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.

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.

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

Exclusions

A finance lease is a lease that transfers substantially all the

risks and rewards incidental to ownership of an asset.

FINANCE LEASE

If answer to any one of the below is yes then it is a Finance Lease

SOME IMPORTANT DEFINITIONS

Matrix for Guaranteed Residual Value in MLP of Lessor / Lessee

SituationWhether to include guaranteed residual value in MLP of Lessor

Whether to include guaranteed residual value in MLP of Lessee

Any independent third party guarantees residual value for a

fee paid by lessor

Include provided the third party is financially capable of meeting

the guarantee.

Exclude, since the fee is paid by the lessor, hence it is clear that

the residual value is not guaranteed by or on behalf of

lessee.

Lessee's subsidiary / associate / joint venture guarantees

residual value of leased assets

Include provided the third party is financially capable of meeting

the guarantee.

Include since the guarantee is on behalf of lessee.

Lessors subsidiary / associates / joint venture guarantees the residual value of the leased

assets

Since there are not independent third parties exclude guaranteed

residual value from MLP

Exclude, since it is not on behalf of lessee.

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 straight-

line 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

SALE AND OPERATING LEASEBACK

CASE I 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 value-Deferred 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.

Example-

If 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 1- ( X )

Selling price - ` 1,22,000

Cost of an asset - ` 1,00,000

Profit - ` 22,000

Out of which ` 20,000 is related to

profit and ` 2,000 is related to finance

income.

Possibility 2- ( √ )

Finance income to be recognized at

commercial rate, say ` 12000,so profit

get reduced to `10,000 instead of `

20,000

Treatment shown under possibility 1 is not allowed as per AS-19.

INCOME TAX ISSUES

TREATMENT AS PER TAX LAWS

tLEASE RENT

Deductible expenditure in the hands of Lessee.

•Taxable income in the hands of

Lessor.•Lessor will be

entitled for depreciation.

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 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