Accounting Standard 19

ACCOUNTING STANDARD 19
LEASES
1. Scope:
This accounting standard is not applicable to
(a) lease agreements to explore for or use natural resources such as oil,
gas, and other mineral rights;
(b) licensing agreements for items such as motion picture films, video
recordings, plays, manuscripts, patents and copyrights; and
(c) lease agreements to use lands.

2. Meaning of Lease:
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.

3. Classification of Leases:
Finance Lease: A finance lease is a lease that transfers substantially all the
risks and rewards incident to ownership of an asset.
Operating Lease: An operating lease is a lease other than a finance lease.

4. Situations which would lead to a lease being classified as a Finance

Lease:
(a) the lessee will get the ownership of the leased asset by the end of
the lease term;

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(b) the lessee has the option to purchase the leased asset at the end of
the term at a price which is lower than the its expected fair value
at the date the option becomes exercisable.
(c) the lease term covers the major part of the economic life of the asset
even if the ownership is not transferred.
(d) at the inception of the lease the present value of the minimum lease
payments covers substantially initial fair value of the leased asset; and
(e) the leased asset is of a specialised nature such that only the lessee
can use it without major modifications being made.

5. Definitions
1. The inception of the lease is the earlier of the
- date of the lease agreement and
- the date of a commitment by the parties
2. The lease term is the
- Non-cancellable period Plus
- Renewal option period if at the inception of the lease it is reasonably
certain that the lessee will exercise such option.
3. A non-cancellable lease is a lease that is cancellable only:
(a) upon the occurrence of some remote contingency; or
(b) with the permission of the lessor; or
(c) if the lessee enters into a new lease for the same or an equivalent
asset with the same lessor; or
(d) upon payment by the lessee of an additional amount such that,
at inception, continuation of the lease is reasonably certain.
4. Lease payments comprise
- minimum payments payable over the lease term and
- purchase option price if the lessee has an option to purchase the
asset at a price which is expected to be sufficiently lower than the
fair value at the date the option becomes exercisable.

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Note: However following payment made by lessee to lessor is not

included in Lease payments
• Contingent rent: Contingent rents are lease payments based on
a factor other than passage of time, eg percentage sales, amount
of usage price indices, market rates of interest.
• Cost for services
• Taxes to be paid by and reimbursed to the lessor
5. Minimum lease payments (MLP)
Minimum lease payments (MLP)

FROM THE STANDPOINT OF

LESSEE LESSOR
Lease Payment over the lease term Lease Payment over the lease term
PLUS PLUS
Guaranteed Residual value (GRV) in Guaranteed Residual value (GRV) in
respect of lessee i.e., respect of lessor i.e.,
Residual value guaranteed Residual value guaranteed
• by lessee or • by lessee or
• on behalf of the lessee • on behalf of the lessee
• by third party

6. LESSEE Accounting – FINANCE LEASE

1 For recognition of lease at the inception of the lease: At the inception of

a finance lease, the lessee should recognise the lease as an asset and a
liability.
Leased Assets A/c Dr
To Lease liability A/c
Note:
1. Such recognition is made at lower of
- Fair value of assets on the inception of lease or

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- Present Value of MLP from the stand point of lessee

2. The present value of the minimum lease payments should be calculated
using the interest rate implicit in the lease.
If this cannot be determined, the lessee’s incremental borrowing rate
shall be used.
2 For Initial direct cost for finance lease: Any initial direct costs of the
lessee (incremental costs that are directly attributable to negotiating and
arranging a lease) are added to the amount recognised as an asset.
Leased Asset A/c Dr.
To Bank A/c
3. For recognition of Finance Charges: The 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.
Finance Charge A/c Dr
To Lease liability A/c

4 For payment of lease Payment on due date:

Lease Liability A/c Dr.
To Bank A/c
5 For Contingent rent, cost of services and taxes: They are recognised as
expense as and when they are incurred
Contingent Rent A/c Dr.
To Bank A/c
6 For Charging of depreciation: The depreciation policy for a leased asset
should be consistent with that for depreciable assets which are owned,
and the depreciation recognised should be calculated on the basis set out
in AS 10 (Revised).
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.
Depreciation A/c Dr.
To Accumulated Depreciation A/c

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7. LESSOR Accounting – FINANCE LEASE

1 For recognition of lease at the inception of the lease: 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.
If Lessor is a manufacturer or dealer:
Lease Receivables A/c Dr. {Net Investment}
To Sales A/c
If Lessor is not a manufacturer or dealer:
Lease Receivables A/c Dr. {Net Investment}
To Assets A/c {Book value}
(any difference will be recognised as profit or loss on sale of assets)
Note:
Net Investment = Gross Investment - Unearned Finance Income.
Gross investment = MLP from the standpoint of lessor + Unguaranteed
Residual value
Unguaranteed Residual Value (UGRV) =
Expected Residual Value - Guaranteed Residual value
Guaranteed Residual value (GRV) in respect of lessor i.e., Residual value
guaranteed
• by lessee or
• on behalf of the lessee
• by third party
Unearned Finance Income = Gross Investment - Present Value of Gross
Investment
Thus, Net Investment = Present Value of Gross Investment
The present value of the minimum lease payments should be calculated
using the interest rate implicit in the lease.
The interest rate implicit in the lease is the discount rate at which
aggregate of present value of the minimum lease payments and any
unguaranteed residual value equal to the fair value of the leased asset.

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2 For Initial direct cost for finance lease:

Initial direct costs, such as commissions and legal fees, are often incurred
by lessors in negotiating and arranging a lease.
For finance leases, these initial direct costs are either recognised
immediately in the statement of profit and loss or allocated against the
finance income over the lease term.
3 For Recognition of Finance Income at year end:
Lease Receivable A/c Dr.
To Finance Income
4 For receipt of lease Payment on due date:
Bank A/c Dr.
To Lease Receivable
5 For Contingent rent, cost of services and taxes: They are recognised as
income as and when they are accrued.
Bank A/c Dr.
To Contingent Rent A/c

8. ACCOUNTING TREATMENT - Operating Lease

Books of Lessee: Books of Lessor:

1. Assets given No Assets is recognised. Record lease out assets as PPE
on lease in the balance sheet.
2. Depreciation No depreciation is charged Charge depreciation as per AS
10.
3. Lease Lease Payment should be Recognise lease income in P&L
Payment recognised as an expense on A/c using SLM basis over the
SLM basis over the lease lease term.
term, in P&L A/c. If any other method is more
If any other method is more appropriate, that method can
appropriate, that method be used.
can be used.

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4. Contingent These will also be charged to These will be credited to P&L

rent, other P&L A/c in the year in which A/c in the year in which it is
Payment it is incurred. accrued.
5. Initial direct Not Applicable Initial direct cost of operating
cost lease should be recognised as
an expense in the year in
which they are incurred.

9. Sale and leaseback transaction

When an asset is sold by the vendor and the same asset is leased back to
vendor, it is called sale and lease back transaction. It is a financing transaction
with the objective of raising fund.
Accounting Treatment
If leaseback is a finance Lease.
a) Any profit or loss on sale (ie, sales price - carrying amount) should
not be immediately recognised in the financial statement of seller -
lessee.
b) It should be deferred and amortised over lease term in proportion to
depreciation of leased asset.
If leaseback is an operating lease.
(a) Sale price is equal to fair value (i.e., a normal sale transaction), any
profit or loss arising out of sale transaction is recognised immediately.
(b) Sale price is below fair value:
- If there is profit, (i.e., sale price is more than carrying amount),
it is recognised immediately.
- If there is loss, (i.e., sale price is less than carrying amount), it
should be recognised immediately provided loss is not
compensated by future lease payments.
If loss is compensated by future lease payments, it should be
deferred and amortised in proportion to the lease payments over
which the asset is expected to be used.

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(c) Sale price is above fair value.

The excess over fair value should be deferred and amortised over the
period for which the asset is expected to be used.

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