Presentation By-

CA Rajeev Sogani
Date : 3rd Dec,2011
 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.

CA RAJEEV SOGANI 3rd December,2011

 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

CA RAJEEV SOGANI 3 rd December,2011

 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.

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 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 for services that do not transfer
the right to use assets. Example- Use of Taxi

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 FINANCE LEASE

A finance lease is a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset.
INDICATORS OF FINANCE LEASE

 Transfer of ownership at the end of lease term.

 Where lessee has purchased the option at very reduced rates and lessee is
certain to opt for this purchase option at the inception.
 Where lease term covers substantial period of economic life of the asset.
 Where amount paid as lease rentals in terms of P.V. is equal to the fair value
of
the asset.
 Where asset is of specialized nature and cannot be used by person other than
lessee without making major modifications.
CA RAJEEV SOGANI 3rd December,2011
 INDICATORS OF FINANCE LEASE

 Long term lease

 Where lease transfers substantially all the risks and rewards incidental
to
ownership. Title may or may not eventually be transferred.
 Where lease cannot be cancelled or can be cancelled only if the lessor
is
reimbursed for any losses.
 Where lessee is required to take the risk of obsolescence.
Where cost of maintenance, taxes and insurance are to be incurred by
the lessee unless the contract so provide for.
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 SOME IMPORTANT DEFINITIONS

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CA RAJEEV SOGANI 3rd December,2011
ACCOUNTING TREATMENT IN CASE OF FINANCE LEASE
This can be explained with the help of an illustration-
Fair value of the machinery `2,35,500
Lease Term 3 years
Lease Rent `1,00,000
Guaranteed Residual Value by lessee ` 17000
Implicit Rate of Interest 16% p.a.
Method of Depreciation SLM
The amount of depreciation charged is equal to ` 72,833
(2,35,500-17,000/3)

CA RAJEEV SOGANI 3rd December,2011

In the books of lessor-
The asset given under a finance lease is recognized as a receivable at an
amount equal to the net investment in the lease.
Amount in `
Year Lease Installment Finance Income Principal Closing
receivable (Lease Balance
receivable x 16%)
1 2,35,500 1,00,000 37,680 62,320 1,73,180
2 1,73,180 1,00,000 27,710 72,290 1,00,890
3 1,00,890 1,00,000 16,140 83,860 17,030

Profit & Loss Account Balance Sheet

Year 1 By Finance income 37,680 Asset (Year 1)

Year 2 By Finance income 27,710 Lease Rent Receivable 2,35,500
Year 3 By Finance income 16,140 (-)Lease rent received 62,320
1,73,180
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In the books of lessee-
The asset taken on lease is recognized at an amount which would be lower of
fair value or P.V. of MLP from standpoint of lessee.
(Amount in `)
Year Lease Installment Finance Repayment of Closing
Rental charges liability balance
payable (Lease rental
payable x 16%)
1 2,35,500 1,00,000 37,680 62,320 1,73,180
2 1,73,180 1,00,000 27,710 72,290 1,00,890
3 1,00,890 1,00,000 16,140 83,860 17,030

Charge in Profit and Loss (Amount in `)

Year Finance Charges Depreciation Total
1 37,680 72,833 1,10,513
2 27,710 72,833 1,00,543
3 16,140 72,834 88,974
GRAND TOTAL 3,00,030
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 Balance Sheet

Liability Asset
1st year O/s Liability 2,35,500 Machinery 2,35,500
(-) Repayment of Liab. 62,320 1,73,180 (-)Depreciation 72,833
1,62,667

2nd year O/s Liability 1,73,180 Machinery 1,62,667

(-) Repayment of Liab. 72,290 1,00,890 (-)Depreciation 72,833 89,834

3rd year O/s Liability 1,00,890 Machinery 89,834

(-) Repayment of Liab. 83,860 17,030 (-)Depreciation 72,834 17,000

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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.

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 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.

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 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 SALE AND

FINANCE OPERATING
LEASEBACK LEASEBACK

CASE I CASE II

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 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.

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• 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.

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 BOOT CONTRACTS
 BOOT (Build, Own, Operate, Transfer) Contracts are executed with
the Government which involves private sector entity constructing the
infrastructure facility on the land owned by the government and
operating and maintaining that infrastructure for specified period
usually 20 to 25 years. This period is referred to as the “Concession
Period” after which ownership is transferred to the government.
 BOOT transactions are outside the purview of finance lease because of
the following reasons-
 It does not cover the majority of the useful life of the asset.

 The element of ownership is totally missing in the contract.

 Major portion of expenditure is incurred by the lessee. Therefore, such

transactions do not qualify for Finance Lease.
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 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

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 If customer opts for Finance Lease and amount paid after 3 years is
` 1,22,000

Possibility 1- (X) Possibility 2- ( √ )

Selling price - ` 1,22,000 Finance income to be recognized at
Cost of an asset - ` 1,00,000 commercial rate, say ` 12000,so profit
Profit - ` 22,000 get reduced to `10,000 instead of `
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.

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 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

•Taxable income
Deductible in the hands of
expenditure in the Lessor.
hands of Lessee. •Lessor will be
entitled for
depreciation.

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 Treatment as per books in case of FINANCE LEASE

LESSEE LESSOR

Depreciation and •Finance income is

Finance charges are credited to P&L account
debited to P&L instead of lease rent.
account instead of •Lessor will not be entitled
lease rent. for depreciation.

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 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.
PERIOD AMOUNT
(5) Lease rentals payable should be shown as follows:-
0-12 months xxx
12-60 months xxx
More than 60 months xxx

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 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
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 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

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 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

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