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Contracts, leases and licences

Anne Harrison
Five topics
• Clarify definitions of leases
• Ownership when asset is shared under
• Look at valuation of items subject to
• When is a contract, lease or licence an
• Treatment of various permits
Three types of lease
• Operating
• Financial
• Resource
Operating lease - fixed asset
• One where the legal owner is also the
economic owner and accepts the
operating risks and receives the
economic benefits from the asset by
using it in a productive activity which
require him as lessor to provide any
necessary repair and maintenance for
the asset. The asset remains on the
balance sheet of the lessor.
Financial lease - fixed asset
• One where the lessor as legal owner,
passes the economic ownership to the
lessee who then accepts the operating
risks and receives the economic
benefits from the asset by using it in a
productive activity which requires him
as lessee to provide any necessary
repair and maintenance…..
Financial lease - cont
• The asset is recorded on the balance
sheet of the lessee but with a loan
payable by the lessee to the lessor.
Initially the value of thelaon is equal to
the net present value of the payments
due under the lease and each period
the payments ae shown as reducing the
outstanding balance of the loan and
• Does not need to be for whole life of
• Give advice on breakdown f payments
into loan repayment and interest
• Financial service may also be provided
Resource lease
• An agreement whereby the legal owner
of a natural resource which has an
infinite life makes it available to a lessee
in return for a regular payment recorded
as property income and described as
rent. The resource is recorded on the
balance sheet of the lessor. No
consumption of fixed capital is recorded
for either lessor or lessee.
Shared ownership
• Financial lease for fixed assets
• Non-produced assets not subject to depletion
– Mobile phone if eventual return to owner
– Sale if lease is infinite or renewable for nominal
– Rent if no change in ownership
• Non-produced assets subject to depletion -
financial lease (least bad option)
• Under operating lease, contract price is
market price even if a newly leases
identical asset would command a
different price
• Value of asset on balance sheet of
owner is encumbered value (net
present value of future rentals)
When is a lease an asset?
• Financial lease - never (may have sale
of asset and repayment of loan)
• Operating (or resource) lease - if
prevailing market price is different from
market price and if the lessee is able
legally and practically to sub-contract a
lease, the lease is an asset
Lease as asset - cont
• Value of lease is unencumbered value
less encumbered value
• Describe as contract, leases and
licences (third party property rights,
marketable operating leases)
• In practice only record when it happens
• One time extraction of natural resource
- sale of asset
• Permission by government to undertake
special activities (taxi, casino) - tax
• Non-government permit - property
income if it is use of an asset, payment
for a service otherwise
Permits - cont
• Government permits can be onsold - treat in
parallel manner to tradeable operating
leases - difference between selling price and
payment to government is an asset for the
initial permit holder if it resale is legally and
practically possible
• Third party property rights - tradeable permits
Future provision
• Goods, eg aircraft options - does not
• Services - footballer asset under
contracts, leases and licences
(entitlement to future service on
nominated legal persons on an
exclusive basis)
Loose ends
• Prepayments - may be acquisition of an
asset or of trade credit (for future
services) depending on terms of lease
• Contribution of an asset is treated as
financial transaction and acquisition of
an asset
• Lost deposits - payments for goods,