Accounting Standard 19:
Leases
· Applies in accounting for all leases other than leases to explore for or use natural resources, licensing agreements for items such as motion pictures films, video recordings, plays etc. and lease for use of lands.
· A lease is classified as a finance lease or an operating lease.
· A finance lease is one where risks and rewards incident to the ownership are transferred substantially; otherwise it is an operating lease.
· Treatment in case of finance lease in the books of lessee:
ü At the inception, lease should be recognised as an asset and a liability at lower of fair value of leased asset and the present value of minimum lease payments (calculated on the basis of interest rate implicit in the lease or if not determinable, at lessee’s incremental borrowing rate).
ü Lease payments should be appropriated between finance charge and the reduction of outstanding liability so as to produce a constant periodic rate of interest on the balance of the liability.
ü Depreciation policy for leased asset should be consistent with that for other owned depreciable assets and to be calculated as per AS 6.
ü Disclosure should be made of assets acquired under finance lease, net carrying amount at the balance sheet date, total minimum lease payments at the balance sheet date and their present values for specified periods, reconciliation between total minimum lease payments at balance sheet date and their present value, contingent rent recognised as income, total of future minimum sub lease payments expected to be received and general descripttion of significant leasing arrangements.
· Treatment in case of finance lease in the books of lessor:
ü The lessor should recognize the asset as a receivable equal to net investment in lease.
ü Finance income should be based on pattern reflecting a constant periodic return on net investment in lease.
ü Manufacturer/dealer lessor should recognize sales as outright sales. If artificially low interest rates quoted, profit should be calculated as if commercial rates of interest were charged. Initial direct costs should be expensed.
ü Disclosure should be made of total gross investment in lease and the present value of the minimum lease payments at specified periods, reconciliation between total gross investment in lease and the present value of minimum lease payments, unearned finance income, unguaranteed residual value accruing to the lessor, accumulated provision for uncollectible minimum lease payments receivable, contingent rent recognised, accounting policy adopted in respect of initial direct costs, general descripttion of significant leasing arrangements.
· Treatment in case of operating lease in the books of the lessee:
ü Lease payments should be recognised as an expense on straightline basis or other systematic basis, if appropriate.
ü Disclosure should be made of total future minimum lease payments for the specified periods, total future minimum sub lease payments expected to be received, lease payments recognised in the P & L statement with separate amount of minimum lease payments and contingent rents, sub lease payments recognised in the P & L statement, general descripttion of significant leasing arrangements.
· Treatment in case of operating lease in the books of the lessor:
ü Lessors should present an asset given on lease under fixed assets and lease income should be recognised on a straight-line basis or other systematic basis, if appropriate.
ü Costs including depreciation should be recognised as an expense.
ü Initial direct costs are either deferred over lease term or recognised as expenses.
ü Disclosure should be made of carrying amount of the leased assets, accumulated depreciation and accumulated impairment loss, depreciation and impairment loss recognised or reversed for the period, future minimum lease payments in aggregate and for the specified periods, general descripttion of the leasing arrangement and policy for initial costs.
· Sale and leaseback transactions:
If the transaction of sale and lease back results in a finance lease, any excess or deficiency of sale proceeds over the carrying amount should be amortized over the lease term in proportion to depreciation of the leased assets.
If the transaction results in an operating lease and is at fair value, profit or loss should be recognised immediately. But if the sale price is below the fair value any profit or loss should be recognised immediately, however, the loss which is compensated by future lease payments should be amortized in proportion to the lease payments over the period for which asset is expected to be used. If the sales price is above the fair value the excess over the fair value should be amortised.
In a transaction resulting in an operating lease, if the fair value is less than the carrying amount of the asset, the difference (loss) should be recognised immediately.
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