AS 19 Leases and its Accounting Treatment

Scope
This Standard should be applied in accounting for all leases other than:

• lease agreements to explore for or use natural resources, such as oil, gas,
timber, metals and other mineral rights; and
• licensing agreements for items such as motion picture films, video
recordings, plays, manuscripts, patents and copyrights; and
• lease agreements to use lands.
Definitions
The following terms are used in this Standard with the meanings specified:

1. 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.
2. A finance lease is a lease that transfers substantially all the risks and rewards
incident to ownership of an asset.
3. An operating lease is a lease other than a finance lease.
4. A non-cancellable lease is a lease that is cancellable only:
• upon the occurrence of some remote contingency; or
• with the permission of the lessor; or
• if the lessee enters into a new lease for the same or an equivalent asset with
the same lessor; or
• upon payment by the lessee of an additional amount such that, at inception,
continuation of the lease is reasonably certain.
5. 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.

6. 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.

7. 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.

8 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.

9 Economic life is either:

• the period over which an asset is expected to be economically usable by one
or more users; or
• the number of production or similar units expected to be obtained from the
asset by one or more users.
10 Useful life of a leased asset is either:
• the period over which the leased asset is expected to be used by the lessee;
or
• the number of production or similar units expected to be obtained from the
use of the asset by the lessee.
11 Residual value of a leased asset is the estimated fair value of the asset at the
end of the lease term.
12 Guaranteed residual value is:
• 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
• 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.

13 Unguaranteed residual value of a leased asset is the amount by which the

residual value of the asset exceeds its guaranteed residual value.

14 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.

15 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.

16 Net investment in the lease is the gross investment in the lease less unearned
finance income.
17 The interest rate implicit in the lease is the discount rate that, at the inception
of the lease, causes the aggregate present value of
• the minimum lease payments under a finance lease from the standpoint of
the lessor; and
• any unguaranteed residual value accruing to the lessor.

Accounting for Finance Lease – In the books of

lessee
The lessee should recognize the lease as an asset at lower of the following

• Fair Value of the leased asset

• Present value of minimum lease payments
(In calculating the present value of the minimum lease payments, the discount rate
is the interest rate implicit in the lease. If implicit rate is not known, the lessee’s
incremental borrowing rate should be used.)
Entry required to be passed:
Lease Assets A/c Dr
To Lessor
All lease payments should then be apportioned between the finance charge and the
reduction of the outstanding liability. Finance charge should be debited to P&L A/c.

Lessor A/c Dr

P&L A/c Dr (With the amount of finance charge)

To Bank A/c (With the amount of lease payment)

The lessee as per A.S.6 should depreciate the leased asset.

Accounting for Finance Lease – In the books of lessor

The lessor should recognise the transaction as a sale with the cash price. 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.

The cost of sale recognised at the commencement of the lease term is the
cost/carrying amount less the present value of the unguaranteed residual value.

Accounting for Operating Lease – In the books of lessee

Lease payments (excluding costs for services such as insurance and maintenance)
are recognised as an expense in the statement of profit or loss on a straight-line
basis unless another systematic basis is more appropriate.

Accounting for Operating Lease – In the books of lessor

Lease receipts are recognised as an income in the statement of profit or loss on a
straight-line basis unless another systematic basis is more appropriate. The lessor
should present an asset given under operating lease in its balance sheet under fixed
assets.

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
of income
• Or, recognised as an expense in the statement of current year profit and
loss.
Sale and Leaseback Transactions
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.

If sale and leaseback transaction results in finance lease:

Excess or deficiency of sale proceeds over the carrying amount should be deferred
and amortised over the lease term in proportion to the depreciation of the leased
asset. It should not be immediately recognised as income or loss in the financial
statements.

If sale and leaseback transaction results in an operating lease:

If the sale price is equal to 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
• If the loss is compensated by future lease payments at below market price,
the profit or loss should be deferred and amortised in proportion to the
lease payments.
If the sale price is above fair value
• The excess over fair value should be deferred and amortised over the period
for asset is expected to be used.
• Further, 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.
Disclosure Requirements:
In the books of lessee in case of financial lease :
a) Assets acquired under finance lease

b) Reconciliation between the total of minimum lease payments and their present
value as at the balance sheet date with following segregation

• not later than one year

• later than one year and not later than five years
• later than five years
c) Contingent rents recognised as an expense.

d) Future minimum sublease payments expected to be received under non-

cancellable subleases

e) General description of the leasing arrangements

In the books of lessor in case of financial lease :

a) General description of the significant leasing arrangement
b) Accounting policy for initial direct cost

c) Reconciliation of total gross investment in lease and present value of minimum

lease payment (MLP) receivable at the balance sheet date.

d) MLP receivable in following categories

• not later than one year

• later than one year and not later than five years
• later than five years
In the books of lessee in case of operating lease :
a) General description of the significant leasing arrangement
b) Total of future minimum lease payments in the following period

• not later than one year later than one year and not later than five years
• later than one year and not later than five years
• later than five years
c) Lease payments recognised in profit & loss account for the period

In the books of lessor in case of operating lease

a) General description of the significant leasing arrangement
b) Accounting policy for the initial direct payment
c) Future lease payments in aggregate classified as:

• not later than one year

• later than one year and not later than five years later than five years
• later than five years