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Accounting Standard (AS) 19Lease

By Vikas Dubey

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Index

ObjectiveScopeDefinitionsTypes of LeasesAccounting treatments of lease transactions Sale & Lease backDisclosuresDifference between AS 19 & IND AS 17

345-78-101112-1415-1718

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Objective

The objective of this standard is to prescribe accounting treatment for Leases

& disclosures in relation to Financial and Operating

Leases.

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Scope This standard applies to all leases except:-

a) Lease rights to explore for or use of natural resources, such as oil, gas and other mineral rights,

b) Leases of motion pictures andc) Lease agreement to use land.

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Definitions

Lease:- Agreement between two parties where one party obtains right to use asset against consideration or series of consideration for an agreed period of time.

Lessee Lessor

Consideration for using asset

Right to use asset

Lease

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Cont. Lease term: The non cancellable period for which the

lessee has agreed to take on lease the asset together with any further period for which the lessee has to continue the lease of the asset.

Minimum Lease Payment: The amount which is required to pay by lessee over the lease term including any guaranteed residual value, but excluding any contingent rent or expense which are reimbursed by lessor.

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Cont. Fair Value: The amount for which an asset can be

exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

Contingent rent: A portion of lease payment which is based on a factor such as percentage of sales etc.

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Types of Leases

There are two types of leases:a) Operating lease,b) Finance lease.

a) Operating Lease: Leases other than finance lease are operating lease.

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Cont.

b) Finance lease : A lease which transfers all risk and rewards incidental to ownership of asset.

Generally, these types of leases are considered as finance

leases: i) Transfer of ownership of leased asset at the end of lease

period for nil consideration. ii) Lease period is almost equal to life of asset. iii) Option to buy leased asset at the end of lease period at a

very low price.

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Cont.

d) Asset is of specified nature and cannot be used by other person without major modifications are made.

e) Present value of lease rental with residual life is approx. equal to cost of asset.

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Accounting Treatment of Lease

Accounting treatment of Finance Lease:

Accounting treatment of Operating Lease:

Microsoft Office Excel Worksheet

Microsoft Office Excel Worksheet

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Sales & lease Back resulting in Financial lease

Excess or deficiency of sale proceeds over carrying amount should be deferred and amortised over lease term, in proportion of Depreciation of leased asset.

Sales and lease back is finance lease

Sales and lease back

Sale Price-WDV= Excess/Profit

Deferred & amortised over lease term

Sale Price-WDV=Deficiency/loss

Deferred & amortised over lease term

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Sale and lease back resulting in operating lease

Sales and lease back

Case 1

SP<FV,SP-WDV=GAIN/

(LOSS)

Recognise immediately in P&L

Note 1

Case 2

SP>FV,SP-WDV= GAIN

Recognise immediately in P&L & SP-FV will be

deferred.Note 2

Case 3

FV<WDV,SP/FV-WDV= Loss

Recognise immediately in P&L

Note 3

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Cont.1) If sale price is below fair value, any profit or loss should be

recognised immediately except that if loss is compensated by future lease payments at below market price, it should be deferred.

2) If sale price is above fair value, the excess over fair value should be deferred.

3) If fair value of the asset is less than carrying amount of asset, a loss equal to amount of difference between carrying amount and fair value should be recognised immediately.

Any gain or loss deferred will be amortised over the lease term of asset. Further, if the transaction is established at fair value, any gain/loss should be recognised immediately.

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DisclosuresBooks of Lessee Books of Lessor

Asset on lease should be specifically specified as no lease.

Unearned finance income.

Contingent rent recognised as expense in P&L for the period.

Unguaranteed residual value.

General leasing policies. Contingent rent recognised in P&L.

The total of sub-lease rentals expected to realise in future, if any.

General leasing policies.

A reconciliation statement as given in slide no.16

A reconciliation statement as given in slide no.17.

Provisions for doubtful debts on lease rents.

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Cont.

A reconciliation statement should be given between total of minimum lease payment and their present value at balance sheet date.

Reconciliation Statement

Period Lease Rent Present value of Lease Rent

Upto 1 Year xx xx

More than1 year but not later than 5 years

xx xx

Later than 5 years xx xx

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Cont.

A reconciliation statement should be given between total gross investments and present value of lease rent at balance sheet date.

Reconciliation Statement

Period Lease Rent Present value of Lease Rent

Upto 1 Year xx xx

More than1 year but not later than 5 years

xx xx

Later than 5 years xx xx

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Differences between AS 19 & IND AS 17Particulars AS 19 IND AS 17

Applicability on Land It does not applies to lease of land.

It applies to lease of land.

Gain or loss on sale and leaseback transaction

Gain or loss should be amortised in ration of Depreciation and over the life of leased asset in case of operating lease.

IND AS 17 is Silent.

Classification of current /non current lease liability

AS 19 is silent. It requires classifications.

Inflation based operating lease

AS 19 is silent Payments should not be recognised on SLM basis.

Distinction between inception of lease and commencement of lease

AS 19 is silent. IND AS 17 Provides distinction between these terms.

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Thank You