As 19

1. ACCOUNTING STANDARD-19ACCOUNTING STANDARD-19
LEASES
J.P., KAPUR & UBERAI

2. SCOPESCOPE

•Applies to leases commencing on and from 1
st
April 2001.
•Excludes
─Lease agreements to explore for or use natural resources (oil, gas,
timber, metals & other mineral rights)
─Licensing agreements for such items as motion picture films,
video recordings, plays, manuscripts, patents & copyrights.
─Lease agreements to use lands.
J.P., KAPUR & UBERAI

3. OBJECTIVESOBJECTIVES

•Accounting policies & disclosures for
lessees & lessors
─Finance Lease
─Operating Lease
J.P., KAPUR & UBERAI

4. CLASSIFICATION OF LEASESCLASSIFICATION OF LEASES

•A finance lease is a lease that transfers substantially all
the risks and rewards incident to ownership of an asset.
Title may or may not eventually be transferred.
•An operating lease is a lease other than a finance lease
•Classification depends on substance of the transaction
rather than the form of the contract
•Basic criteria providing guidance in determining whether
these risks and rewards have been transferred.
J.P., KAPUR & UBERAI

5. EXAMPLES OF FINANCE LEASESEXAMPLES OF FINANCE LEASES
Ownership transferred by end of lease term.
Lease contains bargain purchase option.
Lease term for major part of asset’s economic
life.
Present value of minimum lease payments
amounts to at least substantial all of asset’s fair
value.
Leased asset of specialised nature that only
lessee can use without major modifications being
made
J.P., KAPUR & UBERAI

6. INDICATORS FOR FINANCE LEASESINDICATORS FOR FINANCE LEASES
Lessor’s losses associated with cancellation (if
lessee can cancel lease) borne by lessee.
Gains or losses from fluctuation in fair value of
residual fall on lessee.
Lessee can continue lease for a secondary period
at a rent substantially lower than market rent.
J.P., KAPUR & UBERAI

7. ILLUSTRATIONS FOR TYPES OF ILLUSTRATIONS FOR TYPES OF
LEASESLEASES
ABC Ltd. uses 3 identical pieces of machinery in its factory. These
were all acquired for use on same date by:
Machine 1 rented from Amir Corporation at a cost of Rs. 10,000 per
month payable in advance and terminable by either party.
Machine 2 rented from Sunny Corporation at a cost of 8 half-yearly
payments in advance of Rs. 60,000.
Machine 3 rented from Ajay Corporation at a cost of 6 half-yearly
payments in advance of Rs. 48,000.
Cash price of this type of machine is Rs. 320,000 and its estimated life
is 4 years. Are above machines rented by operating or finance leases?
J.P., KAPUR & UBERAI

8. ILLUSTRATION OF FINANCE LEASEILLUSTRATION OF FINANCE LEASE
A company operates in an industry requiring it to use assets
which are specifically tailored to their needs. Some of these
assets will need to be replaced soon, and they are planning to do
this through a leasing arrangement with a third party.
 Assets will be constructed to their specifications and will be
leased for a period of 4 years. Under draft contract, minimum
lease payments will equal 88% of assets’ fair value at inception
of lease. Their expected useful life is 7 years, although similar
assets they currently own are being depreciated over 5 years.
There is no transfer of title and no bargain purchase option in the
lease.
J.P., KAPUR & UBERAI

9. ACCOUNTING FOR FINANCE LEASES ACCOUNTING FOR FINANCE LEASES
LESSEE’S BOOKSLESSEE’S BOOKS
At inception of a finance lease, lessee should recognise lease as an
asset and a liability on the basis of fair value or present value of
minimum lease payments .
•Liability for a leased asset should be presented separately in balance
sheet as a current liability or a long-term liability as case may be.
•Lease payments should be apportioned between finance charge and
reduction of outstanding liability on a basis which produces a
constant periodic rate of interest on remaining balance of liability for
each period.
•A finance lease gives rise to depreciation expense for asset (on the
basis of lessee’s depreciation policy for owned assets) as well as a
finance expense for each accounting period.
•If there is no reasonable certainty that lessee will obtain ownership
by end of lease term, asset should be fully depreciated over lease
term or its useful life whichever is shorter.
J.P., KAPUR & UBERAI

10. ACCOUNTING FOR FINANCE ACCOUNTING FOR FINANCE
LEASES-LESSOR`S BOOKSLEASES-LESSOR`S BOOKS
Lessor should recognise assets given under a finance lease in its
balance sheet as a receivable at an amount equal to net investment
in the lease.
(MLP+ unguranteed residual value-unearned finance income).
Recognition of finance income should reflect a constant periodic
rate of return on net investment of lessor outstanding in respect of
finance lease.
Manufacturer or dealer lessor should recognise transaction of sale
in profit and loss in accordance with policy followed by enterprise
for outright sales. In case of artificially low rate of interest,
compute sale price based on commercial rates of intrestinitial
direct costs to be expensed.
J.P., KAPUR & UBERAI

11. ACCOUNTING FOR OPERATING LEASES ACCOUNTING FOR OPERATING LEASES
LESSEE’S BOOKSLESSEE’S BOOKS
Lease payments (excluding costs for
services such as insurance &
maintenance) under operating lease
should be recognised as an expense in
profit and loss on a straight line basis
over lease term unless another
systematic basis is more representative
of time pattern of user’s benefit.
J.P., KAPUR & UBERAI

12. ACCOUNTING FOR OPERATING LEASES ACCOUNTING FOR OPERATING LEASES
LESSOR’S BOOKSLESSOR’S BOOKS

•Lease income from operating leases should be
recognised in profit and loss on a straight line basis
over lease term unless another systematic basis
more representative of time pattern in which benefit
derived from use of leased asset diminished.
•Leased asset to be disclosed under fixed assets.
•Depreciation of leased assets should be on a basis
consistent with normal depreciation policy of lessor
for similar assets.
J.P., KAPUR & UBERAI

13. SALE AND LEASEBACK TRANSACTIONS SALE AND LEASEBACK TRANSACTIONS
RESULTNG IN FINANCE LEASES- SELLER RESULTNG IN FINANCE LEASES- SELLER
–LESSEE’S BOOKS–LESSEE’S BOOKS

•Excess or deficiency of sale proceeds over
carrying amount should be deferred or amortised
over lease term, in proportion to depreciation of
leased asset.
J.P., KAPUR & UBERAI

14. SALE AND LEASEBACK TRANSACTIONS SALE AND LEASEBACK TRANSACTIONS
RESULTNG IN OPERATING LEASESRESULTNG IN OPERATING LEASES

•If transaction established at fair value, any profit or loss should be
recognised immediately.
•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 and
amortized in proportion to lease payments over the period for which
asset is expected to be used.
•If sale price is above fair value, the excess over fair value should be
deferred and amortized over the period for which the asset is
expected to be used.
•If fair value at time of a sale and leaseback is less than carrying
amount of asset, a loss equal to amount of difference between
carrying amount and fair value should be recognised immediately.
J.P., KAPUR & UBERAI

15. Lessor
(b)Reconciliation between total gross
investment & present value of MLP
(c)Total gross investments & present value
of MLP under three periodic bands (<1)
(>1-5) & (>5 years)
(d)Contingent rents
(e)Significant leasing arrangements
(f)Unearned finance income
(g)Un-guaranteed residual value accruing
to lessor
(h)Accumulated provision for
uncollectible MLP receivable
(i)Accounting policy of initial direct costs.
Lessee
(b)Leased assets segregated
(c)Net carrying amount
(d)Reconciliation between total
minimum lease payments &
present value
(e)Total minimum leae payments &
present value uner three periodic
bands (<1) (>1-5) & (.5 years)
(f)Contingents rents
(g)Future minimum sublease
payments expected to be
received
(h)Significant lease arrangements.
DISCLOSURES FOR FINANCE LEASES
J.P., KAPUR & UBERAI

16. Lessor
(b)Total future MLP under three periodic
bands (<1) (>1-5) & (>5 years)
(c)Contingent rents.
(d)Significant leasing arrangements.
(e)Gross carrying amount accumulated
depreciation & impairment for each
class of assets & depreciation and
impairment losses recognised/reversed
in P&L.
(f)Accounting policy of initial direct costs.
Lessee
(b)Total future MLP under three
periodic bands (<1) (>1-5) & (>5
years) under non cancellable
operaing leases.
(c)Total future minimum sublease
payments under non cancellable
sublease.
(d)Lease payments in P&L – separaely
for MLP & contingent rents
(e)Sublease payments in P&L.
(f)Significant leasing arrangements
(contingent rents determination,
renewal or purchase & escalation
terms and restrictions – dividend
additional debt and sub-leasing).
DISCLOSURES FOR OPERATING
LEASES
J.P., KAPUR & UBERAI