Consolidated financial statement of JSW S.A. Capital Group for 2012

2.24. Lease

A lease in which a significant portion of risk and benefits derived from the ownership title remain with the lessor (financing party) constitutes an operating lease. Leasing fees paid under operating lease, after reduction by special promotional offers, if any, obtained from the lessor (financing party) are charged to costs using the straight-line method throughout the term of the lease.

Operating lease comprises also the right of perpetual usufruct of land. The purchase price paid for the possibility using this right is amortized over the term of the lease in line with the timing of drawing benefits from such right. The right of perpetual usufruct of land is recognized in the intangible assets line item.

A lease in which all the risks and benefits derived from the possession of a leased item (asset) are transferred, even though the legal title to the asset may but does not have to be ultimately transferred – is classified as a financial lease.

The subject matter of a financial lease is recognized in assets on the lease commencement date, at the lower of the two amounts: the fair value of the leased item or the present value of the minimum leasing fees. The present value of the minimum leasing fees is recorded as liabilities on account of financial lease, divided into a short-term part (payable within 1 year) and a long-term part (payable in over 1 year). When calculating the present value of the minimum leasing fees, the discount rate used is the lease interest rate, provided it can be determined. Otherwise, the lessee's marginal interest rate is used. All of the lessee's initial direct costs are added to the amount recognized as an asset component.

The minimum leasing fees are divided between financial costs and reduction of the liability on account of leases. Financial costs are settled over the individual periods covered by the term of the lease, to obtain a fixed interest rate for the outstanding balance of liabilities. Conditional leasing fees are recognized as costs in the period in which they are incurred.

Depreciable assets acquired under financial leases are depreciated over the useful lives of the assets if the agreement envisages transfer of the ownership title to the leased item to the lessee. If the agreement does not envisage ultimate transfer of the leased item to the lessee the asset is amortized over the term of the lease.