Accounting for Leasing in the Financial Statements of the Lessee and Mutual Fund

 Finance Lease
An asset acquired under a finance lease could be reflected on both sides of the
balance sheet of the lessee.
It should be shown on the assets side at the present value of minimum lease
payments over the lease period.
If the fair value of the leased property is lower than the present value of the
minimum lease payments, the leased asset should be at the fair value.
The rentals should be appropriated between finance charges and the reduction
of the outstanding liability.
 Operating lease
The rental payments should be charged on a systematic basis as expenses to
the revenues of the accounting period over which the benefits of the asset will
be available.

Accounting for Leasing in the Financial Statements of the Lesser
 Finance Lease
An asset held under a finance lease should be recorded in the Balance sheet
not as property, plant & equipment, but as receivable at an amount equal to the
net investment in the lease.
Manufacturer or dealer lesser should include selling profit or loss in income in
accordance with the policy normally followed by the enterprise for outright
sales.
 Operating Lease
Assets held for operating lease should be recorded as property, plant &
equipment in the balance sheet of the lesser.
Rental income should be recognized on a straight line basis over lease term.
The depreciation of the leased assets should be on a basis consistent with the
lesser normal depreciation policy for similar assets.

Leasing in India
FLC – First Leasing Company – based at Madras, India.
1) All India financial
institutions
ICICI – Industrial credit investment corporation of India ltd
IFCI – Industrial Finance corporation of India Ltd
RBI – Reconstruction bank of India
2) Independent Leasing
Companies in the
Private sector
First Leasing Company of India
20th Century Leasing Corporation Ltd
Express Leasing Limited
Grover Leasing Limited
Mazda Leading Limited
3) Finance Companies Sundaram Finance Limited
Motor & General Finance Limited
Nagarjuna Finance Limited
4) Group Related Leasing
Companies
Cholamandal Investment & finance company Limited
Investment Trust Company Ltd
Oriented Leasing Limited
DCL Finance Limited

Reasons for Popularity
1) A greater role in industrial investment has been envisaged in the Eighth Plan
for the private sector.
2) Greater emphasis on priority sector lending by banks has resulted in reduced
availability of bank finance for private sector.
3) Reduced availability of funds for private sector lending with the financial
institutions and great emphasis by the Government on the private sector to
generate its own resources.
4) As a result withdrawal of investment allowance i.e. April 1, 1990. It is more
beneficial for a manufacturer to get the plant & equipment on lease as
compared to purchase it.

Difficulties Ahead
The market for leasing has not grown with the same pace as the number of
lesser.
There is an oversupply of lesser.
There is a scarcity of the right type of personnel.
The top management should have expertise in accounting, finance, legal &
decision areas.
Leasing companies have not been in a position to maintain ideal debt equity
mix.
In order to get popularity among investors, some of the leasing companies have
not been providing adequate depreciation.
Government, financial institutions and leasing companies to join hands together
if they with to reap the maximum benefits.

Mutual Fund
Mutual funds are associations or trusts of public members who wish to make
investments I the financial instruments or assets of the business sectors or
corporate sector for the mutual benefit of their members.
The fund collects the money of these members of their savings & invests them
in a diversified portfolio of financial assets with a view to reduce risks & to
maximize their income.
Mutual fund is a concept of mutual help of subscribers for portfolio investment &
management of these investments by experts in the field.
Open ended mutual fund – whose units can be sold & repurchased at any time.

RBI Guidelines on Mutual Funds
1) MF shall be constituted as a trust under the Indian Trust Act & the sponsoring
Bank should vest in the Board of Trustees.
2) The day to day management of the schemes under the fund should be looked
after by a full time executive trustee who shall not be discharging any other
responsibility of in the convened bank.
3) The sponsor banks should contribute the minimum amount or such high
amount specified by the RBI.
4) Other trustee securities, shares / debentures of the public limited companies,
bonds of public sector undertaking, etc.
5) There is no objection to the mutual funds investing the amounts in the Money
Market instruments like commercial paper, certificate of deposits, treasury bills,
bill re discounting, short term bank deposits, short term government securities
and any other such short term instruments as may be allowed under the
regulations prevailing from time to time.
6) MF should invariably take delivery of the scripts purchased & in the case of
scripts sold, give delivery there of to the purchaser.
7) The MFS should not make investments in any other unit trust.
8) The total cost of managing any scheme under a fund including management
fees & other administrative costs should be kept within a prescribed percentage
of total income of the scheme.
9) The income distribution by way of dividend or capitalization of gains should not
be made on the basis of the revaluation of the stock holding or unrealized
capital appreciation.
10) Depreciation on investment held & provision for bad & doubtful debts if any
have to be provided for to the satisfaction f auditors before declaring any
dividend.

Statement of accounts & disclosure
A MF should maintain separate accounts for each scheme launched by it.
The board of trustees of MF should prepare an annual statement of accounts.
Auditors & board of trustees should be published for the information the
subscribers to the concerned scheme.
The trustees should disclose the NAV of each of the schemes & the method of
valuation for benefit of the concerned subscribers.
Sponsor banks should furnish to RBI the report such as half yearly report
indicating the performance of MF.

Guidelines for Mutual Fund by SEBI
It has become necessary to evolve a comprehensive set of prudential
guidelines for the all round development & regulation of mutual funds.
Money Market Mutual Funds investing exclusively in money market instruments
would be regulated by RBI.

Establishment of MFS
MFS shall be authorized for business by the SEBI.
They shall be sponsored by…
1) Registered companies with a sound track record
2) General reputation
3) Fairness in all their business transactions.
They shall be established in the form of trusts under the Indian Trust Act.

Asset Management Company (AMC)
AMC shall be authorized for business by SEBI.
AMC should have…
1) Sound track record
2) General reputation & fairness in all their business tractions
3) The directors of AMCs should have professional experience in the fields
such as…
Portfolio investment / Investment analysis / financial administration
AMC should not be allowed to act as the trustee of a Unit Trust.

Trustees & trust companies
At least 50 % of board of trustees shall be independent out side members,
having no affiliation with sponsoring institution.
The sponsor should submit the trust deed to SEBI for approval.

Responsibility of Trustees : This entails following checks
To see that the investments are of permitted kind & within the set limit.
The funds assets are duly protected.
Transaction is units are properly checked.
Internal controls.
Incomes are properly accounted for & payments & expenses are properly
made.
Pricing of units & distributions from the fund are properly made.
 Schemes
Each authorized unit should be allowed to float different schemes.
MFs should be allowed to start & operate both closed end & open end scheme.
1) Closed end scheme
Closed end scheme should have a duration fixed in a number of years, at the
end of which it should be wound up or extended with the permission of SEBI.
2) Open end scheme
 NAV and Valuation of Assets of the Scheme
The net asset value shall be calculated by dividing the net assets of the
scheme by the total number of units outstanding on the valuation date.
The NAV will be calculated every day & has to be published at such intervals as
are prescribed by SEBI.