## Lessor Terminology Under Finance Lease (AS 19)

When a lessor accounts for a finance lease, three interlinked amounts must be computed before any journal entry is passed.

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### 1. Gross Investment (GI)

> Gross Investment = Minimum Lease Payments (without discounting) + Unguaranteed Residual Value (UGRY)

Minimum Lease Payments (MLP) for the lessor = periodic lease rentals + Guaranteed Residual Value (GRV)
Residual Value splits into two parts:

Part	Who bears the risk?	Included in MLP?
Guaranteed Residual Value (GRV)	Lessee / third party	Yes
Unguaranteed Residual Value (UGRY)	Lessor	No

So: `Gross Investment = (Lease Rentals × n) + GRV + UGRY` ← all at face value, no discounting

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### 2. Net Investment (NI)

> Net Investment = PV of Gross Investment = PV of MLP + PV of UGRY

This is the carrying amount of the lease receivable recognised on Day 1 in the lessor's books.

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### 3. Unearned Finance Income (UFI)

> Unearned Finance Income = Gross Investment − Net Investment

This is the total interest that the lessor will earn over the entire lease term.
It is not booked on Day 1; it is allocated over the lease period using the effective interest method.
It is disclosed in the financial statements as a deduction from Gross Investment to arrive at Net Investment.

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### Memory Hook

```

GI = MLP (face) + UGRY (face) ← no time-value

NI = PV of MLP + PV of UGRY ← discounted

UFI = GI − NI ← future interest, unearned today

```

Worked example

### Example 1

Example (Aadit / Maman – 10% rate)

Given: Lease rentals = ₹10,00,000 p.a. | Lease term = 5 years | GRV = ₹80,000 | UGRY = ₹20,000 | Discount rate = 10%

Step 1 – Gross Investment

MLP (face) = (10,00,000 × 5) + 80,000 = 50,80,000

GI = 50,80,000 + 20,000 = 51,00,000

Step 2 – Net Investment (PV of cash flows @ 10%)

Yr	Cash Flow	DF 10%	PV
1	10,00,000	0.909	9,09,000
2	10,00,000	0.826	8,26,000
3	10,00,000	0.751	7,51,000
4	10,00,000	0.683	6,83,000
5	10,00,000 + 80,000 + 20,000	0.621	6,83,100
Total			38,52,100

NI = 38,52,100

Step 3 – Unearned Finance Income

UFI = 51,00,000 − 38,52,100 = 12,47,900

### Example 2

Example (Illustration 2 – 15% rate, amounts in lakhs)

Given: Lease rent = ₹8 L p.a. | Term = 5 years | GRV = ₹1.6 L | UGRY = ₹1.4 L | Rate = 15%

Gross Investment = (8 × 5) + 1.6 + 1.4 = 43 lakhs

Net Investment (PV @ 15%):

Yr	Cash Flow	DF 15%	PV
1	8	0.8696	6.96
2	8	0.7561	6.05
3	8	0.6575	5.26
4	8	0.5718	4.57
5	8+1.6+1.4	0.4972	5.47
Total			28.31 L

NI = 28.31 L | UFI = 43 − 28.31 = 14.69 L

⚠️ Common exam mistakes

Adding GRV to lease rentals when computing Gross Investment but forgetting to also add UGRY separately – both must appear in GI.
Discounting UGRY when computing Gross Investment – GI is always at face/undiscounted value.
Confusing Net Investment with the lease receivable on Day 1 – they are the same amount, but students sometimes use GI as the Day-1 debit.
Treating Unearned Finance Income as income on Day 1 – it is deferred and spread over the lease term using the effective interest method.
Using MLP (without UGRY) as the denominator in the PV calculation for Net Investment – UGRY must also be discounted and added.

Bare-Act text Definitions, Para 3 · AS 19 – Leases (ICAI) · click to expand

"Gross investment in the lease" is the aggregate of (i) the minimum lease payments under a finance lease from the standpoint of the lessor, and (ii) any unguaranteed residual value accruing to the lessor. "Net investment in the lease" is the gross investment in the lease discounted at the interest rate implicit in the lease. "Unearned finance income" is the difference between (a) the gross investment in the lease and (b) the net investment in the lease.

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AS 19 Leases – Lessor Key Terms: Gross Investment, Net Investment, Unearned Finance Income

Worked example

⚠️ Common exam mistakes