Download Quick Reference on Accounting Standard (AS) 19 Leases
The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosures in relation to finance leases and operating leases.
Scope Exclusions (not dealt by AS 19)
- lease agreements to explore for or use natural resources, such as oil, gas, timber, metals and other mineral rights
- licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights
- lease agreements to use lands
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.
An operating lease is a lease other than a finance lease.
Accounting Treatment in the Financial Statements of Lessees
|When to recognise?
Inception of the lease
|What to recognise?
An asset and a liability at an amount equal to lower of fair value and the present value of the minimum lease payments from the standpoint of the lessee
|What next ?
For calculating present value of minimum lease payments, discount rate implicit in the lease or, if is not practicable to determine the same, the lessee’s incremental borrowing rate should be used.
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.
Initial direct costs are included as part of the amount recognised as an asset under the lease.
Depreciation policy for a leased asset should be consistent with that for depreciable assets owned.
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.
To determine whether the leased asset is impaired, AS 28 should be applied.
Operating lease payments should be recognised on straight line basis, unless another systematical basis is suitable.
Lease payments exclude costs for services such as insurance and maintenance.
Accounting Treatment in the Financial Statements of Lessors
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.
Finance income is allocated over the lease term in a manner that return on net investment outstanding for various periods is constant.
Lease payments are reduced from both principal and unearned finance income.
Initial direct costs are either recognised immediately in the Statement of Profit and Loss or allocated against the finance income over the lease term.
The lessor should present an asset given under operating lease in its balance sheet under fixed assets and recognise associated costs, including depreciation, as expense. Depreciation of leased assets should be on a basis consistent with normal depreciation policy of the lessor for similar assets. To determine whether the leased asset is impaired, AS 28, Impairment of Assets, should be applied.
Lease income from operating leases (excluding receipts for services provided such as insurance and maintenance) 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.
Initial direct cost 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.
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.
Sale and leaseback transaction resulting in a finance lease
Any excess or deficiency of sales proceeds over the carrying amount should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset.
Sale and leaseback transaction resulting in an operating lease
Sale price = Fair value: Profit or loss is recognised immediately.
Sale price > Fair value: Excess amount is deferred and amortised over expected period of use of the asset.
Sale price < Fair value: If loss is compensated by future lease payments at below market price, then it is deferred and amortised in proportion to lease payments over the expected period of use, otherwise, it should be recognised immediately.
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.