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Saturday, August 20, 2011
Strengths, Customer Benefits & Management
Intellectual Property Right Services
| Intellectual Property Right Services | |
| In the ever-changing realm of trade & commerce, international markets have been flooded with new products and services emerging in the market place which require patent and trademark protection. Intellectual Property Rights aim at safeguarding your ideas and inventions from plagiarism and unauthorized use, so that you may align your Intellectual Property with the relevant commercial context and gain substantially in the process. PNJ Legal Consultants L.L.P recognizes that Intellectual Property support not only requires knowledge of the law and complex technical issues, but also the skills and resources needed to manage the crucial work. PROTECTING YOUR INTELLECTUAL PROPERTY ASSETS Operating from our Rohini facility in India, we offers a comprehensive range of Intellectual Property Rights support services including trademark searches, Intellectual Property monitoring, infringement research, application drafting, and status tracking. All aspects of patent practice such as prior art searches, product clearance searches, and drafting of technical specifications will be skillfully handled by our experienced professionals. We support your Intellectual Property counsel to secure patent and trademark protection cost-effectively; conduct relevant searches to determine patent viability of your Intellectual Property and register ability of your proposed trademark; draft your applications and correspondence on your behalf; track their status; and handle any office action that comes up. PATENT AND TRADEMARK SEARCH We will provide the highest quality research within a short timeframe and at a fraction of the traditional costs. Most importantly, our Intellectual Property support services are tailored to meet the individual requirements of each client. Depending on your specific needs, we will conduct multi-level searches and list the most relevant results. Our robust IT infrastructure, rigorous security measures, and total confidentiality policy ensure that your Intellectual Property details and patent/trademark searches are completely safe with us. PATENTABILITY & INFRINGEMENT ASSESSMENT We assists its clients in patentability searches for determining whether the invention/product under scrutiny can be legally patented. Patenting should be considered for any invention which is relevant to new product development. Even minor inventions may have commercial potentials and patenting these in time will help protect the same. It is also possible to protect inventions related to processes and methods of manufacturing which you would not want your competitors to copy. Infringement search results are perhaps the single most useful piece of information that a company can possess about patents. If a patent is already held by a competitor on a product or process that you are considering using, the knowledge of its existence can help prevent you from being sued for patent infringement. APPLICATION DRAFTING Place your application drafting requirements in the dependable hands of our professionals and we guarantee that your projects will be handled with individual care and diligence. Our high-caliber staff has adequate experience and expertise in patent application drafting - offering you high quality work, best industry practices, and competitive pricing. STATUS TRACKING Status tracking involves effective communication between our professionals and the patent examiner to whom your application has been assigned. In some cases, we may need to have face-to-face interviews with the patent examiner in order to address and resolve relevant issues. We will keep our clients updated about the latest developments throughout the entire patent application process. | |
Impact of the US recession on Indian Legal Process Outsourcing
LPO has the potential to become one of the sunshine sectors for the Indian Economy. IT companies, non-outsourcing and non-legal entities, captive and large Indian law firms are expressing interest in it. Right now only about 30% of the top ten Indian BPO vendors have shown interest to enter this segment. But according to industry experts, Most of the giant BPO industries also keenly watching and analyzing the marketing trend to enter this business in fore future.
When you lose something on one hand you are destined to get something else on the other. This simple law of nature seems to be relevant in the case of the impact of the US recession on Indian industries.
With many top monetary firms, investment banks and enterprises declared bankrupt and many more to do same in near future, there’s a huge rise in demand for legal expertise and law consultancy services in US. According to a survey conducted by law department consultant Rees Morrison and American Lawyer editor Aric Press, the US law departments will spend about US$ 2 billion on legal outsourcing by 2013.
Liberalization of India's Legal Services Market and the Impact on the Legal Process Outsourcing Industry.
Think big. If you were today to think of some common traits amongst all the iconic brands that we know of, some would be apparent and some would be a little more subtle. There are the more perceptible and easily glorifiable things like think big, operational efficiencies, people culture within the organization and some more jargon you will find in each and every management book.
There is however always the other side, the side of caution and trepidation which, mostly, only the ones privy to the dialogues behind the doors to the boardrooms know of. There is, almost always, an army like discipline maintained while dealing with the regulators and policymakers.
GATS- The Final Frontier
India is a signatory to the General Agreement on Trade in Services (GATS), an organ of the World Trade Organization (WTO). Being a signatory it
is under an obligation to open up the services sector to all member nations. Legal profession is also taken to be one of the services which is included in GATS and thus once the government takes all the necessary arrangement and which will include necessary amendments to the existing policy framework also.
Once this is done firms and corporations would have the assurance of a clear regulation and would be more confident in directly investing and setting up or scaling operations in India as well as utilizing services of the Indian vendors.
Why Outsource?
Why Outsource?
Reduce Costs & Save Time
By outsourcing to us, you can decrease your operating costs by up to 70%, while saving a substantial amount of time which you would otherwise spend on this extremely important aspect of litigation.
Moreover, lawyers need time to attend to the many requirements of their clients and firm. Outsourcing frees up time to assist clients, develop case strategy and focus on efforts to attract new clients. Leaving us to handle this repeated non-core task will therefore give you more time to focus on your core and most profitable areas.
By outsourcing to us, you can decrease your operating costs by up to 70%, while saving a substantial amount of time which you would otherwise spend on this extremely important aspect of litigation.
Moreover, lawyers need time to attend to the many requirements of their clients and firm. Outsourcing frees up time to assist clients, develop case strategy and focus on efforts to attract new clients. Leaving us to handle this repeated non-core task will therefore give you more time to focus on your core and most profitable areas.
Immediate Access to Specialist Lawyers
Each member of our team has outstanding credentials and experience, having researched and advised on a wide range of legal topics, for various entities. They all have substantial experience identifying relevant issues and keywords to conduct research.
Our team also undergoes intensive in-house training in legal research, writing and analysis. They are trained to examine and evaluate legal issues just as an experienced counsel would.
Benefit From Comprehensive Information
Our team also undergoes intensive in-house training in legal research, writing and analysis. They are trained to examine and evaluate legal issues just as an experienced counsel would.
Benefit From Comprehensive Information
Lawyers who do not regularly conduct complex research do not have the ability to access the best legal databases and research materials or find the most relevant legal information available. We have access to the most comprehensive legal databases, as well as the ability to find statutes, case-law and secondary sources from any major jurisdiction.
Because we also follow a step-by-step approach in conducting research, we only identify and extract the information which is most relevant to the issues at hand. This ensures our information is both concise and comprehensive.
Because we also follow a step-by-step approach in conducting research, we only identify and extract the information which is most relevant to the issues at hand. This ensures our information is both concise and comprehensive.
How We Work
Clients have two options for submitting a research project.
Online electronic submission - Use the "Submit a Research Project" option to provide relevant information, upload supporting documents and submit your project.
By e-mail - New research projects can be e-mailed to us at parascs@gmail.com
Online electronic submission - Use the "Submit a Research Project" option to provide relevant information, upload supporting documents and submit your project.
By e-mail - New research projects can be e-mailed to us at parascs@gmail.com
How We Handle Our Research
Upon receiving a new research project from a client, we follow this step-by-step approach in handling our research.
1. Identification of the issue(s) based on the facts of
the client's case.
2. Identification of the tools and keywords for
locating the most relevant information.
3. Identifying the statutes and case-law which gives
substance to the issue(s) at hand.
4. Reading
most pertinent to the issue(s) at hand.
5. Presenting the research to the client in the desired
format.
Output Formats For Research
Upon completion, we can present our research to clients in any of the following formats.
Memorandum of law - An objective opinion / recommendation citing the relevant statutes, case-law and other relevant legal authorities, following intensive legal research on the legal issue(s).
Summary - A summary of the relevant information in a short opinion, ensuring easier and more concise access to the desired information.
Letter - A letter to the client in a format which they prescribe, setting out the relevant research and analysis
Memorandum of law - An objective opinion / recommendation citing the relevant statutes, case-law and other relevant legal authorities, following intensive legal research on the legal issue(s).
Summary - A summary of the relevant information in a short opinion, ensuring easier and more concise access to the desired information.
Letter - A letter to the client in a format which they prescribe, setting out the relevant research and analysis
2011 State of the LPO Sector Survey
Last year Ravi Shankar, a Harvard Law graduate, administered the 2010 State of the LPO Sector Survey to study business fundamentals of the LPO industry in India at large. The report had (a) profiled LPO firms and (b) sought to understand how they market themselves.[1] Notable findings from the corresponding 2010 State of the LPO Sector Report include:
· Despite strong growth projections, it is a challenge for most LPO firms to attract clients: Why do LPO firms and commentators project strong industry growth, yet firms find it difficult to attract clients? One explanation offered by a plurality of LPO firms is that few firms capture most of the market.
· 2004 to 2007 may have been a “golden age” for starting a LPO firm: Outside of this three-year window, the number of LPO firms entering the industry appears to have fallen. Does this suggest that new entrants are unable to capture market share despite strong growth projections?
· BPO experience helps: In the view of one CEO, BPO companies possess two advantages: First, security infrastructure is in place—both for employees and data. Second, they have experience marketing themselves to an American and British client base.
Informed by the 2010 Survey as well as communication with LPO firms and relevant field experts, the 2011 Survey has evolved to ask LPO firms about their (a) clients, (b) revenue, and (c) opinion of often-cited market analysts.
Plenty of career opportunities in LPO firms
Legal process outsourcing (LPO) industry has left its pangs of dithering and clarification and reached the stage where its feet are firmly grounded in the outsourcing domain and is charged for an aggressive expansion.
Valuenotes report suggests that the Indian LPO market will be worth more than USD $1bn by 2014. The economy saw the industry strengthening even at the times of global recession.
This exponential growth is owing to increasing pressure on businesses to boost capacity, lower costs and devise efficient ways to deliver services.
For markets such as India, industry experts opine that since developed markets are turning extremely volatile the former are fast emerging as better investment destinations. This creates a big pool of opportunities for young lawyers in India as they stand to benefit not only in the domain of experience by getting a chance to do quality and multijurisdictional legal work but also finding opportunity to take up a business manager’s role as they move up the corporate ladder, which in case of a conventional lawyer is not a predictable career progression.
Litigation or work at law firms in India is associated with initial years of relentless struggle wherein the return on investment of time and money is slow.
Platform for lawyer
LPO companies provide a platform that not only enriches a lawyer with global exposure and knowledge of multiple jurisdictions but also give them the experience to build and manage teams in a relatively short span of time. Employees’ development in such corporations becomes intrinsically linked with the growth of the corporation. Established LPO companies have opened avenues to build long-term career for both fresh and experienced lawyers. A wide variety of services with various levels of complexity has today become the USP for the industry from the work spanning across Legal Research, Contract Solutions, Transaction Support to Document Review.
Opportunities galore
Opportunities such as these are now attracting many young yet experienced lawyers to join LPOs. Lawyers with LLM from international universities equipped with work experience in a law firm as well as some years in private practice choose to work for leading LPOs.
One of them said and I quote - Although legal profession offers a plethora of opportunities, the LPO industry offers a completely new avenue wherein a legal professional not only develops as a lawyer but also is presented with an administrative role.
Delving with business along with the legal nuances gives a bigger and intrinsic perspective to the legal scenario involved in global transactions. Further, it is a multi faced role which keeps fleeting from one client to another and never gets to be monotonous. Along with vast array of knowledge at the work place, the work life balance also forms a pivotal point for a bulk of lawyers transitioning to the outsourcing industry. The outsourcing industry provides more flexibility and a better platform to deliver than rigid and hectic schedules of a legal firm. A brand with some of the biggest names in the global business being its dedicated clients, offers the perfect platform to the legal fraternity to achieve the pinnacle of success in the outsourcing industry.
In the current scenario LPO industry is moving towards consolidation with recent mergers and acquisitions being indicative of this growth. This change is guided by the move to capture the global legal market share where LPO in India, according to some industry experts, alone is expected to reach USD $1bn by 2014, which is less than 1% of global law industry. Although this appears to be a small portion of the pie but undeniably is indicative of the huge potential of legal outsourcing and a glimpse of exciting times ahead.
Thursday, August 18, 2011
Valuation of Inventory
Valuation of Inventory
AS – 2
Contents
Ø Applicability & Nature
Ø Meaning of Inventory
Ø Valuation of Inventory
Ø Steps in Valuation Procedure.
Ø Valuation Method
Ø Important Points
Ø Disclosures
Applicability & Nature
Applicable : 01-04-1999 (Revised)
Nature : Mandatory for all
Meaning of Inventory
 |
Held for Sale Held in production process Held for consumptionFinished Goods Work in Process Raw Material & Supplies
Meaning of Supplies
As per AS – 2, stock of loosed tools or spare parts should also be covered under the accounting principle of AS. The main condition for the application of AS – 2 of these stocks is only the common use in the production departments. As per ASI – 2 if any spare part is related to a particular fixed assets rather than common use, amount of such spare parts should not be covered under the accounting principle of AS – 2 but principle of AS – 10 should be applied.
Valuation of Inventory
Cash or NRV whichever is lower.
Note: As per AS if any stock is to be valued at NRV then loss on valuation should be written off in P&L A/c of the same year.
Steps in Valuation Procedure
Step1: Cost Calculation
Step2: NRV Calculation
Step3: Comparison
Cost Calculation
Finished Goods: Purchase Price of Raw Material + Direct Wages + Factory Overheads = Total Cost
WIP: Purchase Price of Raw Material + Direct Wages + Factory Overheads = Total Cost
Raw Material: Purchase Price of Raw Material = Total Cost
Meaning / Calculation of Purchase Price of Raw Material
In the calculation of purchase price of material all the expenses should be included which are directly incurred for the purchase of material. For Example: Purchase price, Taxes & duty, Freight inward, Material handlings charges or any other expense related to purchase. In the calculation of purchase price amount of trade discount & refundable taxes or duties should not be included.
Meaning of Direct Wages
Amount of direct wages can be used directly from payroll sheets which are prepared in factory premises at the time of payment of wages.
Meaning of Factory Overheads
Variable Overhead
Variable overhead are always per unit fixed & amount of these overhead will be changed by change in production units. Amount of variable expenses should be calculated on the basis of actual production because these expenses are always incurred according to the size of production.
Fixed Overhead
Situation 1: Actual Production is lower than Normal Production
If any enterprise has produced lower no of units than normal capacity, per unit fixed overhead should be calculated on the basis of normal capacity & such rate should be applied on actual production. If any amount remain unallocated then such amount should be transferred to P&L a/c. but can’t be included as a part of production cost.
Example: Fixed Overhead Rs. 2,00,000
Normal Production 10,000 units
Actual Production 8,000 units
Calculate production cost
Sol: 2,00,000 / 10,000 = Rs 20 per unit
Production cost = 8,000 x Rs 20/- = Rs 1,60,000
Situation 2: Actual Production is higher than Normal Production
If actual production is higher than normal production, the total amount of actual expenses should be included as a part of production cost and rate per unit should not be calculated by normal production.
Important note: In the calculation of cost of inventories only factory cost is considered and amount of administration overhead or selling overhead should not be considered in the calculation of cost.
NRV Calculation
Net Realizable Value = Market Price – Estimated cost to complete sale
[Comment: In the calculation of NRV the entire cost which is expected to complete the sale should be deducted because market value is not comparable directly to factory cost. Amount of administrative expense & selling overhead which are expected to be incurred should be deducted out of market value to convert such price equal to factory cost.]
Comparison
(1) Finished Goods
Example Material 2,00,000
Wages 1,00,000
Factory Overhead (Variable) 1,00,000
4,00,000
Factory Overhead (Fixed) 4,00,000
Normal Capacity 1,00,000 units
Actual Capacity 80,000 units
Out of 80,000 units, the enterprise has sold the 70,000 units. Calculate value of 10,000 units which are held in the stocks assuming market price Rs 50 per unit & estimated cost to complete the sale of Rs 25,000.
Sol: Calculation of Fixed cost
Material 2,00,000
Wages 1,00,000
Factory Overhead (V) 1,00,000
Factory Overhead (F) 3,20,000 (400000 / 100000 x 80000)
7,20,000
Cost of 10000 units = 720000 / 80000 x 10000 = Rs 90,000
NRV = 500000 – 25000 = Rs 4,75,000
Valuation = Cost or NRV whichever is lower
= Rs 90,000
(2) Raw Material
Example: Finished goods are valued at cost.
Raw Material (10000) Rs 10/- Cost
Raw Material Rs 8/- S.P.
Valuation of RM ?
Comments: In the given case valuation of raw material should be carried at cost only even if market price of such material is lower than cost. Raw material are purchased only for consumption purpose and after consumption such material will be converted into finished goods which are valued at cost. It means that there is no loss on finished goods due to which loss can’t be recorded on direct material.
Example: Finished goods are valued at NRV
Raw Material (cost) Rs 10/-
(i) Market Price Rs 12/-
(ii) Market Price Rs 8/-
Comments: Finished goods are valued at NRV due to which valuation of raw material should be made as per valuation principle. In the first case valuation should be carried at Rs 10 per unit because cost is lower. In second case valuation should be made at market price because cost is higher.
(3) Working in Process
Valuation of WIP should always be made at cost because market price estimation may not be accurate for these goods.
Important Points
(1) If any enterprise is having units of contract sale then independent market price should be ignored for the valuation of contract sale of unit. Valuation of these units should be considered only by contract price.
(2) As per AS – 2 interest can’t be capitalized in the cost of inventory because such amount is not related to production but interest can be capitalized in the cost of inventory as per the provision of AS – 16.
Valuation Method
FIFO
Weighted Average
Retail Value (For Mall)
Example: Retail Value
Particulars RV Cost
Op. Stock 10000 2000
Purchase 50000 25000
60000 27000
Retail Value Sold = Rs 50000
Stock value = 25000 / 50000 x 10000 = Rs 5000
Avg base = 27000 / 60000 x 10000 = Rs 4500
Disclosures
(1) Accounting policy should be disclosed. (FIFO / Weighted Avg / Retail Value)
(2) If any stock has been valued at NRV then description of such stock should also given in the note to accounts.
By fair value (subject to conditions and should be included in Goodwill
specified below)
(ii) Fair value of intangible asset can be recognized by active market or latest transaction price.
(iii) If active market is available then full amount of intangible asset should be recognized.
(iv) If latest transaction price is used for recognition then cost can be recognized to the extent by which capital reserve is not created. (The above provision can be applicable only for amalgamation in the nature of purchase)
Purchased by Govt Grant
If any intangible asset is purchased by Govt grant then cost of intangible asset can be recorded by net approach or gross approach specified in AS – 12.
Balance Sheet (Disclosure) [Net Approach]
Intangible Asset xxxx
Less: Grant xxxx xxxx
Balance Sheet (Disclosure) [Gross Approach]
Deferred Grant xxxx Intangible Asset xxxx
(Full amount)
Internally Generated Intangible Asset
If any intangible asset is generated internally by the enterprise, then it is generated under two different phases.
1) Research Phase: Research phase is the planed investigation carried by enterprise to create new application of business activities. Research activities may include invention of new products, production techniques, technical system or any other finding for cost saving or future benefits to enterprise. (All the expenses during research phase should be written off in P&L a/c immediately because it is not certain during research phase that any result will be obtained or not from research.)
2) Development Phase: Development phase is the verified application of research activities and all the expenses during the development phase should be capitalized in the cost of intangible asset. Before capitalizing the expenditure during development phase the following conditions should be satisfied.
- Technical should be available with the enterprise.
- The
- After completion of intangible the enterprise should be able to use or sell intangible.
- Future economic benefit should be measured by suitable assumption.
- Financial Resources should be proper to complete the asset.
- There will be proper system to record the cost during development phase.
(i) Cash/Bank/Grant Receivable Dr
To Govt Grant
(ii) Grant A/c Dr
To Deferred Grant A/c (It is transferred to reserve &surplus)
(iii) Deferred Grant A/c Dr
To P&L A/c
Refund of Grant:
Deferred Grant A/c (O/s Bal) Dr
P&L A/c (which is already used) Dr
To Cash/Bank/Grant Receivable
Note: At the time of refund of grant total benefit should be reversed in the current period in total irrespective the effect of these transaction on current year profits.
Disclosure:
(i) Accounting policy should be disclosed separately in relation to classification of nature of grant.
(ii) If any refund has been made during the period then amount of refund should be also disclosed.
Difference between AS/IAS/US GAAP:
If any grant is related to promoter’s contributions then accounting of such grant should be made as capital profits as per as-12. The same grant should be recognized as revenue profits as per other statements. Revenue profits should be recognized on deferred basis as per management intention.
Accounting for Lease Transactions
Accounting for Lease Transactions
AS – 19
Contents
Ø Definitions
Meaning of Lease Types of Lease Meaning of Operating Lease Meaning of Finance Lease Meaning of MLP Meaning of RV Meaning of Gross Investment Meaning of Net Investment Meaning of IRR InvestmentØ Accounting in the books of parties
Ø Sale & Lease Back Transactions
Ø Manufactures or Dealers
Ø Disclosures
Definitions
Meaning of Lease
Lease is an agreement whereby Lessor conveys to the Lessee right to an asset for agreed period of time in return of a payment or series of payments.
Types of Lease
As per AS, Lease agreement can be classified under two separate heading as follows.
Operating Lease: Operating Lease agreement is the agreement which can’t be recognized as finance lease.
Finance Lease: Finance Lease is the agreement whereby all the risks and rewards incidental to ownership are transferred by Lessor to Lessee.
The following situations conditions should be considered before classification of Lease agreement.
v If major part of life of the asset is covered by lease agreement then agreement can be classified as finance lease agreement (Meaning of major part is not explained in the provisions of AS but in practical questions more than 2/3rd can be considered as major part)
v If any option to purchase is specified in the lease agreement at the end of lease period then agreement can be classified as finance lease agreement.
v If any lessee is bound to purchase the leased asset at the end of lease period then agreement can be classified as finance lease agreement.
v If nature of asset is only useable for lessee without modification then agreement related to such asset should be classified as finance lease agreement.
v Present value of MLP should be equal to or higher than cost of Lessor (fair value) then agreement can be classified as finance lease agreement.
Imp Notes: At least 3 conditions should be satisfied out of 5 conditions as specified above to classify an agreement as finance lease agreement.
Ques 3.
As per AS – 19 any lease agreement can be claimed as finance lease agreement if the 3 conditions out of 5 conditions are satisfied. These conditions are discussed above.
In the given situation only two conditions can be analyzed. Total life of the asset is 12 yrs but lease agreement covers only 5 yrs which is not a major part of life. Further amount of rental is not equal to fair value of assets.
On the basis of available situations the lease agreement should be classified as operating lease agreement because features of agreement are not in the favour of finance lease agreement.
Ques 6.
W.N.1 Calculation of Present Value of Rental
Period Rental PVF (18%) P. Value
0 40000 1 40000
1 25000 0.847 21175
2 15000 0.718 10770
3 10000 0.609 6090
Total 78035
Comment: Present value of rental is not equal to fair value of the asset on the date of lease agreement. On the basis of such calculation agreement should be classified as operating lease agreement. Other conditions are not specified in the question so other conditions should be ignored.
Accounting for Operating Lease
- Books of Lessor
- Books of Lessee
Books of Lessor
As per AS, accounting in the books of Lessor under operating lease should be made with the help of following steps.
Step 1: First of all Lessor shall receive amount of rentals which are payable by lessee at the time of receipt of rental the following journal entry shall take place.
Bank A/c Dr.
To Lease Rental
Step 2: Amount of rentals should be recognized as normal income for lessor and to be taken to P&L A/c.
Lease Rental Dr.
To Profit & Loss A/c
Exception of Step 2: It may be possible that amount of Lease Rental is not equal over the lease period. In such case income from lease rental in the books of lessor can be recognized only by SLM. It means that equal income can be recognized over the lease period. ( Difference between actual collection and income should be recognized as advance income or receivable income.)
Receivable Income Dr. (B.F.)
Lease Rental Dr. (Actual)
To P&L A/c (SLM)
To Advance Income (B.F.)
Ex:
Period Lease Rental
1 25000
2 30000
3 5000
Pass journal entries in the books of lessor assuming operating lease.
Ans:
W.N. 1 Calculation of SLM rental
1 25000
2 30000 SLM = 60000 / 3 = 20000
3 5000
Journal Entry
1st Year
Bank A/c Dr. 25000
To Lease Rental 25000
Lease Rental Dr. 25000
To P&L A/c 20000
To Advance Income 5000
2nd Year
Bank A/c Dr. 30000
To Lease Rental 30000
Lease Rental Dr. 25000
To P&L A/c 15000
To Advance Income 10000
3rd Year
Bank A/c Dr. 5000
To Lease Rental 5000
Lease Rental Dr. 5000
Advance Income Dr. 15000
To P&L A/c 20000
Imp Note: It may be possible that technique SLM is not accurate for the presentation of financial statements. In such a case lease rental can be divided between different periods on the basis of systematic allocation.
Ex. Lease Rental = 5 yrs
Rentals = Rs 10 Lakhs p.a.
Cost of Lessor on the date of Lease agreement = 100 Lakhs
Life of Assets = 10 Yrs
Assumed Int. rate on Investment = 10%
Prepare a statement on the basis of systematic allocation.
Ans: Statement showing Systematic allocation
| Period | Investment use By Lessee | Interest (Assumed) | Rental ( |
| 1 | 100 Lakhs | 10 Lakhs | 10 / 40 x 50 = 12.50 Lakhs |
| 2 | 90 Lakhs | 9 Lakhs | 9 / 40 x 50 = 11.25 Lakhs |
| 3 | 80 Lakhs | 8 Lakhs | 8 / 40 x 50 = 10.00 Lakhs |
| 4 | 70 Lakhs | 7 Lakhs | 7 / 40 x 50 = 8.75 Lakhs |
| 5 | 60 Lakhs | 6 Lakhs | 6 / 40 x 50 = 7.50 Lakhs |
| | | | 50 Lakhs |
Books of Lessee
(a) First of all Lessee shall record the payments of rental according to Lease agreement.
Lease Rental a/c Dr.
To Bank
(b) Amount of Lease rental should be written off in P&L a/c as normal expenses.
To Lease Rental
Exception: It may be possible that Lease rentals over the lease period are not same. In such case amount of expense should be written off on SLM basis. (Difference between actual payments & SLM amount should be recognized as prepaid expense or outstanding expense.)
Ex. Lease Period Amount
1 10,000
2 2,000
3 8,000
4 10,000
Ans
W.N.1 Calculation of SLM Exp
10,000 + 2,000 + 8,000 + 10,0000 = 30,000
SLM = 30,000 / 4 = 7,500
Entries
1st year Lease Rental A/c Dr. 10,000
To Bank 10,000
Prepaid Exp Dr.
To Lease Rental A/c 10,000
2nd year Lease Rental A/c Dr. 2,000
To Bank 2,000
To Lease Rental 2,000
To Prepaid Exp. 2,500
To O/s Exp. 3,000
3rd year Lease Rental Dr. 8,000
To Bank 8,000
O/S Exp. Dr. 500
To Lease Rental 8,000
4th year Lease Rental Dr. 10,000
To Bank 10,000
O/S Exp. Dr. 2,500
To Lease Rental 10,000
Accounting for Operating Lease
Meaning of M.L.P. (Minimum Lease Payment)
MLP are the amounts which are payable by lessee to the lessor over the lease period. Amount of MLP shall include only two amounts.
(a) Lease Rentals
(b) GRV (Guaranteed Residual Value)
GRV is the minimum price or amount which is require to be paid by lessee at the end of lease period to lessor in addition to lease rentals. GRV can be different from residual value which is actually available at the end of lease period.
The following points may be considerable in practical questions at the time of difference between GRV & RV:-
If RV is lower than GRV: If residual value is lower than GRV then difference will be paid by lessee assuming extra use of asset than estimated use in such case the lessee has to pay such difference in cash and also to return the assets if he is not interested to purchase the asset.
In case lessee is interested to purchase the assets the end of lease period then lessee shall pay amount of GRV to the Lessor for the purchase of assets.
If RV is higher than GRV: If residual value is higher than GRV, difference should be recognized UGRV. Benefit of UGRV will be given to lessor only because he is the actual owner of the asset.
In case of UGRV, no additional cash will be paid by lessee at the time of return of asset. But Lessor shall charge total residual value at the time of sale of asset. (UGRV = RV – GRV)
Meaning of Gross Investment
Gross Investment is the tool of inflow which is expected to be included or received from the point of view of lessor. Total inflows of the lessor shall include amount of lease rental + amount of GRV + amount of UGRV.
Meaning of Net Investment
Net Investment is the amount of outflow which is invested by lessor on the date of lease agreement. Net Investment can also be recognized equal to face value of the assets on the date of lease agreement.
Meaning of Finance Income
Difference between inflow and outflow should be recognized as Finance Income from the point of view of lessor because it is assumed by Finance Lease that assumed ownership is transfer by lessor to lessee on the date of lease agreement.
Meaning of I.R.R. (Implicit or Internal Rate of Return)
Internal rate of return is the rate at which gross investment & net investment will be equal. It can also be said that IRR is the rate at which inflow & outflow of the lessor will be equal.
Calculation of IRR
Step – 1: Assume any two rates
Step – 2: Calculate PV factors at the assumed rates
Step – 3: Calculate present values of inflows by the PV factors of assumed rate.
Step – 4: Calculate difference between inflow & outflow by taking present value at the assumed rate.
Step – 5: After calculating difference apply the following equation:
IRR = Lower Rate + Lower rate Diff(NPV) X Diff in Rates
Lower Rate Diff – Higher rate diffEx. Lease Period = 4 years
Lease Rental = 5 Lakhs p.a
G.R.V. = 1,00,000
R.V. = 3,00,000
F.V. = 16,00,000
Calculate IRR.
Ans.
Calculation of NPV
| Period | Inflow | PVF 10% | PVF 15% | PV 10% | PV 15% |
| 1 | 5,00,000 | 0.909 | 0.870 | 4,54,500 | 4,35,000 |
| 2 | 5,00,000 | 0.826 | 0.756 | 4,13,000 | 3,78,000 |
| 3 | 5,00,000 | 0.751 | 0.658 | 3,75,500 | 3,29,000 |
| 4 | 5,00,000 | 0.683 | 3,41,500 | 2,86,000 | |
| 4 | 3,00,000 | 0.683 | 0.572 | 2,04,900 | 1,71,600 |
| | | Total | 17,89,400 | 15,99,600 | |
| | | Less: P.V. of Outflow | (16,00,000) | (16,00,000) | |
| | | Difference | 1,89,400 | (400) | |
IRR = 10% + 189400 / [189400 – (-400)] X 5
= 14.98%
Books of Lessee
As per AS Accounting for Lease in the books of Lessee should be made by considering the following steps:-
Step – 1: First of all Lessee shall recognized purchase of asset as well as liability to lessor.
Assets on Lease A/c Dr
To Lessor A/c
Step – 2: Lessee will recognize the assets & liabilities as recorded above as lower amount out of following:
PV of MLP or Fair value
Step – 3: After recognition of assets & liabilities, lease rentals as per lease agreement will be paid by the Lessee. The following journal entry should be recorded.
Lease Rental A/c Dr.
To Bank
Step – 4: Amount of lease rental should be divided between payment to Lessor and Interest expenses (finance charge)
Interest Exp = Balance O/S in Lessor account x IRR
Lessor Payment = Rental – Interest
Interest Exp. A/c Dr.
Lessor A/c Dr.
To Lease Rental
To Interest
run:� a9>��b���0 Lakh 6.30 LakhWorking Capital 110 Lakh 9.90 Lakh
650 Lakh
Treatment: -
(a) Interest of Rs. 10.80 Lakh and 31.50 Lakh should be capitalized in the cost of building and plant respectively. Because these assets are ready for use at the end of the year.
(b) Interest of Rs. 6.30 Lakh should be also be capitalized in the name of Capital WIP because advance payment for installation of plant has been made and it can be assumed that administrative activities which are required to complete have been in progress.
(c) Working capital is not qualifying asset so interest related to working capital should be transferred to P&L a/c.
Note: Wherever in any ques there is difference in the amount of expenditure as well as period of progress then gross borrowing cost should not be allocated in the ratio of expenditure but the following steps should be applied.
Step1:
First of all average capitalization rate should be calculated on average basis.
Capitalization rate = Total Borrowing cost X 100
Total used amount during the period Step 2:
After calculation of capitalization rate, such rate should be applied on the expenditure of qualifying assets directly with reference to period of construction or progress.
Ques 14
W.N.1 Calculation of Capitalization rate
Total used amount during the period
18% Bank Loan = 1000 x 12/12 = 1000
14% Debenture = 2000 x 6/12 = 1000
16% Term Loan = 3000 x 9/12 = 2250
4250
|
Capitalization Rate = 180 + 140 +360 X 100 |
4250
Statement showing allocation of Gross Borrowing Cost
Factory Shed 2500 x 16% x 12/12 = 400.00
Plant I 1500 x 16% x 9/12 = 180.00
Plant II 1000 x 16% x 7/12 = 93.33
Total Capitalized Cost 673.33 |
Comment:
Total Borrowing cost is of Rs. 680 but cost can be capitalized to the extent of Rs. 673.33 as per above statement. Difference between total cost and capitalized amount should be transferred to P&L a/c because expenditure is lower than total borrowings.
Disclosures: (Notes to Account)
1. Accounting policy should be disclosed separately.
2. Amount of borrowing cost which is capitalized during the period should be disclosed separately.
Difference between AS – 16, IAS – 23 and US
Difference between the three Statement is not important because such difference is not related to accounting of borrowing cost but it is related to disclosure only.
1. As per IAS – 23, amount of interest expense which is capitalized or not capitalized during the period should be disclosed separately.
2. As per US GAAP – 34, amount of capitalization is not required but capitalization rate should be disclosed separately.
3. As per AS – 16, if any interest cost is not capitalized during the period then no disclosure will be required. It means that disclosure requirements are applicable only if capitalization of borrowing cost has been made during the period.
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