Finance

Asianic Brewery, a company based in Hong Kong, produces various malt beverages such as beer, iced tea, bottled water, hard liquor, and carbonated soft drinks. Its products are sold on a very limited scale and it owns about 15% of the alcohol market. Because of this, the company seldom buys and instead opts to lease major equipments. One of the major equipments that it leases is the bottle washer. A bottle washer keeps bottles clean and free from contamination prior to bottling beer and other beverages.

A lease is basically a contract between the lessor or the owner of the asset and the lessee, the party seeking use of the asset. Through the lease, the lessor grants the lessee the right to use the asset. In exchange, the lessee makes periodic lease payments to the lessor. A lease, then, is a form of financing to the lessee provided directly from the lessor in order to enable the lessee to purchase the use of the leased asset.
In Asianic’s balance sheet, PFRS suggests that the lease appears only as a disclosure but should include the total of future minimum lease payments under non-cancellable operating leases for specific periods, i.e. not later than one year, later than one year but not later than five years, and later than five years. Asianic should also disclose the total of future minimum sublease payments expected to be received under non-cancellable subleases at balance sheet date, lease and sublease payments recognized as an expense in the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments. A general description of the lessee’s significant leasing arrangements should also be disclosed. This should include the basis on which contingent rent payable is determined, the existence and terms of renewal or purchase options
and escalation clauses, and restrictions imposed by said lease arrangements. (PRFS, IAS/PAS 17-13)

As such, since the lease of the bottle washer is of significant in terms of amount and term, Asianic should disclose this information in its balance sheet. Add to the fact that as a brewing company, a bottle washer is no doubt one of its major equipments. However, since this is an operating rather than a finance lease, no liability is to be recognized on Asianic’s balance sheet.