AS-19 for Lease ?????
This query is : Resolved
26 May 2008
What is the calculation of lease according to AS-19 for private limited company?
What is in AS-19?
What is in AS-19?
26 May 2008
359
Accounting Standard (AS) 19
(issued 2001)
Leases
Contents
OBJECTIVE
SCOPE Paragraphs 1-2
DEFINITIONS 3-4
CLASSIFICATION OF LEASES 5-10
LEASES IN THE FINANCIAL STATEMENTS
OF LESSEES 11-25
Finance Leases 11-22
Operating Leases 23-25
LEASES IN THE FINANCIAL STATEMENTS
OF LESSORS 26-46
Finance Leases 26-38
Operating Leases 39-46
SALE AND LEASEBACK TRANSACTIONS 47-55
APPENDIX
Accounting Standard (AS) 19
(issued 2001)
Leases
(This Accounting Standard includes paragraphs set in bold italic type
and plain type, which have equal authority. Paragraphs in bold italic
type indicate the main principles. This Accounting Standard should be
read in the context of its objective and the Preface to the Statements of
Accounting Standards1.)
Accounting Standard (AS) 19, ‘Leases’, issued by the Council of the Institute
of Chartered Accountants of India, comes into effect in respect of all assets
leased during accounting periods commencing on or after 1.4.2001 and is
mandatory in nature2 from that date. Accordingly, the ‘Guidance Note on
Accounting for Leases’ issued by the Institute in 1995, is not applicable in
respect of such assets. Earlier application of this Standard is, however,
encouraged.
In respect of accounting periods commencing on or after 1-4-20043 , an
enterprise which does not fall in any of the following categories need not
disclose the information required by paragraphs 22(c), (e) and (f); 25(a), (b)
and (e); 37(a), (f) and (g); and 46(b), (d) and (e), of this Standard:
(i) Enterprises whose equity or debt securities are listed whether in
India or outside India.
(ii) Enterprises which are in the process of listing their equity or debt
securities as evidenced by the board of directors’ resolution in
this regard.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which
Accounting Standards are intended to apply only to items which are material.
2 Reference may be made to the section titled ‘Announcements of the Council
regarding status of various documents issued by the Institute of Chartered
Accountants of India’ appearing at the beginning of this Compendium for a detailed
discussion on the implications of the mandatory status of an accounting standard.
3 AS 19 was originally made mandatory, in its entirety, for all enterprises in respect
of all assets leased during accounting periods commencing on or after 1-4-2001.
Leases 361
(iii) Banks including co-operative banks.
(iv) Financial institutions.
(v) Enterprises carrying on insurance business.
(vi) All commercial, industrial and business reporting enterprises,
whose turnover for the immediately preceding accounting period
on the basis of audited financial statements exceeds Rs. 50 crore.
Turnover does not include ‘other income’.
(vii) All commercial, industrial and business reporting enterprises having
borrowings, including public deposits, in excess ofRs. 10 crore at
any time during the accounting period.
(viii) Holding and subsidiary enterprises of any one of the above at any
time during the accounting period.
In respect of an enterprise which falls in any one or more of the above
categories, at any time during the accounting period, the Standard is applicable
in its entirety.
Where an enterprise has been covered in any one or more of the above
categories and subsequently, ceases to be so covered, the enterprise will not
qualify for exemption from paragraphs 22(c), (e) and (f); 25(a), (b) and (e);
37(a), (f) and (g); and 46(b), (d) and (e), of this Standard, until the enterprise
ceases to be covered in any of the above categories for two consecutive
years.
Where an enterprise has previously qualified for exemption fromparagraphs
22(c), (e) and (f); 25(a), (b) and (e); 37(a), (f) and (g); and 46(b), (d) and (e),
of this Standard (being not covered by any of the above categories) but no
longer qualifies for exemption in the current accounting period, this Standard
becomes applicable, in its entirety, from the current period. However, the
corresponding previous period figures in respect of above paragraphs need
not be disclosed.
An enterprise, which, pursuant to the above provisions, does not disclose the
information required by paragraphs 22(c), (e) and (f); 25(a), (b) and (e);
37(a), (f) and (g); and 46(b), (d) and (e) should disclose the fact.
362 AS 19 (issued 2001)
The following is the text of the Accounting Standard.
Objective
The objective of this Statement is to prescribe, for lessees and lessors, the
appropriate accounting policies and disclosures in relation to finance leases
and operating leases.
Scope
1. This Statement should be applied in accounting for all leases other
than:
(a) lease agreements to explore for or use natural resources,
such as oil, gas, timber, metals and other mineral rights; and
(b) licensing agreements for items such as motion picture films,
video recordings, plays, manuscripts, patents and
copyrights; and
(c) lease agreements to use lands.
2. This Statement applies to agreements that transfer the right to use assets
even though substantial services by the lessor may be called for in
connection with the operation or maintenance of such assets. On the other
hand, this Statement does not apply to agreements that are contracts for
services that do not transfer the right to use assets from one contracting
party to the other.
Definitions
3. The following terms are used in this Statement with the meanings
specified:
A lease is an agreement whereby the lessor conveys to the lessee in
return for a payment or series of payments the right to use an asset for
an agreed period of time.
A finance lease is a lease that transfers substantially all the risks and
rewards incident to ownership of an asset.
Leases 363
An operating lease is a lease other than a finance lease.
A non-cancellable lease is a lease that is cancellable only:
(a) upon the occurrence of some remote contingency; or
(b) with the permission of the lessor; or
(c) if the lessee enters into a new lease for the same or an
equivalent asset with the same lessor; or
(d) upon payment by the lessee of an additional amount such
that, at inception, continuation of the lease is reasonably
certain.
The inception of the lease is the earlier of the date of the lease
agreement and the date of a commitment by the parties to the principal
provisions of the lease.
The lease term is the non-cancellable period for which the lessee has
agreed to take on lease the asset together with any further periods for
which the lessee has the option to continue the lease of the asset, with or
without further payment, which option at the inception of the lease it is
reasonably certain that the lessee will exercise.
Minimum lease payments are the payments over the lease term that the
lessee is, or can be required, to make excluding contingent rent, costs
for services and taxes to be paid by and reimbursed to the lessor,
together with:
(a) in the case of the lessee, any residual value guaranteed by or
on behalf of the lessee; or
(b) in the case of the lessor, any residual value guaranteed to the
lessor:
(i) by or on behalf of the lessee; or
(ii) by an independent third party financially capable of
meeting this guarantee.
364 AS 19 (issued 2001)
However, if the lessee has an option to purchase the asset at a price
which is expected to be sufficiently lower than the fair value at the date
the option becomes exercisable that, at the inception of the lease, is
reasonably certain to be exercised, the minimum lease payments
comprise minimum payments payable over the lease term and the
payment required to exercise this purchase option.
Fair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable, willing parties in an arm’s
length transaction.
Economic life is either:
(a) the period over which an asset is expected to be economically
usable by one or more users; or
(b) the number of production or similar units expected to be
obtained from the asset by one or more users.
Useful life of a leased asset is either:
(a) the period over which the leased asset is expected to be used
by the lessee; or
(b) the number of production or similar units expected to be
obtained from the use of the asset by the lessee.
Residual value of a leased asset is the estimated fair value of the asset
at the end of the lease term.
Guaranteed residual value is:
(a) in the case of the lessee, that part of the residual value which
is guaranteed by the lessee or by a party on behalf of the
lessee (the amount of the guarantee being the maximum
amount that could, in any event, become payable); and
(b) in the case of the lessor, that part of the residual value which
is guaranteed by or on behalf of the lessee, or by an
independent third party who is financially capable of
discharging the obligations under the guarantee.
Leases 365
Unguaranteed residual value of a leased asset is the amount by which
the residual value of the asset exceeds its guaranteed residual value.
Gross investment in the lease is the aggregate of the minimum lease
payments under a finance lease from the standpoint of the lessor and
any unguaranteed residual value accruing to the lessor.
Unearned finance income is the difference between:
(a) the gross investment in the lease; and
(b) the present value 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,
at the interest rate implicit in the lease.
Net investment in the lease is the gross investment in the lease less
unearned finance income.
The interest rate implicit in the lease is the discount rate that, at the
inception of the lease, causes the aggregate present value of
(a) the minimum lease payments under a finance lease from the
standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor,
to be equal to the fair value of the leased asset.
The lessee’s incremental borrowing rate of interest is the rate of interest
the lessee would have to pay on a similar lease or, if that is not
determinable, the rate that, at the inception of the lease, the lessee would
incur to borrow over a similar term, and with a similar security, the
funds necessary to purchase the asset.
Contingent rent is that portion of the lease payments that is not fixed in
amount but is based on a factor other than just the passage of time (e.g.,
percentage of sales, amount of usage, price indices, market rates of
interest).
366 AS 19 (issued 2001)
4. The definition of a lease includes agreements for the hire of an asset
which contain a provision giving the hirer an option to acquire title to the
asset upon the fulfillment of agreed conditions. These agreements are
commonly known as hire purchase agreements. Hire purchase agreements
include agreements under which the property in the asset is to pass to the
hirer on the payment of the last instalment and the hirer has a right to
terminate the agreement at any time before the property so passes.
Classification of Leases
5. The classification of leases adopted in this Statement is based on the
extent to which risks and rewards incident to ownership of a leased asset lie
with the lessor or the lessee. Risks include the possibilities of losses from
idle capacity or technological obsolescence and of variations in return due to
changing economic conditions. Rewards may be represented by the
expectation of profitable operation over the economic life of the asset and of
gain from appreciation in value or realisation of residual value.
6. A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incident to ownership. Titlemay ormay not eventually be
transferred. A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incident to ownership.
7. Since the transaction between a lessor and a lessee is based on a lease
agreement common to both parties, it is appropriate to use consistent
definitions. The application of these definitions to the
differing circumstances of the two parties may sometimes result in the
same lease being classified differently by the lessor and the lessee.
8. Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than its form. Examples of situations
which would normally lead to a lease being classified as a finance lease are:
(a) the lease transfers ownership of the asset to the lessee by the
end of the lease term;
(b) the lessee has the option to purchase the asset at a price which is
expected to be sufficiently lower than the fair value at the date
the option becomes exercisable such that, at the inception of the
lease, it is reasonably certain that the option will be exercised;
Leases 367
(c) the lease term is for the major part of the economic life of the
asset even if title is not transferred;
(d) at the inception of the lease the present value of the minimum
lease payments amounts to at least substantially all of the fair
value of the leased asset; and
(e) the leased asset is of a specialised nature such that only the
lessee can use it without major modifications being made.
9. Indicators of situations which individually or in combination could also
lead to a lease being classified as a finance lease are:
(a) if the lessee can cancel the lease, the lessor’s losses associated
with the cancellation are borne by the lessee;
(b) gains or losses fromthe fluctuation in the fair value of the residual
fall to the lessee (for example in the form of a rent rebate
equalling most of the sales proceeds at the end of the lease); and
(c) the lessee can continue the lease for a secondary period at a rent
which is substantially lower than market rent.
10. Lease classification is made at the inception of the lease. If at any
time the lessee and the lessor agree to change the provisions of the lease,
other than by renewing the lease, in a manner that would have resulted in a
different classification of the lease under the criteria in paragraphs 5 to 9
had the changed terms been in effect at the inception of the lease,
the revised agreement is considered as a new agreement over its revised
term. Changes in estimates (for example, changes in estimates of the
economic life or of the residual value of the leased asset) or changes in
circumstances
(for example, default by the lessee), however, do not give rise to a new
classification of a lease for accounting purposes.
Leases in the Financial Statements of Lessees
Finance Leases
11. At the inception of a finance lease, the lessee should recognise the
lease as an asset and a liability. Such recognition should be at an
amount equal to the fair value of the leased asset at the inception of the
368 AS 19 (issued 2001)
lease. However, if the fair value of the leased asset exceeds the present
value of the minimum lease payments from the standpoint of the lessee,
the amount recorded as an asset and a liability should be the present
value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the
discount rate is the interest rate implicit in the lease, if this is
practicable to determine; if not, the lessee’s incremental borrowing rate
should be used.
Example
(a) An enterprise (the lessee) acquires a machinery on lease from a
leasing company (the lessor) on January 1, 20X0. The lease term
covers the entire economic life of the machinery, i.e., 3 years. The
fair value of the machinery on January 1, 20X0 is Rs.2,35,500. The
lease agreement requires the lessee to pay an amount of Rs.1,00,000
per year beginning December 31, 20X0. The lessee has guaranteed
a residual value of Rs.17,000 on December 31, 20X2 to the lessor.
The lessor, however, estimates that the machinery would have a
salvage value of only Rs.3,500 on December 31, 20X2.
The interest rate implicit in the lease is 16 per cent (approx.). This
is calculated using the following formula:
ALR ALR ALR RV
Fair value = + + … + +
(1 + r)1 (1 + r)2 (1 + r)n (1 + r)n
where ALR is annual lease rental,
RV is residual value (both guaranteed and
unguaranteed),
n is the lease term,
r is interest rate implicit in the lease.
The present value of minimum lease payments from the stand point
of the lessee is Rs.2,35,500.
The lessee would record the machinery as an asset at Rs. 2,35,500
with a corresponding liability representing the present value of lease
payments over the lease term (including the guaranteed residual
value).
Leases 369
(b) In the above example, suppose the lessor estimates that the
machinery would have a salvage value of Rs. 17,000 on December
31, 20X2. The lessee, however, guarantees a residual value of Rs.
5,000 only.
The interest rate implicit in the lease in this case would remain
unchanged at 16% (approx.). The present value of the minimum
lease payments from the standpoint of the lessee, using this interest
rate implicit in the lease, would be Rs.2,27,805. As this amount is
lower than the fair value of the leased asset (Rs.2,35,500), the lessee
would recognise the asset and the liability arising from the lease at
Rs. 2,27,805.
In case the interest rate implicit in the lease is not known to the
lessee, the present value of the minimum lease payments from the
standpoint of the lessee would be computed using the lessee’s
incremental borrowing rate.
12. Transactions and other events are accounted for and presented in
accordance with their substance and financial reality and not merely with
their legal form. While the legal form of a lease agreement is that the lessee
may acquire no legal title to the leased asset, in the case of finance leases
the substance and financial reality are that the lessee acquires the economic
benefits of the use of the leased asset for the major part of its economic life
in return for entering into an obligation to pay for that right an amount
approximating to the fair value of the asset and the related finance charge.
13. If such lease transactions are not reflected in the lessee’s balance
sheet, the economic resources and the level of obligations of an enterprise
are understated thereby distorting financial ratios. It is therefore appropriate
that a finance lease be recognised in the lessee’s balance sheet both as an
asset and as an obligation to pay future lease payments. At the inception of
the lease, the asset and the liability for the future lease payments are
recognised in the balance sheet at the same amounts.
14. It is not appropriate to present the liability for a leased asset as a
deduction from the leased asset in the financial statements. The liability for
a leased asset should be presented separately in the balance sheet as a
current liability or a long-term liability as the case may be.
15. Initial direct costs are often incurred in connection with specific leasing
Year Finance Payment
370 AS 19 (issued 2001)
activities, as in negotiating and securing leasing arrangements. The costs
identified as directly attributable to activities performed by the lessee for a
finance lease are included as part of the amount recognised as an asset
under the lease.
16. Lease payments should be apportioned between the finance
charge and the reduction of the outstanding liability. The finance
charge should be allocated to periods during the lease term so as to
produce a constant periodic rate of interest on the remaining balance
of the liability for each period.
Example
In the example (a) illustrating paragraph 11, the lease payments would be
apportioned by the lessee between the finance charge and the reduction
of the outstanding liability as follows:
Reduction Outstandcharge
(Rs.) in ing
(Rs.) outstanding liability
liability (Rs.) (Rs.)
Year 1 (January 1) 2,35,500
(December 31) 37,680 1,00,000 62,320 1,73,180
Year 2 (December 31) 27,709 1,00,000 72,291 1,00,889
Year 3 (December 31) 16,142 1,00,000 83,858 17,031*
17. In practice, in allocating the finance charge to periods during the lease
term, some form of approximation may be used to simplify the calculation.
18. A finance lease gives rise to a depreciation expense for the asset
as well as a finance expense for each accounting period. The
depreciation policy for a leased asset should be consistent with that for
depreciable assets which are owned, and the depreciation recognised
should be calculated on the basis set out in Accounting Standard (AS)
6, Depreciation Accounting. If there is no reasonable certainty that the
lessee will obtain ownership by the end of the lease term, the asset
should be fully depreciated over the lease term or its useful life,
whichever is shorter.
* The difference between this figure and guaranteed residual value (Rs.17,000) is
due to approximation in computing the interest rate implicit in the lease.
Leases 371
19. The depreciable amount of a leased asset is allocated to each
accounting period during the period of expected use on a systematic basis
consistent with the depreciation policy the lessee adopts for depreciable
assets that are owned. If there is reasonable certainty that the lessee will
obtain ownership by the end of the lease term, the period of expected use is
the useful life of the asset; otherwise the asset is depreciated over the lease
term or its useful life, whichever is shorter.
20. The sum of the depreciation expense for the asset and the finance
expense for the period is rarely the same as the lease payments payable for
the period, and it is, therefore, inappropriate simply to recognise the lease
payments payable as an expense in the statement of profit and loss.
Accordingly, the asset and the related liability are unlikely to be equal in
amount after the inception of the lease.
21. To determine whether a leased asset has become impaired, an
enterprise applies the Accounting Standard dealing with impairment of
assets4, that sets out the requirements as to howan enterprise should perform
the review of the carrying amount of an asset, how it should determine the
recoverable amount of an asset and when it should recognise, or reverse, an
impairment loss.
22. The lessee should, in addition to the requirements of AS 10,
Accounting for Fixed Assets, AS 6, Depreciation Accounting, and the
governing statute, make the following disclosures for finance leases:
(a) assets acquired under finance lease as segregated from the
assets owned;
(b) for each class of assets, the net carrying amount at the
balance sheet date;
(c) a reconciliation between the total of minimum lease
payments at the balance sheet date and their present value.
In addition, an enterprise should disclose the total of
minimum lease payments at the balance sheet date, and their
present value, for each of the following periods:
(i) not later than one year;
4 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
372 AS 19 (issued 2001)
(ii) later than one year and not later than five years;
(iii) later than five years;
(d) contingent rents recognised as expense in the statement of
profit and loss for the period;
(e) the total of future minimum sublease payments expected to
be received under non-cancellable subleases at the balance
sheet date; and
(f) a general description of the lessee’s significant leasing
arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are
determined;
(ii) the existence and terms of renewal or purchase options
and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as
those concerning dividends, additional debt, and further
leasing.
Operating Leases
23. Lease payments under an operating lease should be recognised
as an expense in the statement of profit and loss on a straight line basis
over the lease term unless another systematic basis is more
representative of the time pattern of the user’s benefit.
24. For operating leases, lease payments (excluding costs for services such
as insurance and maintenance) are recognised as an expense in the
statement of profit and loss on a straight line basis unless another systematic
basis is more representative of the time pattern of the user’s benefit, even if
the payments are not on that basis.
25. The lessee should make the following disclosures for operating
leases:
(a) the total of future minimum lease payments under nonLeases
373
cancellable operating leases for each of the following
periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to
be received under non-cancellable subleases at the balance
sheet date;
(c) lease payments recognised in the statement of profit and loss
for the period, with separate amounts for minimum lease
payments and contingent rents;
(d) sub-lease payments received (or receivable) recognised in
the statement of profit and loss for the period;
(e) a general description of the lessee’s significant leasing
arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are
determined;
(ii) the existence and terms of renewal or purchase options
and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as
those concerning dividends, additional debt, and further
leasing.
Leases in the Financial Statements of Lessors
Finance Leases
26. The lessor should recognise assets given under a finance lease in
its balance sheet as a receivable at an amount equal to the net
investment in the lease.
374 AS 19 (issued 2001)
27. Under a finance lease substantially all the risks and rewards incident to
legal ownership are transferred by the lessor, and thus the lease payment
receivable is treated by the lessor as repayment of principal, i.e.,
net investment in the lease, and finance income to reimburse and reward
the lessor for its investment and services.
28. The recognition of finance income should be based on a pattern
reflecting a constant periodic rate of return on the net investment of the
lessor outstanding in respect of the finance lease.
29. A lessor aims to allocate finance income over the lease term on a
systematic and rational basis. This income allocation is based on a pattern
reflecting a constant periodic return on the net investment of the lessor
outstanding in respect of the finance lease. Lease payments relating to the
accounting period, excluding costs for services, are reduced from both the
principal and the unearned finance income.
30. Estimated unguaranteed residual values used in computing the lessor’s
gross investment in a lease are reviewed regularly. If there has been a
reduction in the estimated unguaranteed residual value, the income allocation
over the remaining lease term is revised and any reduction in respect of
amounts already accrued is recognised immediately. An upward adjustment
of the estimated residual value is not made.
31. Initial direct costs, such as commissions and legal fees, are
often incurred by lessors in negotiating and arranging a lease. For finance
leases, these initial direct costs are incurred to produce finance income
and are either recognised immediately in the statement of profit and loss or
allocated against the finance income over the lease term.
32. The manufacturer or dealer lessor should recognise the
transaction of sale in the statement of profit and loss for the period, in
accordance with the policy followed by the enterprise for outright sales.
If artificially low rates of interest are quoted, profit on sale should be
restricted to that which would apply if a commercial rate of interest
were charged. Initial direct costs should be recognised as an expense
in the statement of profit and loss at the inception of the lease.
33. Manufacturers or dealers may offer to customers the choice of either
buying or leasing an asset. A finance lease of an asset by a manufacturer or
dealer lessor gives rise to two types of income:
Leases 375
(a) the profit or loss equivalent to the profit or loss resulting from an
outright sale of the asset being leased, at normal selling prices,
reflecting any applicable volume or trade discounts; and
(b) the finance income over the lease term.
34. The sales revenue recorded at the commencement of a finance lease
term by a manufacturer or dealer lessor is the fair value of the asset.
However, if the present value of the minimum lease payments accruing to
the lessor computed at a commercial rate of interest is lower than the fair
value, the amount recorded as sales revenue is the present value so
computed. The cost of sale recognised at the commencement of the lease
term is the cost, or carrying amount if different, of the leased asset less the
present value of the unguaranteed residual value. The difference between
the sales revenue and the cost of sale is the selling profit,which is recognised
in accordance with the policy followed by the enterprise for sales.
35. Manufacturer or dealer lessors sometimes quote artificially low rates
of interest in order to attract customers. The use of such a rate would result
in an excessive portion of the total income from the transaction being
recognised at the time of sale. If artificially low rates of interest are quoted,
selling profit would be restricted to that which would apply if a commercial
rate of interest were charged.
36. Initial direct costs are recognised as an expense at the commencement
of the lease term because they are mainly related to earning the
manufacturer’s or dealer’s selling profit.
37. The lessor should make the following disclosures for finance
leases:
(a) a reconciliation between the total gross investment in the
lease at the balance sheet date, and the present value of
minimum lease payments receivable at the balance sheet
date. In addition, an enterprise should disclose the total
gross investment in the lease and the present value of
minimum lease payments receivable at the balance sheet
date, for each of the following periods:
(i) not later than one year;
376 AS 19 (issued 2001)
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) unearned finance income;
(c) the unguaranteed residual values accruing to the benefit of
the lessor;
(d) the accumulated provision for uncollectible minimum lease
payments receivable;
(e) contingent rents recognised in the statement of profit and loss
for the period;
(f) a general description of the significant leasing
arrangements of the lessor; and
(g) accounting policy adopted in respect of initial direct costs.
38. As an indicator of growth it is often useful to also disclose the gross
investment less unearned income in new business added during the
accounting period, after deducting the relevant amounts for cancelled leases.
Operating Leases
39. The lessor should present an asset given under operating lease in
its balance sheet under fixed assets.
40. Lease income from operating leases should be recognised in the
statement of profit and loss on a straight line basis over the lease term,
unless another systematic basis is more representative of the time
pattern in which benefit derived from the use of the leased asset is
diminished.
41. Costs, including depreciation, incurred in earning the lease income are
recognised as an expense. Lease income (excluding receipts for services
provided such as insurance and maintenance) is recognised in the statement
of profit and loss on a straight line basis over the lease term even if the
receipts are not on such a basis, unless another systematic basis is more
representative of the time pattern in which benefit derived from the use of
the leased asset is diminished.
Leases 377
42. Initial direct costs incurred specifically to earn revenues from an
operating lease are either deferred and allocated to income over the lease
term in proportion to the recognition of rent income, or are recognised as an
expense in the statement of profit and loss in the period in which they are
incurred.
43. The depreciation of leased assets should be on a basis
consistent with the normal depreciation policy of the lessor for similar
assets, and the depreciation charge should be calculated on the basis
set out in AS
6, Depreciation Accounting.
44. To determine whether a leased asset has become impaired, an
enterprise applies the Accounting Standard dealing with impairment of
assets5 that sets out the requirements for how an enterprise should perform
the review of the carrying amount of an asset, how it should determine the
recoverable amount of an asset and when it should recognise, or reverse, an
impairment loss.
45. A manufacturer or dealer lessor does not recognise any selling profit
on entering into an operating lease because it is not the equivalent of a sale.
46. The lessor should, in addition to the requirements of AS 6,
Depreciation Accounting and AS 10, Accounting for Fixed Assets, and
the governing statute, make the following disclosures for operating
leases:
(a) for each class of assets, the gross carrying amount, the
accumulated depreciation and accumulated impairment
losses at the balance sheet date; and
(i) the depreciation recognised in the statement of profit
and loss for the period;
(ii) impairment losses recognised in the statement of profit
and loss for the period;
(iii) impairment losses reversed in the statement of profit
and loss for the period;
5 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
378 AS 19 (issued 2001)
(b) the future minimum lease payments under non-cancellable
operating leases in the aggregate and for each of the
following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(c) total contingent rents recognised as income in the statement
of profit and loss for the period;
(d) a general description of the lessor’s significant leasing
arrangements; and
(e) accounting policy adopted in respect of initial direct costs.
Sale and LeasebackTransactions
47. A sale and leaseback transaction involves the sale of an asset by the
vendor and the leasing of the same asset back to the vendor. The lease
payments and the sale price are usually interdependent as they are
negotiated as a package. The accounting treatment of a sale and leaseback
transaction depends upon the type of lease involved.
48. If a sale and leaseback transaction results in a finance lease, any
excess or deficiency of sales proceeds over the carrying amount should
not be immediately recognised as income or loss in the financial
statements of a seller-lessee. Instead, it should be deferred and
amortised over the lease term in proportion to the depreciation of the
leased asset.
49. If the leaseback is a finance lease, it is not appropriate to regard an
excess of sales proceeds over the carrying amount as income. Such excess
is deferred and amortised over the lease term in proportion to the
depreciation of the leased asset. Similarly, it is not appropriate to regard a
deficiency as loss. Such deficiency is deferred and amortised over the lease
term.
50. If a sale and leaseback transaction results in an operating lease,
Leases 379
and it is clear that the transaction is established at fair value, any profit
or loss should be recognised immediately. If the sale price is below fair
value, any profit or loss should be recognised immediately except that,
if the loss is compensated by future lease payments at below market
price, it should be deferred and amortised in proportion to the lease
payments over the period for which the asset is expected to be used. If
the sale price is above fair value, the excess over fair value should be
deferred and amortised over the period for which the asset is expected
to be used.
51. If the leaseback is an operating lease, and the lease payments and the
sale price are established at fair value, there has in effect been a normal sale
transaction and any profit or loss is recognised immediately.
52. For operating leases, if the fair value at the time of a sale and
leaseback transaction is less than the carrying amount of the asset, a
loss equal to the amount of the difference between the carrying amount
and fair value should be recognised immediately.
53. For finance leases, no such adjustment is necessary unless there has
been an impairment in value, in which case the carrying amount is reduced
to recoverable amount in accordance with the Accounting Standard dealing
with impairment of assets.
54. Disclosure requirements for lessees and lessors apply equally to sale
and leaseback transactions. The required description of the significant
leasing arrangements leads to disclosure of unique or unusual provisions of
the agreement or terms of the sale and leaseback transactions.
55. Sale and leaseback transactions may meet the separate disclosure
criteria set out in paragraph 12 of Accounting Standard (AS) 5, Net Profit or
Loss for the Period, Prior Period Items and Changes in Accounting Policies.
380 AS 19 (issued 2001)
Appendix
Sale and Leaseback Transactions that Result in Operating
Leases
The appendix is illustrative only and does not form part of the
accounting standard. The purpose of this appendix is to illustrate the
application of the accounting standard.
A sale and leaseback transaction that results in an operating lease may give
rise to profit or a loss, the determination and treatment of which depends on
the leased asset’s carrying amount, fair value and selling price. The
following table shows the requirements of the accounting standard in various
circumstances.
Sale price
established at
fair value
(paragraph 50)
Carrying
amount
equal to
fair value
Carrying
amount less
than fair value
Carrying
amount
above fair
value
Profit No profit Recognise profit
immediately
Not applicable
Los s No loss Not applicable Recognise loss
immediately
Sale price below
fair value
(paragraph 50)
Profit No profit Recognise profit
immediately
No profit
(note 1)
Loss not
compensated by
future lease
payments at below
market price
Recognise
loss
immediately
Recognise loss
immediately
(note 1)
Loss compensated
by future lease
payments at below
market price
Defer and
amortise loss
Defer and
amortise loss
(note 1)
Leases 381
Sale price above
fair value
(paragraph 50)
Profit Defer and
amortise profit
Defer and
amortise profit
Defer and
amortise
profit
(note 2)
Los s No loss No loss (note 1)
Note 1. These parts of the table represent circumstances that would have
been dealt with under paragraph 52 of the Standard. Paragraph 52 requires
the carrying amount of an asset to be written down to fair value where it is
subject to a sale and leaseback.
Note 2. The profit would be the difference between fair value and sale
price as the carrying amount would have been written down to fair value in
accordance with paragraph 52.
Rgds/
Vineet
Accounting Standard (AS) 19
(issued 2001)
Leases
Contents
OBJECTIVE
SCOPE Paragraphs 1-2
DEFINITIONS 3-4
CLASSIFICATION OF LEASES 5-10
LEASES IN THE FINANCIAL STATEMENTS
OF LESSEES 11-25
Finance Leases 11-22
Operating Leases 23-25
LEASES IN THE FINANCIAL STATEMENTS
OF LESSORS 26-46
Finance Leases 26-38
Operating Leases 39-46
SALE AND LEASEBACK TRANSACTIONS 47-55
APPENDIX
Accounting Standard (AS) 19
(issued 2001)
Leases
(This Accounting Standard includes paragraphs set in bold italic type
and plain type, which have equal authority. Paragraphs in bold italic
type indicate the main principles. This Accounting Standard should be
read in the context of its objective and the Preface to the Statements of
Accounting Standards1.)
Accounting Standard (AS) 19, ‘Leases’, issued by the Council of the Institute
of Chartered Accountants of India, comes into effect in respect of all assets
leased during accounting periods commencing on or after 1.4.2001 and is
mandatory in nature2 from that date. Accordingly, the ‘Guidance Note on
Accounting for Leases’ issued by the Institute in 1995, is not applicable in
respect of such assets. Earlier application of this Standard is, however,
encouraged.
In respect of accounting periods commencing on or after 1-4-20043 , an
enterprise which does not fall in any of the following categories need not
disclose the information required by paragraphs 22(c), (e) and (f); 25(a), (b)
and (e); 37(a), (f) and (g); and 46(b), (d) and (e), of this Standard:
(i) Enterprises whose equity or debt securities are listed whether in
India or outside India.
(ii) Enterprises which are in the process of listing their equity or debt
securities as evidenced by the board of directors’ resolution in
this regard.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which
Accounting Standards are intended to apply only to items which are material.
2 Reference may be made to the section titled ‘Announcements of the Council
regarding status of various documents issued by the Institute of Chartered
Accountants of India’ appearing at the beginning of this Compendium for a detailed
discussion on the implications of the mandatory status of an accounting standard.
3 AS 19 was originally made mandatory, in its entirety, for all enterprises in respect
of all assets leased during accounting periods commencing on or after 1-4-2001.
Leases 361
(iii) Banks including co-operative banks.
(iv) Financial institutions.
(v) Enterprises carrying on insurance business.
(vi) All commercial, industrial and business reporting enterprises,
whose turnover for the immediately preceding accounting period
on the basis of audited financial statements exceeds Rs. 50 crore.
Turnover does not include ‘other income’.
(vii) All commercial, industrial and business reporting enterprises having
borrowings, including public deposits, in excess ofRs. 10 crore at
any time during the accounting period.
(viii) Holding and subsidiary enterprises of any one of the above at any
time during the accounting period.
In respect of an enterprise which falls in any one or more of the above
categories, at any time during the accounting period, the Standard is applicable
in its entirety.
Where an enterprise has been covered in any one or more of the above
categories and subsequently, ceases to be so covered, the enterprise will not
qualify for exemption from paragraphs 22(c), (e) and (f); 25(a), (b) and (e);
37(a), (f) and (g); and 46(b), (d) and (e), of this Standard, until the enterprise
ceases to be covered in any of the above categories for two consecutive
years.
Where an enterprise has previously qualified for exemption fromparagraphs
22(c), (e) and (f); 25(a), (b) and (e); 37(a), (f) and (g); and 46(b), (d) and (e),
of this Standard (being not covered by any of the above categories) but no
longer qualifies for exemption in the current accounting period, this Standard
becomes applicable, in its entirety, from the current period. However, the
corresponding previous period figures in respect of above paragraphs need
not be disclosed.
An enterprise, which, pursuant to the above provisions, does not disclose the
information required by paragraphs 22(c), (e) and (f); 25(a), (b) and (e);
37(a), (f) and (g); and 46(b), (d) and (e) should disclose the fact.
362 AS 19 (issued 2001)
The following is the text of the Accounting Standard.
Objective
The objective of this Statement is to prescribe, for lessees and lessors, the
appropriate accounting policies and disclosures in relation to finance leases
and operating leases.
Scope
1. This Statement should be applied in accounting for all leases other
than:
(a) lease agreements to explore for or use natural resources,
such as oil, gas, timber, metals and other mineral rights; and
(b) licensing agreements for items such as motion picture films,
video recordings, plays, manuscripts, patents and
copyrights; and
(c) lease agreements to use lands.
2. This Statement applies to agreements that transfer the right to use assets
even though substantial services by the lessor may be called for in
connection with the operation or maintenance of such assets. On the other
hand, this Statement does not apply to agreements that are contracts for
services that do not transfer the right to use assets from one contracting
party to the other.
Definitions
3. The following terms are used in this Statement with the meanings
specified:
A lease is an agreement whereby the lessor conveys to the lessee in
return for a payment or series of payments the right to use an asset for
an agreed period of time.
A finance lease is a lease that transfers substantially all the risks and
rewards incident to ownership of an asset.
Leases 363
An operating lease is a lease other than a finance lease.
A non-cancellable lease is a lease that is cancellable only:
(a) upon the occurrence of some remote contingency; or
(b) with the permission of the lessor; or
(c) if the lessee enters into a new lease for the same or an
equivalent asset with the same lessor; or
(d) upon payment by the lessee of an additional amount such
that, at inception, continuation of the lease is reasonably
certain.
The inception of the lease is the earlier of the date of the lease
agreement and the date of a commitment by the parties to the principal
provisions of the lease.
The lease term is the non-cancellable period for which the lessee has
agreed to take on lease the asset together with any further periods for
which the lessee has the option to continue the lease of the asset, with or
without further payment, which option at the inception of the lease it is
reasonably certain that the lessee will exercise.
Minimum lease payments are the payments over the lease term that the
lessee is, or can be required, to make excluding contingent rent, costs
for services and taxes to be paid by and reimbursed to the lessor,
together with:
(a) in the case of the lessee, any residual value guaranteed by or
on behalf of the lessee; or
(b) in the case of the lessor, any residual value guaranteed to the
lessor:
(i) by or on behalf of the lessee; or
(ii) by an independent third party financially capable of
meeting this guarantee.
364 AS 19 (issued 2001)
However, if the lessee has an option to purchase the asset at a price
which is expected to be sufficiently lower than the fair value at the date
the option becomes exercisable that, at the inception of the lease, is
reasonably certain to be exercised, the minimum lease payments
comprise minimum payments payable over the lease term and the
payment required to exercise this purchase option.
Fair value is the amount for which an asset could be exchanged or a
liability settled between knowledgeable, willing parties in an arm’s
length transaction.
Economic life is either:
(a) the period over which an asset is expected to be economically
usable by one or more users; or
(b) the number of production or similar units expected to be
obtained from the asset by one or more users.
Useful life of a leased asset is either:
(a) the period over which the leased asset is expected to be used
by the lessee; or
(b) the number of production or similar units expected to be
obtained from the use of the asset by the lessee.
Residual value of a leased asset is the estimated fair value of the asset
at the end of the lease term.
Guaranteed residual value is:
(a) in the case of the lessee, that part of the residual value which
is guaranteed by the lessee or by a party on behalf of the
lessee (the amount of the guarantee being the maximum
amount that could, in any event, become payable); and
(b) in the case of the lessor, that part of the residual value which
is guaranteed by or on behalf of the lessee, or by an
independent third party who is financially capable of
discharging the obligations under the guarantee.
Leases 365
Unguaranteed residual value of a leased asset is the amount by which
the residual value of the asset exceeds its guaranteed residual value.
Gross investment in the lease is the aggregate of the minimum lease
payments under a finance lease from the standpoint of the lessor and
any unguaranteed residual value accruing to the lessor.
Unearned finance income is the difference between:
(a) the gross investment in the lease; and
(b) the present value 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,
at the interest rate implicit in the lease.
Net investment in the lease is the gross investment in the lease less
unearned finance income.
The interest rate implicit in the lease is the discount rate that, at the
inception of the lease, causes the aggregate present value of
(a) the minimum lease payments under a finance lease from the
standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor,
to be equal to the fair value of the leased asset.
The lessee’s incremental borrowing rate of interest is the rate of interest
the lessee would have to pay on a similar lease or, if that is not
determinable, the rate that, at the inception of the lease, the lessee would
incur to borrow over a similar term, and with a similar security, the
funds necessary to purchase the asset.
Contingent rent is that portion of the lease payments that is not fixed in
amount but is based on a factor other than just the passage of time (e.g.,
percentage of sales, amount of usage, price indices, market rates of
interest).
366 AS 19 (issued 2001)
4. The definition of a lease includes agreements for the hire of an asset
which contain a provision giving the hirer an option to acquire title to the
asset upon the fulfillment of agreed conditions. These agreements are
commonly known as hire purchase agreements. Hire purchase agreements
include agreements under which the property in the asset is to pass to the
hirer on the payment of the last instalment and the hirer has a right to
terminate the agreement at any time before the property so passes.
Classification of Leases
5. The classification of leases adopted in this Statement is based on the
extent to which risks and rewards incident to ownership of a leased asset lie
with the lessor or the lessee. Risks include the possibilities of losses from
idle capacity or technological obsolescence and of variations in return due to
changing economic conditions. Rewards may be represented by the
expectation of profitable operation over the economic life of the asset and of
gain from appreciation in value or realisation of residual value.
6. A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incident to ownership. Titlemay ormay not eventually be
transferred. A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incident to ownership.
7. Since the transaction between a lessor and a lessee is based on a lease
agreement common to both parties, it is appropriate to use consistent
definitions. The application of these definitions to the
differing circumstances of the two parties may sometimes result in the
same lease being classified differently by the lessor and the lessee.
8. Whether a lease is a finance lease or an operating lease depends on the
substance of the transaction rather than its form. Examples of situations
which would normally lead to a lease being classified as a finance lease are:
(a) the lease transfers ownership of the asset to the lessee by the
end of the lease term;
(b) the lessee has the option to purchase the asset at a price which is
expected to be sufficiently lower than the fair value at the date
the option becomes exercisable such that, at the inception of the
lease, it is reasonably certain that the option will be exercised;
Leases 367
(c) the lease term is for the major part of the economic life of the
asset even if title is not transferred;
(d) at the inception of the lease the present value of the minimum
lease payments amounts to at least substantially all of the fair
value of the leased asset; and
(e) the leased asset is of a specialised nature such that only the
lessee can use it without major modifications being made.
9. Indicators of situations which individually or in combination could also
lead to a lease being classified as a finance lease are:
(a) if the lessee can cancel the lease, the lessor’s losses associated
with the cancellation are borne by the lessee;
(b) gains or losses fromthe fluctuation in the fair value of the residual
fall to the lessee (for example in the form of a rent rebate
equalling most of the sales proceeds at the end of the lease); and
(c) the lessee can continue the lease for a secondary period at a rent
which is substantially lower than market rent.
10. Lease classification is made at the inception of the lease. If at any
time the lessee and the lessor agree to change the provisions of the lease,
other than by renewing the lease, in a manner that would have resulted in a
different classification of the lease under the criteria in paragraphs 5 to 9
had the changed terms been in effect at the inception of the lease,
the revised agreement is considered as a new agreement over its revised
term. Changes in estimates (for example, changes in estimates of the
economic life or of the residual value of the leased asset) or changes in
circumstances
(for example, default by the lessee), however, do not give rise to a new
classification of a lease for accounting purposes.
Leases in the Financial Statements of Lessees
Finance Leases
11. At the inception of a finance lease, the lessee should recognise the
lease as an asset and a liability. Such recognition should be at an
amount equal to the fair value of the leased asset at the inception of the
368 AS 19 (issued 2001)
lease. However, if the fair value of the leased asset exceeds the present
value of the minimum lease payments from the standpoint of the lessee,
the amount recorded as an asset and a liability should be the present
value of the minimum lease payments from the standpoint of the lessee.
In calculating the present value of the minimum lease payments the
discount rate is the interest rate implicit in the lease, if this is
practicable to determine; if not, the lessee’s incremental borrowing rate
should be used.
Example
(a) An enterprise (the lessee) acquires a machinery on lease from a
leasing company (the lessor) on January 1, 20X0. The lease term
covers the entire economic life of the machinery, i.e., 3 years. The
fair value of the machinery on January 1, 20X0 is Rs.2,35,500. The
lease agreement requires the lessee to pay an amount of Rs.1,00,000
per year beginning December 31, 20X0. The lessee has guaranteed
a residual value of Rs.17,000 on December 31, 20X2 to the lessor.
The lessor, however, estimates that the machinery would have a
salvage value of only Rs.3,500 on December 31, 20X2.
The interest rate implicit in the lease is 16 per cent (approx.). This
is calculated using the following formula:
ALR ALR ALR RV
Fair value = + + … + +
(1 + r)1 (1 + r)2 (1 + r)n (1 + r)n
where ALR is annual lease rental,
RV is residual value (both guaranteed and
unguaranteed),
n is the lease term,
r is interest rate implicit in the lease.
The present value of minimum lease payments from the stand point
of the lessee is Rs.2,35,500.
The lessee would record the machinery as an asset at Rs. 2,35,500
with a corresponding liability representing the present value of lease
payments over the lease term (including the guaranteed residual
value).
Leases 369
(b) In the above example, suppose the lessor estimates that the
machinery would have a salvage value of Rs. 17,000 on December
31, 20X2. The lessee, however, guarantees a residual value of Rs.
5,000 only.
The interest rate implicit in the lease in this case would remain
unchanged at 16% (approx.). The present value of the minimum
lease payments from the standpoint of the lessee, using this interest
rate implicit in the lease, would be Rs.2,27,805. As this amount is
lower than the fair value of the leased asset (Rs.2,35,500), the lessee
would recognise the asset and the liability arising from the lease at
Rs. 2,27,805.
In case the interest rate implicit in the lease is not known to the
lessee, the present value of the minimum lease payments from the
standpoint of the lessee would be computed using the lessee’s
incremental borrowing rate.
12. Transactions and other events are accounted for and presented in
accordance with their substance and financial reality and not merely with
their legal form. While the legal form of a lease agreement is that the lessee
may acquire no legal title to the leased asset, in the case of finance leases
the substance and financial reality are that the lessee acquires the economic
benefits of the use of the leased asset for the major part of its economic life
in return for entering into an obligation to pay for that right an amount
approximating to the fair value of the asset and the related finance charge.
13. If such lease transactions are not reflected in the lessee’s balance
sheet, the economic resources and the level of obligations of an enterprise
are understated thereby distorting financial ratios. It is therefore appropriate
that a finance lease be recognised in the lessee’s balance sheet both as an
asset and as an obligation to pay future lease payments. At the inception of
the lease, the asset and the liability for the future lease payments are
recognised in the balance sheet at the same amounts.
14. It is not appropriate to present the liability for a leased asset as a
deduction from the leased asset in the financial statements. The liability for
a leased asset should be presented separately in the balance sheet as a
current liability or a long-term liability as the case may be.
15. Initial direct costs are often incurred in connection with specific leasing
Year Finance Payment
370 AS 19 (issued 2001)
activities, as in negotiating and securing leasing arrangements. The costs
identified as directly attributable to activities performed by the lessee for a
finance lease are included as part of the amount recognised as an asset
under the lease.
16. Lease payments should be apportioned between the finance
charge and the reduction of the outstanding liability. The finance
charge should be allocated to periods during the lease term so as to
produce a constant periodic rate of interest on the remaining balance
of the liability for each period.
Example
In the example (a) illustrating paragraph 11, the lease payments would be
apportioned by the lessee between the finance charge and the reduction
of the outstanding liability as follows:
Reduction Outstandcharge
(Rs.) in ing
(Rs.) outstanding liability
liability (Rs.) (Rs.)
Year 1 (January 1) 2,35,500
(December 31) 37,680 1,00,000 62,320 1,73,180
Year 2 (December 31) 27,709 1,00,000 72,291 1,00,889
Year 3 (December 31) 16,142 1,00,000 83,858 17,031*
17. In practice, in allocating the finance charge to periods during the lease
term, some form of approximation may be used to simplify the calculation.
18. A finance lease gives rise to a depreciation expense for the asset
as well as a finance expense for each accounting period. The
depreciation policy for a leased asset should be consistent with that for
depreciable assets which are owned, and the depreciation recognised
should be calculated on the basis set out in Accounting Standard (AS)
6, Depreciation Accounting. If there is no reasonable certainty that the
lessee will obtain ownership by the end of the lease term, the asset
should be fully depreciated over the lease term or its useful life,
whichever is shorter.
* The difference between this figure and guaranteed residual value (Rs.17,000) is
due to approximation in computing the interest rate implicit in the lease.
Leases 371
19. The depreciable amount of a leased asset is allocated to each
accounting period during the period of expected use on a systematic basis
consistent with the depreciation policy the lessee adopts for depreciable
assets that are owned. If there is reasonable certainty that the lessee will
obtain ownership by the end of the lease term, the period of expected use is
the useful life of the asset; otherwise the asset is depreciated over the lease
term or its useful life, whichever is shorter.
20. The sum of the depreciation expense for the asset and the finance
expense for the period is rarely the same as the lease payments payable for
the period, and it is, therefore, inappropriate simply to recognise the lease
payments payable as an expense in the statement of profit and loss.
Accordingly, the asset and the related liability are unlikely to be equal in
amount after the inception of the lease.
21. To determine whether a leased asset has become impaired, an
enterprise applies the Accounting Standard dealing with impairment of
assets4, that sets out the requirements as to howan enterprise should perform
the review of the carrying amount of an asset, how it should determine the
recoverable amount of an asset and when it should recognise, or reverse, an
impairment loss.
22. The lessee should, in addition to the requirements of AS 10,
Accounting for Fixed Assets, AS 6, Depreciation Accounting, and the
governing statute, make the following disclosures for finance leases:
(a) assets acquired under finance lease as segregated from the
assets owned;
(b) for each class of assets, the net carrying amount at the
balance sheet date;
(c) a reconciliation between the total of minimum lease
payments at the balance sheet date and their present value.
In addition, an enterprise should disclose the total of
minimum lease payments at the balance sheet date, and their
present value, for each of the following periods:
(i) not later than one year;
4 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
372 AS 19 (issued 2001)
(ii) later than one year and not later than five years;
(iii) later than five years;
(d) contingent rents recognised as expense in the statement of
profit and loss for the period;
(e) the total of future minimum sublease payments expected to
be received under non-cancellable subleases at the balance
sheet date; and
(f) a general description of the lessee’s significant leasing
arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are
determined;
(ii) the existence and terms of renewal or purchase options
and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as
those concerning dividends, additional debt, and further
leasing.
Operating Leases
23. Lease payments under an operating lease should be recognised
as an expense in the statement of profit and loss on a straight line basis
over the lease term unless another systematic basis is more
representative of the time pattern of the user’s benefit.
24. For operating leases, lease payments (excluding costs for services such
as insurance and maintenance) are recognised as an expense in the
statement of profit and loss on a straight line basis unless another systematic
basis is more representative of the time pattern of the user’s benefit, even if
the payments are not on that basis.
25. The lessee should make the following disclosures for operating
leases:
(a) the total of future minimum lease payments under nonLeases
373
cancellable operating leases for each of the following
periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) the total of future minimum sublease payments expected to
be received under non-cancellable subleases at the balance
sheet date;
(c) lease payments recognised in the statement of profit and loss
for the period, with separate amounts for minimum lease
payments and contingent rents;
(d) sub-lease payments received (or receivable) recognised in
the statement of profit and loss for the period;
(e) a general description of the lessee’s significant leasing
arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are
determined;
(ii) the existence and terms of renewal or purchase options
and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as
those concerning dividends, additional debt, and further
leasing.
Leases in the Financial Statements of Lessors
Finance Leases
26. The lessor should recognise assets given under a finance lease in
its balance sheet as a receivable at an amount equal to the net
investment in the lease.
374 AS 19 (issued 2001)
27. Under a finance lease substantially all the risks and rewards incident to
legal ownership are transferred by the lessor, and thus the lease payment
receivable is treated by the lessor as repayment of principal, i.e.,
net investment in the lease, and finance income to reimburse and reward
the lessor for its investment and services.
28. The recognition of finance income should be based on a pattern
reflecting a constant periodic rate of return on the net investment of the
lessor outstanding in respect of the finance lease.
29. A lessor aims to allocate finance income over the lease term on a
systematic and rational basis. This income allocation is based on a pattern
reflecting a constant periodic return on the net investment of the lessor
outstanding in respect of the finance lease. Lease payments relating to the
accounting period, excluding costs for services, are reduced from both the
principal and the unearned finance income.
30. Estimated unguaranteed residual values used in computing the lessor’s
gross investment in a lease are reviewed regularly. If there has been a
reduction in the estimated unguaranteed residual value, the income allocation
over the remaining lease term is revised and any reduction in respect of
amounts already accrued is recognised immediately. An upward adjustment
of the estimated residual value is not made.
31. Initial direct costs, such as commissions and legal fees, are
often incurred by lessors in negotiating and arranging a lease. For finance
leases, these initial direct costs are incurred to produce finance income
and are either recognised immediately in the statement of profit and loss or
allocated against the finance income over the lease term.
32. The manufacturer or dealer lessor should recognise the
transaction of sale in the statement of profit and loss for the period, in
accordance with the policy followed by the enterprise for outright sales.
If artificially low rates of interest are quoted, profit on sale should be
restricted to that which would apply if a commercial rate of interest
were charged. Initial direct costs should be recognised as an expense
in the statement of profit and loss at the inception of the lease.
33. Manufacturers or dealers may offer to customers the choice of either
buying or leasing an asset. A finance lease of an asset by a manufacturer or
dealer lessor gives rise to two types of income:
Leases 375
(a) the profit or loss equivalent to the profit or loss resulting from an
outright sale of the asset being leased, at normal selling prices,
reflecting any applicable volume or trade discounts; and
(b) the finance income over the lease term.
34. The sales revenue recorded at the commencement of a finance lease
term by a manufacturer or dealer lessor is the fair value of the asset.
However, if the present value of the minimum lease payments accruing to
the lessor computed at a commercial rate of interest is lower than the fair
value, the amount recorded as sales revenue is the present value so
computed. The cost of sale recognised at the commencement of the lease
term is the cost, or carrying amount if different, of the leased asset less the
present value of the unguaranteed residual value. The difference between
the sales revenue and the cost of sale is the selling profit,which is recognised
in accordance with the policy followed by the enterprise for sales.
35. Manufacturer or dealer lessors sometimes quote artificially low rates
of interest in order to attract customers. The use of such a rate would result
in an excessive portion of the total income from the transaction being
recognised at the time of sale. If artificially low rates of interest are quoted,
selling profit would be restricted to that which would apply if a commercial
rate of interest were charged.
36. Initial direct costs are recognised as an expense at the commencement
of the lease term because they are mainly related to earning the
manufacturer’s or dealer’s selling profit.
37. The lessor should make the following disclosures for finance
leases:
(a) a reconciliation between the total gross investment in the
lease at the balance sheet date, and the present value of
minimum lease payments receivable at the balance sheet
date. In addition, an enterprise should disclose the total
gross investment in the lease and the present value of
minimum lease payments receivable at the balance sheet
date, for each of the following periods:
(i) not later than one year;
376 AS 19 (issued 2001)
(ii) later than one year and not later than five years;
(iii) later than five years;
(b) unearned finance income;
(c) the unguaranteed residual values accruing to the benefit of
the lessor;
(d) the accumulated provision for uncollectible minimum lease
payments receivable;
(e) contingent rents recognised in the statement of profit and loss
for the period;
(f) a general description of the significant leasing
arrangements of the lessor; and
(g) accounting policy adopted in respect of initial direct costs.
38. As an indicator of growth it is often useful to also disclose the gross
investment less unearned income in new business added during the
accounting period, after deducting the relevant amounts for cancelled leases.
Operating Leases
39. The lessor should present an asset given under operating lease in
its balance sheet under fixed assets.
40. Lease income from operating leases should be recognised in the
statement of profit and loss on a straight line basis over the lease term,
unless another systematic basis is more representative of the time
pattern in which benefit derived from the use of the leased asset is
diminished.
41. Costs, including depreciation, incurred in earning the lease income are
recognised as an expense. Lease income (excluding receipts for services
provided such as insurance and maintenance) is recognised in the statement
of profit and loss on a straight line basis over the lease term even if the
receipts are not on such a basis, unless another systematic basis is more
representative of the time pattern in which benefit derived from the use of
the leased asset is diminished.
Leases 377
42. Initial direct costs incurred specifically to earn revenues from an
operating lease are either deferred and allocated to income over the lease
term in proportion to the recognition of rent income, or are recognised as an
expense in the statement of profit and loss in the period in which they are
incurred.
43. The depreciation of leased assets should be on a basis
consistent with the normal depreciation policy of the lessor for similar
assets, and the depreciation charge should be calculated on the basis
set out in AS
6, Depreciation Accounting.
44. To determine whether a leased asset has become impaired, an
enterprise applies the Accounting Standard dealing with impairment of
assets5 that sets out the requirements for how an enterprise should perform
the review of the carrying amount of an asset, how it should determine the
recoverable amount of an asset and when it should recognise, or reverse, an
impairment loss.
45. A manufacturer or dealer lessor does not recognise any selling profit
on entering into an operating lease because it is not the equivalent of a sale.
46. The lessor should, in addition to the requirements of AS 6,
Depreciation Accounting and AS 10, Accounting for Fixed Assets, and
the governing statute, make the following disclosures for operating
leases:
(a) for each class of assets, the gross carrying amount, the
accumulated depreciation and accumulated impairment
losses at the balance sheet date; and
(i) the depreciation recognised in the statement of profit
and loss for the period;
(ii) impairment losses recognised in the statement of profit
and loss for the period;
(iii) impairment losses reversed in the statement of profit
and loss for the period;
5 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements
relating to impairment of assets.
378 AS 19 (issued 2001)
(b) the future minimum lease payments under non-cancellable
operating leases in the aggregate and for each of the
following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;
(c) total contingent rents recognised as income in the statement
of profit and loss for the period;
(d) a general description of the lessor’s significant leasing
arrangements; and
(e) accounting policy adopted in respect of initial direct costs.
Sale and LeasebackTransactions
47. A sale and leaseback transaction involves the sale of an asset by the
vendor and the leasing of the same asset back to the vendor. The lease
payments and the sale price are usually interdependent as they are
negotiated as a package. The accounting treatment of a sale and leaseback
transaction depends upon the type of lease involved.
48. If a sale and leaseback transaction results in a finance lease, any
excess or deficiency of sales proceeds over the carrying amount should
not be immediately recognised as income or loss in the financial
statements of a seller-lessee. Instead, it should be deferred and
amortised over the lease term in proportion to the depreciation of the
leased asset.
49. If the leaseback is a finance lease, it is not appropriate to regard an
excess of sales proceeds over the carrying amount as income. Such excess
is deferred and amortised over the lease term in proportion to the
depreciation of the leased asset. Similarly, it is not appropriate to regard a
deficiency as loss. Such deficiency is deferred and amortised over the lease
term.
50. If a sale and leaseback transaction results in an operating lease,
Leases 379
and it is clear that the transaction is established at fair value, any profit
or loss should be recognised immediately. If the sale price is below fair
value, any profit or loss should be recognised immediately except that,
if the loss is compensated by future lease payments at below market
price, it should be deferred and amortised in proportion to the lease
payments over the period for which the asset is expected to be used. If
the sale price is above fair value, the excess over fair value should be
deferred and amortised over the period for which the asset is expected
to be used.
51. If the leaseback is an operating lease, and the lease payments and the
sale price are established at fair value, there has in effect been a normal sale
transaction and any profit or loss is recognised immediately.
52. For operating leases, if the fair value at the time of a sale and
leaseback transaction is less than the carrying amount of the asset, a
loss equal to the amount of the difference between the carrying amount
and fair value should be recognised immediately.
53. For finance leases, no such adjustment is necessary unless there has
been an impairment in value, in which case the carrying amount is reduced
to recoverable amount in accordance with the Accounting Standard dealing
with impairment of assets.
54. Disclosure requirements for lessees and lessors apply equally to sale
and leaseback transactions. The required description of the significant
leasing arrangements leads to disclosure of unique or unusual provisions of
the agreement or terms of the sale and leaseback transactions.
55. Sale and leaseback transactions may meet the separate disclosure
criteria set out in paragraph 12 of Accounting Standard (AS) 5, Net Profit or
Loss for the Period, Prior Period Items and Changes in Accounting Policies.
380 AS 19 (issued 2001)
Appendix
Sale and Leaseback Transactions that Result in Operating
Leases
The appendix is illustrative only and does not form part of the
accounting standard. The purpose of this appendix is to illustrate the
application of the accounting standard.
A sale and leaseback transaction that results in an operating lease may give
rise to profit or a loss, the determination and treatment of which depends on
the leased asset’s carrying amount, fair value and selling price. The
following table shows the requirements of the accounting standard in various
circumstances.
Sale price
established at
fair value
(paragraph 50)
Carrying
amount
equal to
fair value
Carrying
amount less
than fair value
Carrying
amount
above fair
value
Profit No profit Recognise profit
immediately
Not applicable
Los s No loss Not applicable Recognise loss
immediately
Sale price below
fair value
(paragraph 50)
Profit No profit Recognise profit
immediately
No profit
(note 1)
Loss not
compensated by
future lease
payments at below
market price
Recognise
loss
immediately
Recognise loss
immediately
(note 1)
Loss compensated
by future lease
payments at below
market price
Defer and
amortise loss
Defer and
amortise loss
(note 1)
Leases 381
Sale price above
fair value
(paragraph 50)
Profit Defer and
amortise profit
Defer and
amortise profit
Defer and
amortise
profit
(note 2)
Los s No loss No loss (note 1)
Note 1. These parts of the table represent circumstances that would have
been dealt with under paragraph 52 of the Standard. Paragraph 52 requires
the carrying amount of an asset to be written down to fair value where it is
subject to a sale and leaseback.
Note 2. The profit would be the difference between fair value and sale
price as the carrying amount would have been written down to fair value in
accordance with paragraph 52.
Rgds/
Vineet
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