b-c) Rs. (e)
Rs. Rs.
At 139,358
inception
2005 50,000 13,186 (1) 9,766 3,420 40,234 99,124
2006 50,000 9,504 (2) 6,947 2,557 43,053 56,071
2007 50,000 5,455 (3) 3,929 1,526 46,071 10,000
150,000 28,145* 20,642 7,503 129,358

*Rounded
(b.1) Rs.131,858 x 10%=Rs.13,186
(b.2) [Rs.131,858 – (Rs.50,000-RS.13,186)] x 10%= Rs.9,504
(b.3) [Rs.95,044 – ( Rs.50,000-9,504)] x 10%= Rs.5,455

Here the interest is computed as 7.008% of the net investment. Note again that the
net investment at the end of the lease term is equal to the estimated residual value.

(d) The entry made initially to record the lease is as follows:

Lease Receivable**[(Rs.50,000x3) + Rs.10,000] 160,000

Asset acquired for leasing 131,858
Unearned lease revenue 28,142

Page 20 of 30
When the payment (or obligation to pay) of the initial direct costs occurs, the
following entry must be made:

Initial direct costs 7,500

Cash 7,500

(e)Using the schedule above, the following entries would be made during each of
the indicated years:

2005 2006 2007

Cash 50,000 50,000 50,000
Lease 50,000 50,000 50,000
Receivable
Unearned 13,186 9,054 5,455
finance
income
Initial direct 3,420 2,557 1,526
costs
Interest 9,766 6,947 3,929
Income

Finally, when the asset is returned to the lessor at the end of the lease term, it must
be recorded on the books. The necessary entry is as follows:

Used Asset 10,000

Lease Receivable 10,000

**Also commonly referred to as the “gross investment in lease.”

Page 21 of 30
SOLUTIONS TO PAST PAPERS
A-1
a)
i) The Internal Rate of Return

47,460 = AF x Periodic Cash flows + DF x Redemption Value

Let’s say interest rate is 10%
47,460 = 3.486 x 13,610
47,460 = 47,460
Therefore, the interest rate is 10%

ii) Notes to the accounts 31-12-x3

Lease receivable Rs.

Minimum lease
payments

Within one year 13,610

Two to five 27,220

years

Gross investment 40,830

Un-earned finance income

Within one year 3,385

Two to five 3,595

years

6,980

Net investment in the lease 33,850

Lease repayment schedule

Date Rental Interest Principal Balance

31-12-x3 47,460

31,12-x3 13,610 -- 13,610 33,850

31-12-x4 13,610 3,385 10,225 23,625

31-12-x5 13,610 2,363 11,247 12,378

Page 22 of 30
 31-12-x6 13,610 1,232 12,378 --

b) Disclosures of operating lease under IAS 17

Lessees shall, in addition to meeting the requirements of IFRS 7, make the
following disclosures for operating leases:
(a) the total of future minimum lease payments under non-cancellable
operating leases for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years.
(b) the total of future minimum sublease payments expected to be received
under non-cancellable subleases at the end of the reporting period.
(c) lease and sublease payments recognised as an expense in the period,
with separate amounts for minimum lease payments, contingent rents,
and sublease payments.
(d) a general description of the lessee’s significant leasing arrangements
including, but not limited to, the following:
(i) the basis on which contingent rent payable is determined;
(ii) the existence and terms of renewal or purchase options and
escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt and further leasing.
A-2
a) The operating lease is recognized on straight line basis by lessee irrespective
of the amount of rent paid in different lease periods even if some rent free
periods are offered by the lessor. The same principle will apply on lessor. (IAS
17 and SIC 15)
Therefore, the expense / income to be recognized by lessee / lessor is Rs.
170,000 per year (3,400,000/20).
b) Disclosure of discontinued operation under IFRS 5
An entity shall disclose:
(a) a single amount in the statement of comprehensive income
comprising the total of:
(i) the post-tax profit or loss of discontinued operations and
(ii) the post-tax gain or loss recognized on the measurement to fair
value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operation.
(b) an analysis of the single amount in (a) into:
(i) the revenue, expenses and pre-tax profit or loss of discontinued
operations;
(ii) the related income tax expense as required by paragraph 81(h)
of IAS 12; and
(iii) the gain or loss recognized on the measurement to fair value
less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operation.
The analysis may be presented in the notes or in the statement of
comprehensive income. If it is presented in the statement of comprehensive
income it shall be presented in a section identified as relating to discontinued
operations, i.e. separately from continuing operations. The analysis is not

Page 23 of 30
 required for disposal groups that are newly acquired subsidiaries that meet
the criteria to be classified as held for sale on acquisition.
c) Disclosures under IAS 34
An entity shall apply the same accounting policies in its interim financial
statements as are applied in its annual financial statements, except for
accounting policy changes made after the date of the most recent annual
financial statements that are to be reflected in the next annual financial
statements. However, the frequency of an entity’s reporting (annual, half-
yearly, or quarterly) shall not affect the measurement of its annual results. To
achieve that objective, measurements for interim reporting purposes shall be
made on a year-to-date basis.

Requiring that an entity apply the same accounting policies in its interim
financial statements as in its annual statements may seem to suggest that
interim period measurements are made as if each interim period stands alone
as an independent reporting period. However, by providing that the
frequency of an entity’s reporting shall not affect the measurement of its
annual results, paragraph 28 acknowledges that an interim period is a part of
a larger financial year. Year-to-date measurements may involve changes in
estimates of amounts reported in prior interim periods of the current financial
year. But the principles for recognizing assets, liabilities, income, and expenses
for interim periods are the same as in annual financial statements.
To illustrate:
(a) the principles for recognizing and measuring losses from inventory
write-downs, restructurings, or impairments in an interim period are the
same as those that an entity would follow if it prepared only annual
financial statements. However, if such items are recognized and
measured in one interim period and the estimate changes in a
subsequent interim period of that financial year, the original estimate is
changed in the subsequent interim period either by accrual of an
additional amount of loss or by reversal of the previously recognized
amount;
(b) a cost that does not meet the definition of an asset at the end of an
interim period is not deferred in the statement of financial position
either to await future information as to whether it has met the definition
of an asset or to smooth earnings over interim periods within a financial
year; and
(c) income tax expense is recognized in each interim period based on the
best estimate of the weighted average annual income tax rate
expected for the full financial year. Amounts accrued for income tax
expense in one interim period may have to be adjusted in a
subsequent interim period of that financial year if the estimate of the
annual income tax rate changes.
A-3
a) Gross investment in the lease
i) Minimum lease payments + Un-guaranteed residual value (UGRV)
[(36,500x6) + 10,000] = 229,000
ii) Un-earned finance income
Gross investment – Net investment
229,000 – [AF x Periodic Cash flow + DF x UGRV]
229,000 – [4.9927 x 36,500 + 0.630 x 10,000]
229,000 – (182,235 + 6,300)
Page 24 of 30
 229,000 – 188535
40,465
b) Extract to financial statements 30-06-2005
Statement of financial position Rs.

Non-current assets

Lease receivable 127,698

Current assets

Lease receivable 24,397

Interest receivable 12,163

Statement of comprehensive
income

Profit or loss account

Revenue (188,535- 182,235

6,300)

Cost of sales (150,000- (143,700)

6,300)

Gross profit 38,535

Interest income 12,163

Net profit 50,698

Notes to the accounts

Minimum lease payments Rs.

Within one year 36,500

Two to five years 146,000

After five years --

182,500

Un-guaranteed residual value 10,000

Gross investment 192,500

Un-earned finance income

Within one year 12,163

Two to five years 28,302

Page 25 of 30
 After five years --

40,465

Net investment in the lease 152,035

Working lease repayment schedule

Date Rental Interest principal Balance
1-7-2004 188,535
1-7-2004 36,500 36,500 152,035
1-7-2005 36,500 12,163 24,337 127,698
1-7-2006 36,500 10,216 26,284 101,414
1-7-2007 36,500 8,113 28,387 73,027
1-7-2008 36,500 5,843 30,657 42,370
1-7-2009 36,500 4,130 32,370 10,000
A-4
a) The lease should be accounted for as operating lease as none of the criteria
under IAS 17 leases is satisfied. The operating lease is accounted for on
straight line basis i.e. by calculating the annual rental by dividing the total of
MLP’s by the lease term. The whole amount of lease rentals recognized in a
year will be recognized as an expense immediately. As the deposit paid is a
financial asset i.e. right to receive cash therefore it should be measured at fair
value on initial recognition i.e. discounted at the market rate of interest and
classified as at amortized cost asset. Subsequently, the asset should be
measured at amortized cost at effective rate of interest i.e. the market rate at
initial recognition.
b) Journal entries for the current year
Debit Credit

Rs. Rs.

Year -1

Start of the year – deposit given

Receivable account 11.27

Profit or loss account 3.73

Bank account 15

15x(1.10)^-3

End of the year

Operating lease expense account 12

Bank account 12

Receivable account 1.13

Interest income 1.13

Page 26 of 30
 Year – 2

End of year

Receivable account 1.24

Interest income 1.24

Unwinding of receivable

Operating lease expense 12

Bank account 12

Year -3

End of year

Receivable account 1.36

Interest income 1.36

Operating lease expense 12

Bank account 12

Bank account 15

Receivable account 15

A-5
Auto Construction Limited
Notes to the Financial Statements
For the year ended December 31, 2009

Rs. in '000
Present value of minimum lease payment W1 37,001
Less: Current portion shown under current liabilities W1 (6,572)
30,429

Minimum Future PV of
lease finance lease
payments cost liability
2009
Rs. in ‘000’
Not later than one year W2 11,000 952 10,048
Later than one year and not later than five years W2 38,500 11,547 26,953
49,500 12,499 37,001

The minimum lease payments have been discounted at interest rate of 12.506% per
annum to arrive at the present value.

Page 27 of 30
2. Operating lease rental receivable
Not later than Later than one Total
one year year and not
later than five
Rs. in ‘000’
Future minimum lease payment W3 10,250 16,276 26,526

For the construction machinery the company has entered into an operating lease
agreement on July 1, 2009 for 3 years at a half yearly rent of Rs. 5 million, payable in
advance with 5% annual increase.
W1: Finance lease interest and payment schedule
Installment payment date Installment Finance Principal Closing
amount expense @ recovery balance
12.506%
July 1, 2009 (Total lease 40,000
31-Dec-2009 (Paid) 5,500 2,501 2,999 37,001
30-Jun-2010 5,500 2,314 3,186 33,815
31-Dec-2010 5,500 2,114 3,386 30,429
11,000 4,428 6,572
30-Jun-2011 5,500 1,903 3,597 26,832
31-Dec-2011 5,500 1,678 3,822 23,010
30-Jun-2012 5,500 1,439 4,061 18,949
31-Dec-2012 5,500 1,185 4,315 14,634
30-Jun-2013 5,500 915 4,585 10,049
31-Dec-2013 5,500 627 4,873 5,176
30-Jun-2014 5,500 324 5,176 0
Payable later than one year 38,500 8,071 30,429
and not later than five years
55,000 15,000 40,000

W2: Present value

Due date Present value at Installment Present value Financial
12.506% amount charges
30-Jun-2010 0.9411 5,500 5,176 324
31-Dec-2010 0.8858 5,500 4,872 628
Not later than 1 11,000 10,048 952
31-Dec-2010 0.8336 5,500 4,585 915
30-Jun-2011 0.7846 5,500 4,315 1,185
31-Dec-2011 0.7384 5,500 4,061 1,439
30-Jun-2012 0.6949 5,500 3,822 1,678
31-Dec-2012 0.6541 5,500 3,598 1,902
30-Jun-2013 0.6156 5,500 3,386 2,114
31-Dec-2013 0.5793 5,500 3,186 2,314
Later than 1 year and not later than 38,500 26,953 11,547
49,500 37,001 12,499

W3: Operating lease payments

Not later than 1 year 01-Jan-10 5,000

Page 28 of 30
 01-Jul-10 5,250 10,250
Later than one year and not later than five years 01-Jan-11 5,250
01-Jul-11 5,513
01-Jan-12 5,513 16,276
26,526
A-6
Hi-Tech Pakistan Limited
Year ended 30 September, 2011
2011 2010
Rs. in million
Statement of Comprehensive Income
Sale revenue (100x1.25) 125.00
Revenue from maintenance contract (2011: 12/3 2010: 4.00 2.00
12/3x0.5)
Cost of sales (2010: 100+1.7) (2.5) (101.70)
Sales promotion expenses (16.00)
Staff training (12.00)
Impairment loss W2 1.60 -
Finance lease income (2011: 7.66+8.12) 15.78 8.89

Statement of Financial Position

Non-current assets
Net investment in finance lease 29.74 64.90
W1/W3
Current assets
Current maturity of net investment in finance lease 53.33 35.99
W1/W3
Long-term liabilities
Deferred maintenance contract revenue 6.00 10.00
WORKINGS
W1: Finance lease income and payment schedule prior to restructuring
Installment Opening Finance Receipts Recovery of Closing
due date balance income at principal balance
15.192% p.a
Ol-Apr-2010 *137.00 (20.00) 20.00 117.00
30-Sep-2010 117.00 8.89 (25.00) 16.11 100.89
31-Mar-2011 **100.89 **7.66 (25.00) 17.34 83.55
30-Sep-2011 83.55 6.35 (25.00) 18.65 64.90
*(100*1.25)+(8.4/0.7)
W2: Impairment loss
Net investment in lease as on 31-3-2011 (**100.89+7.66 ) 108.55
Present value of 4 half yearly installments of Rs. 32 million each as on ***106.9
31.03.2011 32 X (l-(l+0.15192/2)-4)/(0.15192/2) 5
1.60
W3: Finance lease income and payment schedule prior to restructuring
Installment Opening Finance Receipts Recovery of Closing
due date balance income at principal balance
15.192% p.a.
30-Sep-2011 ***106.95 8.12 (32.00) 23.88 83.07
31-Mar-2012 83.07 6.31 (32.00) 25.69 57.38
30-Sep-2012 57.38 4.36 (32.00) 27.64 29.74

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A-7
Arabian Automotives Limited
Profit or loss account for the year ended December 31, 2013 (Rupees)
Sales revenue at lower of FV or PV of MLP’s 16,642,402
Fair value of 10 cars 18,000,000
PV of minimum lease payments W-1 16,642,402
Finance lease income W-1 1,637,088
Revenue from servicing of cars (10,000x1.2)x10 120,000
Cost of sales (1,800,000x85%x10+110,000) (15,410,000)

Statement of financial position as at December 31, 2013

Non-current liabilities
Deferred servicing revenue (10,000x1.2)x10x2 240,000
Non-current assets
Net investment in finance lease W-1 (5,680,000- 5,191,429
608,571)+120,000
Current assets
Current maturity of net investment in finance lease W-1 (5,680,000- 4,648.061
1,151,939)+120,000

W -1 Amortization schedule for car payments

Date Interest at payments Balance Pv of MLP
12% per @12% p.a.
annum
01-Jan-2013 -- (3,000,000) 16,642,402 3,000,000
31-Dec-2013 1,637,088 (5,680,000) 9,599,490 5,071,429
31-Dec-2014 1,151,939 (5,680,000) 5,071,429 4,528,061
31-Dec-2015 608,571 (5,680,000) -- 4,042,912
3,397,598 (20,040,000) 16,642,402

A-8
Date Particulars Debit Credit
Rs. (m) Rs. (m)
01/04/2014 Bank 135
Deferred loss (2x10) 20
Profit or loss account 5
Property, plant and equipment 160
(record sale of power generation plant
on sale or lease basis)
31/03/2015 Lease rental 24
Deferred loss (20/10) 2
Bank 22
Record the lease rental along with
deferred loss reversal in accordance
with IAS 17)

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