THEORY

1. ACCOUNTING FOR LEASE

Lease is a contractual agreement that assigns the right to use the asset
within a specified period of time.
There are two parties in lease contract :
1. Lessor (seller of rent)
2. Lessee (buyer of rent)

2. ECONOMIC ADVANTAGES OF LEASING

There are three main advantages for lessee parties to lease than buy :
1) No down payment
It's very interesting for companies who do not have enough cash for a
down payment or a company that wants to use an available capital for
operating purposes and the other investment.
2) Avoids risks of ownership
There are many risks in possession of pricing such as losses due to the
disaster and economic conditions. Lessee can discontinue the lease
although it’s subject to a fine, and thus avoid the bearing of the risk from
the incident.
3) Flexibility
If assets are in lease, companies can more easily replace assets as
response to changes.
3. HISTORICAL DEVELOPMENT OF ACCOUNTING LEASE
Leasing (leasing) business has been in existence since 2000 BC which
is done by Sumerian people. Documents that found from Sumerian culture
indicate that lease transactions is include leasing equipment, land, and pets. In
the next developments, many legal systems include leasing as one of
financing method. Business development in the agricultural, manufacturing
and transportation industries brings many types of equipment that can be
financed by leasing.

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 Leasing business activities is introduced in 1974 with a joint decree of
the Minister of Finance, Minister of Industry, and Minister of Trade No.
Kep.122 / MK / IVi2 / 1974, Number 32 / M / SK / 2/1974, and Number 301
Kpb / II74 Dated January 7th, 1974 about business licensing of Leasing.
Furthermore, the Minister of Finance issued Decree no.6491MKIIV / 5/1974
dated May 6th, 1974 which regulates the provisions of licensing procedures
and leasing business activities in Indonesia.
To support its development, the Minister of Finance issued Decree No.
650 / MK / IV / 511974 dated May 6, 1974 on the affirmation of the Sales
Tax provisions and the amount of Stamp Duty on Leasing Business. With the
issuance of the deregulation policy on December 20, 1988 or called Pakdes
20 1998, Leasing business activities are included in the finance company. In
addition, Presidential Decree Number 61 of 1998 and the decision of the
Minister of Finance No. 1251 / KMK.013 / 1988 dated December 20, 1988 is
part of the Pakdes 88 where the financing institution is a business entity
engaged in financing activities in the form of provision of funds or capital
goods with not withdraw fund Directly from the community. The provisions
of the minimum paid-in capital for the establishment of a financing company
that conducts business activities of leasing was arranged in Pakdes 20 in 1988
with the decision by the Minister of finance Number 1251/KMK. 013/1988
on December 20, 1988, by which the amount of paid-in capital or mandatory
deposits and principal deposits are defined as follows :
• National private company amounting to Rp 3 billion
• Indonesian foreign joint venture of Rp 10 billion
• Cooperative amounting to Rp 3 billion
Decree of the Minister of Finance No. 1169 / KMK.01 / 1991 dated 21
November 1991 concerning Lease Activities

4. NATURE OF LEASES
a. Cancellation Provisions
Nature can not be cancelled

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b. Lease Term
 The period of time starting from the beginning until the end of the
lease
 The lease initiation date is defined as the date of the lease agreement
 The beginning of the lease period occurs when the lease agreement
becomes effective, that is if the leased property has been transferred to
the lessee
c. End of the lease term
The end of the specified lease period where cancellation is not allowed
plus all periods

d. Bargain Purchases Option

Leases often contain provisions granting the tenant the right to purchase
leased property on a future day. The exact purchase price or option price
can be set although in some cases the price is expressed as fair market
value at the date the option is utilized. If the price of this predefined option
is estimated to be much less than the fair market value or value on the date
of the purchase option, then in this case the option of purchase is cheap.

e. Residual Value
The market value of a property leased at the end of the lease period is
called residual value or residue. In some rentals, the lease period exceeds
the economic life of the asset. In other leases the rental period is shorter
and residual value is absent.
If the lessee can purchase the asset at the end of the lease period for a price
much lower than its residual value, a low-cost purchase option already
exists, and it is reliable that the lessee will exercise this option and
purchase the asset.
Some lease contracts require the tenant or designated third party to
guarantee the minimum residual value of the asset. And if the fair market
value at the end of the rental period falls below the guaranteed residual
value, then the lessee or third party must pay the difference.

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 f. Minimum Lease Payments
Minimum lease payments are rent payments requested during the rental
period plus the amount to be paid for the residual value, either through a
low-cost purchase option or a residual value guarantee
Rental payments sometimes include insurance, maintenance, and tax
expenses incurred on leased property. The expenditure is called an
executive fee and is not included as part of the minimum payment. If the
lessor enters the expense for the allowance for profit in this cost, then the
profit is also considered an executive fee

g. Incremental borrowing rate

The incremental interest rate is the interest the borrower will incur if he
borrows the amount necessary to purchase the leased asset and in it the
financial condition of the lesseee and the conditions prevailing in the
market.

h. Implicit interest rate

The implicit interest rate is the interest rate that will be used to discount
the minimum lease payments to the fair market value of the asset when the
lease occurs.
The lessor uses an implicit interest rate in determining the present value of
minimum lease payments.
However, renters use implicit interest rates or incremental lending rates,
whichever is lower. If the lessee is not aware of the implicit interest rate
then the lessee must use the incremental lending rate.

5. LEASE CLASSIFICATION CRITERIA

5.1 Accounting for Lease-Lesse
Each lease if viewed in terms of the lessee can be classified into 2
types namely :
1) Operating lease
Accounting for operationg lease :

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 1. Involve the recognation of lease cost during the lease period.
2. The leased assets are not reported as assets in the lessee’s balance
sheet, and
2) There is no debt is recognized from the obligations to make any future
payment for the use of the wealth.
3) Capital lease
Accounting for capital lease :
1. Requires the lessee to report the present value from the payment of
lease in future payment on balance sheet, either as an assets or as a
obligations.
2. Asset is depreciated as if they had been purchased by the lessee.
5.1.1 Accounting for Operating Leases – Lessee
Operating lease is considered to be a regular lease agreement by
debiting an estimate expense when a payment is made.
Example:
For example, the lease requirements for factory equipment is
payment for lease cost amount Rp. 40.000 per year. (Payment in
every year is same)
Journal for lease per year is:
Rent Expense 40.000
Cash 40.000

Operating leases with varying rental payments

If lease payment is different during lease period, then:
1. rent expense must be recognized based on straight line,
except the other systematics bases and reasonable more
describes the time pattern in which the benefits of use are
derived from the leased propety.
2. When record the rent expense, the dfference between actual
payments and debit to expense will be reported as rent

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 payable or prepaid rent , depend on wether the payment is
getting bigger or smaller.
Example :
The lease requirements by Garuda Airlines, seeting payments
150.000 a year for the first 2 years and 250.000 a year for the next
3 years.
Then the total of lease payment for 5 years becomes 1.050.000 or
210.000 a year (straight line).
Calculation :
Year 1 = 150.000
Year 2 = 150.000
Year 3 = 250.000
Year 4 = 250.000
Year 5 = 250.000 +
Total = 1.050.000 / 5 year = 210.000 / year
Conclusion : then recognition of payment based on staright line
amount Rp. 210.000
Joutnal for the first 2 years :
Rent Expense 210.000
Cash 150.000
Rent Payable 60.000

Journal for each payment for the next 3 years become :

Rent Expense 210.000
Rent Payable 40.000
Cash 250.000

Part of rent payable which is due in the next year will be classified
as current liabilities.

5.1.2 Accounting for Capital Leases – Lessee

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Capital lease considered as purchase property rather than rent.
As the result, the accounting for capital lease by the lessee
demanding a journal entry which simila to the required journal
entry that required for the purchase of an asset with long term
credit terms.
Amounts recorded as assets and liabilities are the present value of
minimum lease payments in the future
Example :
PT ABC (Lesse) leased equipment from Untung Leasing Company
(Lessor) withrequirements as follows
Lease Period : 5 Year, start from january 1, 1988. Cannot be
cancelled
Rent amount : Rp 65.000 per year, prepaid every year, include Rp
5.000 for executory costs
The esstimated economics life of equipment : 5 Year
The estimated residual value of equipment at the end of lease
period: -
Example: Incremental borrowing rate PT ABC sebesar 10%, and
the interest rate is same or smaller than implicit interest, then
present value for the lease are:
(NB: use an upfront annuity)

First : Set Minimum of Lease Payments

Rent payment without executor cost (60.000 * 5) = 300.000
Guaranteed residual value = 0+
Total Minimum Lease Payments = 300.000

Second : Determine Present Value of Minimum Lease

Payments
Future Value Present Value
Payment of rent without executory cost

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 (60.000 * 5) 300.000 250.194
The residual value that guaranteed 0 0
Total Present Value from Minimum Lease
Payments 300.000 250.194

Counting when use table 4 :

PVn = 60.000 (tabel 4 n-1 i + 1)

PVn = 60.000 (tabel 4 5-1 10% + 1)

PVn = 60.000 (tabel 4 4 10% + 1)

PVn = 60.000 (3.1699 + 1)

PVn = 60.000 (4.1699)
PVn = 250.194
Counting when use table 6 :
PVn = 60.000 (tabel 6 n i )

PVn = 60.000 (tabel 6 5 10% )

PVn = 60.000 (4.1699)

PVn = 250.194

Journal to record the lease at the beginning of the lease period will be as
follows :
Jan 1 Lease Equipment 250.194
Obligations Under Capital Leases 250.194
Untuk mencatat lease

Lease Expense 5.000

Obligations Under Capital Leases 60.000
Cash 65.000
The value of assets should be amortized according with the normal depreciation
policy of the lease.

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Journal for amortization of assets, 31 December 1988:

31 Des Amortization Exp. On Leased Equipment 50.039

Acc. Amortization on Leased Equipment 50.039

Schedule of payment lease:

Schedule of Payment Lease
Lease 5 years, Payment / year 60.000
(Net of Executory Cost), Interest 10% Pembayaran Lease
Date Description Amount Interest Principal Lease
Expense Obligation
A B C D E F
(F * 10%) (C – D) (F – E)
01-01-88 Saldo awal 250.194
01-01-88 Pembayaran 60.000 60.000 190.194
31-12-88 Pembayaran 60.000 19.019 40.981 149.213
31-12-89 Pembayaran 60.000 14.921 45.079 104.134
31-12-90 Pembayaran 60.000 10.413 49.587 54.547
31-12-91 Pembayaran 60.000 5.453 54.547 0

Explanation of table calculation :

Interest Expense :
31-12-88 19.019 = 190.194 * 10%
31-12-89 14.921 = 149.213 * 10%
31-12-90 10.413 = 104.134 * 10%
31-12-91 5.453 = 54.547 * 10%

Principle :
31-12-88 40.981 = 60.000 - 19.019
31-12-89 45.079 = 60.000 - 14.921
31-12-90 49.587 = 60.000 - 10.413

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 31-12-91 54.547 = 60.000 - 5.453

Lease Obligation :
01-01-88 190.194 = 250.194 - 60.000
31-12-88 149.213 = 190.194 - 40.981
31-12-89 104.134 = 149.213 - 45.079
31-12-90 54.547 = 104.134 - 49.587
31-12-91 0 = 54.547 - 54.547

On 31st December 1998, journal for second prepaid lease payment,

including executive expense (See Schedule of Lease Payment)

31 Des Prepaid Executory Costs 5.000

Obligations Under Capital Leases 40.981
Interest Expense 19.019
Cash 65.000
5.1.3 Accounting for Lease - Lessor

In lease transaction, the lessor hands over the physical

property to the lessee. If surrender of property is deemed to be
temporary, the lessor will continue to record the assets that leased
in the balance sheet as an owned asset and the revenue from the
lease will be reported when the earned is obtained.

The depreciation of the lease assets will be matched with

the corresponding revenue. This type of lease called operating
lease and cash received from the lessee is treated similarly to the
procedure for operating lease for the lessee.

However, if the lease has a condition that makes the nature

of the transaction the same as the sale of property or the surrender
of property to the lessee, Then the lessor no longer has to report the

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 property as if it is still owned, but must show the surrender of the
property to the lessee.

5.2.1 Accounting for Operation Lease-Lessor

Accounting for lease operations for the lessor equals the

lessor. Lessor recognizes payments as income when payment is
received. If there is an important variation in the terms of payment,
a journal entry is required to reflect a straight line pattern of
revenue recognition. Initial direct costs incurred will be deferred
and then amortized over the lease period, thus being matched by
rental income.

Example:

Assume the 5-year leased equipment by PT ABC with a

payment of Rp 65,000 per year, including an executive expense of
Rp 5,000 per year. The cost of equipment Rp 400,000. Initial direct
costs that have been incurred to acquire leases amounting Rp
15,000. The equipment is estimated to be 10 years old, with no
residual value at the end of the 10th year.

It is assumed that there is no purchase option or lease

extension or lease guarantee, and is considered an operating lease.

Journal for first and direct costs payment and receive rent :
Jan 1 Deferred initial Direct Costs 15.000
Cash 15.000
Jan 1 Cash 65.000
Rent Revenue 65.000
Assuming the lessor depreciating the equipment on a straight-line
basis over 10 years, and amortize initial direct costs on a straight-
line basis over 5 years of lease period, journal of depreciation and
amortization for first end year:

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 Des 31 Amortization of Initial Direct Costs 3.000
Deferred initial Direct Costs 3.000
Des 31 Depr. Expense on Leased Equipment 40.000
Acc. Amortization on Leased Equipment 40.000

5.2 Accounting for Sale Leaseback Transactions

The special aspect from this lease is an agreement where the first
part is selling the asset to the second parties, and then the first part is
leasback the asset.
If that sales is resulting the profit, so the profit should be
suspended and amortized by the proportional with the asset amortized
which is leased if the lease is the capital lease. Or proportional with the
payment of rent if it that lease is an operation lease.
If that transaction is resluting the loss cause the fair value from
asset is more less than the acquisition cost that not amortized, so the loss
should be recognized.

Example :

On January 1st, 1988, PT Makmur sells a building which is have the book
value Rp 5.500.000,- to PT Asco with the price Rp 7.500.000,- and
leaseback that building soon :

This condition is covering this transaction :

 The cost of land is more less 25% than the total of fair value.
 The lease period during 10years, can not canceled. The same
payment of rent is Rp 1.071.082,- that paid in every early year.
 On January 1st, 1988. The building has the fair value
Rp7.500.000,- and the estimated of economic life are 20 years. The
staright line method is used for every asset which is owned.

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  Lease has the option to upate the lease with the payment Rp
100.000,- per year during 10 years, that is during the rest of that
economic life.

Form the data, it can be concluded that lease is qualifiated as the

capital lease.

Journal for the Seller of Lease (PT Makmur)

Jan Cash 7.500.000

Warehouse 5.500.000
Unearned of Gain from Sale Leaseback
2.000.000
Transaction
(The first seller of building)
1 Jan Leased Warehouse 7.500.000
Obligations Under Capital Leases 6.428.918
Cash 1.071.082
(The warehouse Lease, include the 1st payment)
31 Des Amortization Exp. On Leased Warehouse 375.000
Accum. Amortization on Leased Warehouse 375.000
Warehouse Amortize during the 20 tahun periods (7.500.000 / 20)
31 Des Interest Expense 642.892
Obligations Under Capital Leases 428.190
Cash 1.071.082
(The 2nd lease payment, interest expense=Rp6.428.918*10%)
31 Des Unearned of Gain from Sale Leaseback
100.000
Transaction
Revenue from Sale Leaseback Transaction 100.000
(Recognizing from sales and leaseback)
(Recognizing of revenue during 20 years by proportional with asset
amortized which is leased)

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Journal for buyer of Lease (PT Asco)
1 Jan Warehouse 7.500.000
Cash 7.500.000
(Warehouse Purchase)
1 Jan Cash 1.071.082
Lease Payments Receivable 10.639.738
Warehouse 7.500.000
Unearned Interest Revenue 4.210.820
Direct Payment with leaseback for PT Makmur
Total Account Receivanle
(10 * 1.071.082) + (10 * 100.000) = 11.710.820
11.710.820 - 1.071.082 = 10.639.738
31 Des Cash 1.071.082
Unearned Interest Revenue 642.892
Lease payments Receivable 1.071.082
Interest Revenue 642.892
Receive from payment the 2nd lease, look at the calculation according
PT Makmur.

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 REFERENCES

http://repository.binus.ac.id/content/A0056/A005668195.pdf

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