PRE AS-19 ERA
Prior to 1.04.2001 the “Guidance Note on Accounting for
Leases” was applicable on leasing industries. This Guidance
Note was based on the matching principle i.e. the periodic
costs comprising of depreciation and lease equalization
charges were recommended to be matched with lease rentals
so that the net income from a finance lease will show a true
and fair view. For this Lease Equalization Reserve used to be
created.
MEANING
Lease means transfer of rights to use assets for a specified period of time against
the consideration or a series of consideration.
Rights to Use Asset
Lessee
Lessor
Consideration
OBJECTIVE
The objective of this accounting standard is to prescribe for
lessees and lessors, the appropriate accounting policies
and disclosures in relation to all assets leased that may be
finance lease or operating lease.
Accounting provided in this AS is based on SUBSTANCE of
the transaction rather than on FORM.
Exclusions
 AS-19 does not apply to the followings:-
(a) Lease agreement for natural resources such as oil, gas,
timber, metals and mineral rights.
(b) Licensing agreements for items such as motion picture films,
video recordings, patents, manuscripts and copyrights.
(c) Lease agreement to use land.
(d) Agreements for contracts of services that do not transfer the
right to use assets. Example- Use of Taxi
FINANCE LEASE
A finance lease is a lease that transfers substantially all the
risks and rewards incidental to ownership of an asset.
If answer to any one of the below is yes then it is a
Finance Lease
No
No
• Ownership transferred by the end of lease term
• Lease contains bargain purchase option which is so attractive that is
reasonably certain that lessee will exercise it.
No
• Lease term for major part of assets economic life even if title is
not transferred
No
• PV of MLP substantially equals the assets Fair Value as at the
date of inception of the lease
No
• Is the lease assets such that it is specialized and cannot be used
by any one else other than lessee without major modification
No
• Substance of the agreement is that the significant risk and
reward of ownership are transferred to the lessee
• Operating Lease
SOME IMPORTANT DEFINITIONS
Minimum lease payments (MLP)
MLP from standpoint of Lessee:
Minimum Rent + Residual value guaranteed by or on behalf of the lessee.
MLP from standpoint of Lessor:
Minimum Rent + Residual value guaranteed by or on behalf of the lessee or by an independent
party.
Matrix for Guaranteed Residual Value in MLP of Lessor /
Lessee
Situation
Whether to include guaranteed Whether to include guaranteed
residual value in MLP of Lessor residual value in MLP of Lessee
Exclude, since the fee is paid by
Any independent third party Include provided the third party the lessor, hence it is clear that
guarantees residual value for a is financially capable of meeting
the residual value is not
fee paid by lessor
the guarantee.
guaranteed by or on behalf of
lessee.
Lessee's subsidiary / associate / Include provided the third party
Include since the guarantee is on
joint venture guarantees residual is financially capable of meeting
behalf of lessee.
value of leased assets
the guarantee.
Lessors subsidiary / associates /
Since there are not independent
joint venture guarantees the
Exclude, since it is not on behalf
third parties exclude guaranteed
residual value of the leased
of lessee.
residual value from MLP
assets
Gross Investment in the lease
Gross investment= MLP from the standpoint of lessor+ Unguaranteed residual value
Unearned Finance Income
Gross investment in the Lease - Net investment in the Lease
Net Investment in the lease:P V of Gross investment in the Lease
It is calculated by discounting the gross investment in the Lease at the interest rate implicit
in the lease.
Interest rate implicit in the lease (IRR)
It is a discount rate which equates Gross Investment in the lease to the fair value of the leased
asset.
Contingent Rent
It is that portion of the lease payments that is not fixed in amount but is based on
production or rendering of services. E.g. Percentage of sales.
NOTE- MLP from Lessee does not include Contingent Rent.
OPERATING LEASE
A lease other than a finance lease or where indicators of finance
lease do not exist, such type of lease shall be classified as operating
lease.
INDICATORS OF OPERATING LEASE
 Short term lease
 Where lease does not transfer substantially all the risks and
rewards incidental to ownership.
 Where cost of maintenance, taxes and insurance are to incurred
by the lessor.
 Where the lessee is protected against the risk of obsolescence.
Accounting treatment for operating lease:From Lessee’s point of view
 Lease rental paid/payable by lessee should be recognized as an expense
on systematic basis.
 Systematic basis means an expense should be recorded as and when
benefits are availed. When systematic basis cannot be identified then
straight-line method is used for recording the expenses.
From Lessor’s point of view
 Lease rental received/receivable by lessor should be recognized as an
income on systematic basis. If same cannot be identified then straightline method is used for recording the incomes.
SALE AND LEASEBACK TRANSACTIONS
A sale and leaseback transaction involves the sale of an asset by the
vendor and leasing of the same asset back to the vendor.
SALE AND
LEASEBACK
SALE AND
FINANCE
LEASEBACK
CASE I
SALE AND
OPERATING
LEASEBACK
CASE II
CASE I
Whenever SLB is of financial nature, any gain/loss on sale
should be deferred and amortized over the lease term in
proportion to the depreciation of the leased asset.
CASE II
Whenever SLB is of operating nature, any profit/loss arising
out of sale transaction is recognized immediately when sale
price is equal to fair value.
• If sale price is above fair valueDeferred income = Sale proceeds – Fair value of asset
• If the sale price is below fair value, any profit or loss should be
recognized immediately except that, if the loss is compensated
by future lease payments at below market price, it should be
deferred and amortized in proportion to the lease payments
over the period for which the asset is expected to be used.
Manufacturer or Dealer lessor
 The manufacturer or dealer lessor should recognize 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.
ExampleIf customer opts for buying of an asset
Cost of an asset
` 1,00,000
Outright Sale
` 1,20,000
Profit
` 20,000
If customer opts for Finance Lease and amount paid after 3 years is
` 1,22,000
Possibility 1Selling price
(X)
- ` 1,22,000
Possibility 2- ( √ )
Finance income to be recognized at
Cost of an asset - ` 1,00,000
commercial rate, say ` 12000,so profit
Profit
get reduced to `10,000 instead of
- ` 22,000
Out of which ` 20,000 is related to
20,000
profit and ` 2,000 is related to finance
income.
Treatment shown under possibility 1 is not allowed as per AS-19.
`
INCOME TAX ISSUES
Since Income Tax Act does not recognize the concept of Finance lease, therefore,
there will be timing difference and an adjustment for deferred tax will be carried
out. However, in case of operating lease accounting treatment is same as per tax
laws. Hence ,there is no difference.
TREATMENT AS PER TAX LAWS
t
LEASE
RENT
Deductible
expenditure in the
hands of Lessee.
•Taxable income
in the hands of
Lessor.
•Lessor will be
entitled for
depreciation.
Treatment as per books in case of FINANCE LEASE
LESSEE
LESSOR
Depreciation and
Finance charges are
debited to P&L
account instead of
lease rent.
•Finance income is credited
to P&L account instead of
lease rent.
•Lessor will not be entitled
for depreciation.
DISCLOSURE REQUIREMENTS
Disclosures in finance lease by the lessee(1) Assets acquired under finance lease as segregated from the assets
owned.
(2) For each class of assets, the net carrying amount at the balance sheet
date.
(3) Contingent rent recognized as an expense in the statement of Profit
& loss for the period.
(4)The total of future minimum sublease payments expected to be
received under non-cancellable subleases at the balance sheet date.
(5) Lease rentals payable should be shown as follows:PERIOD
AMOUNT
0-12 months
xxx
12-60 months
xxx
More than 60 months
xxx
Disclosures in finance lease by the lessor(1) Unearned Finance Income
(2) The unguaranteed residual values accruing to the benefit of the
lessor.
(3) A general description of the significant leasing arrangements of the
lessor.
(4) Contingent rent recognized as an income in the statement of Profit
& loss for the period.
(5) Accounting policy adopted in respect of initial direct costs.
(6) The total gross investment in the lease and the present value of minimum
Lease payments receivable should be shown as follows:PERIOD
AMOUNT
0-12 months
xxx
12-60 months
xxx
More than 60 months
xxx
Disclosures in operating lease by the lessor(1) Accounting policy adopted in respect of initial direct costs.
(2) For each class of assets, the gross carrying amount, the accumulated
depreciation and accumulated impairment losses at the balance
sheet date.
(3) A general description of the significant leasing arrangements.
(4) Contingent rent recognized as an income in the statement of Profit & Loss
for the period.
(5) Lease rentals should be shown as follows:PERIOD
AMOUNT
0-12 months
xxx
12-60 months
xxx
More than 60 months
xxx
Disclosures in operating lease by the lessee(1) A general description of the significant leasing arrangements.
(2) The total of future minimum sublease payments expected to be received
under non-cancellable subleases at the balance sheet date.
(3) Lease payments recognized in the statement of Profit & Loss for the period.
(4) Lease rentals payable should be shown as follows:-
PERIOD
AMOUNT
0-12 months
xxx
12-60 months
xxx
More than 60 months
xxx