Wednesday, December 22, 2010

IAS 19

Accounting Standard (AS) 19

(issued 2001)

Leases

Contents

OBJECTIVE

SCOPE Paragraphs 1-2

DEFINITIONS 3-4

CLASSIFICATION OF LEASES 5-10

LEASES IN THE FINANCIAL STATEMENTS

OF LESSEES 11-25

Finance Leases 11-22

Operating Leases 23-25

LEASES IN THE FINANCIAL STATEMENTS

OF LESSORS 26-46

Finance Leases 26-38

Operating Leases 39-46

SALE AND LEASEBACK TRANSACTIONS 47-55

APPENDIX

Accounting Standard (AS) 19

(issued 2001)

Leases

(This Accounting Standard includes paragraphs set in bold italic type

and plain type, which have equal authority. Paragraphs in bold italic

type indicate the main principles. This Accounting Standard should be

read in the context of its objective and the Preface to the Statements of

Accounting Standards1.)

Accounting Standard (AS) 19, ‘Leases’, issued by the Council of the Institute

of Chartered Accountants of India, comes into effect in respect of all assets

leased during accounting periods commencing on or after 1.4.2001 and is

mandatory in nature2 from that date. Accordingly, the ‘Guidance Note on

Accounting for Leases’ issued by the Institute in 1995, is not applicable in

respect of such assets. Earlier application of this Standard is, however,

encouraged.

In respect of accounting periods commencing on or after 1-4-20043 , an

enterprise which does not fall in any of the following categories need not

disclose the information required by paragraphs 22(c), (e) and (f); 25(a), (b)

and (e); 37(a), (f) and (g); and 46(b), (d) and (e), of this Standard:

(i) Enterprises whose equity or debt securities are listed whether in

India or outside India.

(ii) Enterprises which are in the process of listing their equity or debt

securities as evidenced by the board of directors’ resolution in

this regard.

1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which

Accounting Standards are intended to apply only to items which are material.

2 Reference may be made to the section titled ‘Announcements of the Council

regarding status of various documents issued by the Institute of Chartered

Accountants of India’ appearing at the beginning of this Compendium for a detailed

discussion on the implications of the mandatory status of an accounting standard.

3 AS 19 was originally made mandatory, in its entirety, for all enterprises in respect

of all assets leased during accounting periods commencing on or after 1-4-2001.

Leases 361

(iii) Banks including co-operative banks.

(iv) Financial institutions.

(v) Enterprises carrying on insurance business.

(vi) All commercial, industrial and business reporting enterprises,

whose turnover for the immediately preceding accounting period

on the basis of audited financial statements exceeds Rs. 50 crore.

Turnover does not include ‘other income’.

(vii) All commercial, industrial and business reporting enterprises having

borrowings, including public deposits, in excess ofRs. 10 crore at

any time during the accounting period.

(viii) Holding and subsidiary enterprises of any one of the above at any

time during the accounting period.

In respect of an enterprise which falls in any one or more of the above

categories, at any time during the accounting period, the Standard is applicable

in its entirety.

Where an enterprise has been covered in any one or more of the above

categories and subsequently, ceases to be so covered, the enterprise will not

qualify for exemption from paragraphs 22(c), (e) and (f); 25(a), (b) and (e);

37(a), (f) and (g); and 46(b), (d) and (e), of this Standard, until the enterprise

ceases to be covered in any of the above categories for two consecutive

years.

Where an enterprise has previously qualified for exemption fromparagraphs

22(c), (e) and (f); 25(a), (b) and (e); 37(a), (f) and (g); and 46(b), (d) and (e),

of this Standard (being not covered by any of the above categories) but no

longer qualifies for exemption in the current accounting period, this Standard

becomes applicable, in its entirety, from the current period. However, the

corresponding previous period figures in respect of above paragraphs need

not be disclosed.

An enterprise, which, pursuant to the above provisions, does not disclose the

information required by paragraphs 22(c), (e) and (f); 25(a), (b) and (e);

37(a), (f) and (g); and 46(b), (d) and (e) should disclose the fact.

362 AS 19 (issued 2001)

The following is the text of the Accounting Standard.

Objective

The objective of this Statement is to prescribe, for lessees and lessors, the

appropriate accounting policies and disclosures in relation to finance leases

and operating leases.

Scope

1. This Statement should be applied in accounting for all leases other

than:

(a) lease agreements to explore for or use natural resources,

such as oil, gas, timber, metals and other mineral rights; and

(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. This Statement applies to agreements that transfer the right to use assets

even though substantial services by the lessor may be called for in

connection with the operation or maintenance of such assets. On the other

hand, this Statement does not apply to agreements that are contracts for

services that do not transfer the right to use assets from one contracting

party to the other.

Definitions

3. The following terms are used in this Statement with the meanings

specified:

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.

Leases 363

An operating lease is a lease other than a finance lease.

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.

The inception of the lease is the earlier of the date of the lease

agreement and the date of a commitment by the parties to the principal

provisions of the lease.

The lease term is the non-cancellable period for which the lessee has

agreed to take on lease the asset together with any further periods for

which the lessee has the option to continue the lease of the asset, with or

without further payment, which option at the inception of the lease it is

reasonably certain that the lessee will exercise.

Minimum lease payments are the payments over the lease term that the

lessee is, or can be required, to make excluding contingent rent, costs

for services and taxes to be paid by and reimbursed to the lessor,

together with:

(a) in the case of the lessee, any residual value guaranteed by or

on behalf of the lessee; or

(b) in the case of the lessor, any residual value guaranteed to the

lessor:

(i) by or on behalf of the lessee; or

(ii) by an independent third party financially capable of

meeting this guarantee.

364 AS 19 (issued 2001)

However, 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 that, at the inception of the lease, is

reasonably certain to be exercised, the minimum lease payments

comprise minimum payments payable over the lease term and the

payment required to exercise this purchase option.

Fair value is the amount for which an asset could be exchanged or a

liability settled between knowledgeable, willing parties in an arm’s

length transaction.

Economic life is either:

(a) the period over which an asset is expected to be economically

usable by one or more users; or

(b) the number of production or similar units expected to be

obtained from the asset by one or more users.

Useful life of a leased asset is either:

(a) the period over which the leased asset is expected to be used

by the lessee; or

(b) the number of production or similar units expected to be

obtained from the use of the asset by the lessee.

Residual value of a leased asset is the estimated fair value of the asset

at the end of the lease term.

Guaranteed residual value is:

(a) in the case of the lessee, that part of the residual value which

is guaranteed by the lessee or by a party on behalf of the

lessee (the amount of the guarantee being the maximum

amount that could, in any event, become payable); and

(b) in the case of the lessor, that part of the residual value which

is guaranteed by or on behalf of the lessee, or by an

independent third party who is financially capable of

discharging the obligations under the guarantee.

Leases 365

Unguaranteed residual value of a leased asset is the amount by which

the residual value of the asset exceeds its guaranteed residual value.

Gross investment in the lease is the aggregate of the minimum lease

payments under a finance lease from the standpoint of the lessor and

any unguaranteed residual value accruing to the lessor.

Unearned finance income is the difference between:

(a) the gross investment in the lease; and

(b) the present value of

(i) the minimum lease payments under a finance lease

from the standpoint of the lessor; and

(ii) any unguaranteed residual value accruing to the lessor,

at the interest rate implicit in the lease.

Net investment in the lease is the gross investment in the lease less

unearned finance income.

The interest rate implicit in the lease is the discount rate that, at the

inception of the lease, causes the aggregate present value of

(a) the minimum lease payments under a finance lease from the

standpoint of the lessor; and

(b) any unguaranteed residual value accruing to the lessor,

to be equal to the fair value of the leased asset.

The lessee’s incremental borrowing rate of interest is the rate of interest

the lessee would have to pay on a similar lease or, if that is not

determinable, the rate that, at the inception of the lease, the lessee would

incur to borrow over a similar term, and with a similar security, the

funds necessary to purchase the asset.

Contingent rent is that portion of the lease payments that is not fixed in

amount but is based on a factor other than just the passage of time (e.g.,

percentage of sales, amount of usage, price indices, market rates of

interest).

366 AS 19 (issued 2001)

4. The definition of a lease includes agreements for the hire of an asset

which contain a provision giving the hirer an option to acquire title to the

asset upon the fulfillment of agreed conditions. These agreements are

commonly known as hire purchase agreements. Hire purchase agreements

include agreements under which the property in the asset is to pass to the

hirer on the payment of the last instalment and the hirer has a right to

terminate the agreement at any time before the property so passes.

Classification of Leases

5. The classification of leases adopted in this Statement is based on the

extent to which risks and rewards incident to ownership of a leased asset lie

with the lessor or the lessee. Risks include the possibilities of losses from

idle capacity or technological obsolescence and of variations in return due to

changing economic conditions. Rewards may be represented by the

expectation of profitable operation over the economic life of the asset and of

gain from appreciation in value or realisation of residual value.

6. A lease is classified as a finance lease if it transfers substantially all the

risks and rewards incident to ownership. Titlemay ormay not eventually be

transferred. A lease is classified as an operating lease if it does not transfer

substantially all the risks and rewards incident to ownership.

7. Since the transaction between a lessor and a lessee is based on a lease

agreement common to both parties, it is appropriate to use consistent

definitions. The application of these definitions to the

differing circumstances of the two parties may sometimes result in the

same lease being classified differently by the lessor and the lessee.

8. Whether a lease is a finance lease or an operating lease depends on the

substance of the transaction rather than its form. Examples of situations

which would normally lead to a lease being classified as a finance lease are:

(a) the lease transfers ownership of the asset to the lessee by the

end of the lease term;

(b) the lessee has the 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 such that, at the inception of the

lease, it is reasonably certain that the option will be exercised;

Leases 367

(c) the lease term is for the major part of the economic life of the

asset even if title is not transferred;

(d) at the inception of the lease the present value of the minimum

lease payments amounts to at least substantially all of the 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.

9. Indicators of situations which individually or in combination could also

lead to a lease being classified as a finance lease are:

(a) if the lessee can cancel the lease, the lessor’s losses associated

with the cancellation are borne by the lessee;

(b) gains or losses fromthe fluctuation in the fair value of the residual

fall to the lessee (for example in the form of a rent rebate

equalling most of the sales proceeds at the end of the lease); and

(c) the lessee can continue the lease for a secondary period at a rent

which is substantially lower than market rent.

10. Lease classification is made at the inception of the lease. If at any

time the lessee and the lessor agree to change the provisions of the lease,

other than by renewing the lease, in a manner that would have resulted in a

different classification of the lease under the criteria in paragraphs 5 to 9

had the changed terms been in effect at the inception of the lease,

the revised agreement is considered as a new agreement over its revised

term. Changes in estimates (for example, changes in estimates of the

economic life or of the residual value of the leased asset) or changes in

circumstances

(for example, default by the lessee), however, do not give rise to a new

classification of a lease for accounting purposes.

Leases in the Financial Statements of Lessees

Finance Leases

11. At the inception of a finance lease, the lessee should recognise the

lease as an asset and a liability. Such recognition should be at an

amount equal to the fair value of the leased asset at the inception of the

368 AS 19 (issued 2001)

lease. However, if the fair value of the leased asset exceeds the present

value of the minimum lease payments from the standpoint of the lessee,

the amount recorded as an asset and a liability should be the present

value of the minimum lease payments from the standpoint of the lessee.

In calculating the present value of the minimum lease payments the

discount rate is the interest rate implicit in the lease, if this is

practicable to determine; if not, the lessee’s incremental borrowing rate

should be used.

Example

(a) An enterprise (the lessee) acquires a machinery on lease from a

leasing company (the lessor) on January 1, 20X0. The lease term

covers the entire economic life of the machinery, i.e., 3 years. The

fair value of the machinery on January 1, 20X0 is Rs.2,35,500. The

lease agreement requires the lessee to pay an amount of Rs.1,00,000

per year beginning December 31, 20X0. The lessee has guaranteed

a residual value of Rs.17,000 on December 31, 20X2 to the lessor.

The lessor, however, estimates that the machinery would have a

salvage value of only Rs.3,500 on December 31, 20X2.

The interest rate implicit in the lease is 16 per cent (approx.). This

is calculated using the following formula:

ALR ALR ALR RV

Fair value = + + … + +

(1 + r)1 (1 + r)2 (1 + r)n (1 + r)n

where ALR is annual lease rental,

RV is residual value (both guaranteed and

unguaranteed),

n is the lease term,

r is interest rate implicit in the lease.

The present value of minimum lease payments from the stand point

of the lessee is Rs.2,35,500.

The lessee would record the machinery as an asset at Rs. 2,35,500

with a corresponding liability representing the present value of lease

payments over the lease term (including the guaranteed residual

value).

Leases 369

(b) In the above example, suppose the lessor estimates that the

machinery would have a salvage value of Rs. 17,000 on December

31, 20X2. The lessee, however, guarantees a residual value of Rs.

5,000 only.

The interest rate implicit in the lease in this case would remain

unchanged at 16% (approx.). The present value of the minimum

lease payments from the standpoint of the lessee, using this interest

rate implicit in the lease, would be Rs.2,27,805. As this amount is

lower than the fair value of the leased asset (Rs.2,35,500), the lessee

would recognise the asset and the liability arising from the lease at

Rs. 2,27,805.

In case the interest rate implicit in the lease is not known to the

lessee, the present value of the minimum lease payments from the

standpoint of the lessee would be computed using the lessee’s

incremental borrowing rate.

12. Transactions and other events are accounted for and presented in

accordance with their substance and financial reality and not merely with

their legal form. While the legal form of a lease agreement is that the lessee

may acquire no legal title to the leased asset, in the case of finance leases

the substance and financial reality are that the lessee acquires the economic

benefits of the use of the leased asset for the major part of its economic life

in return for entering into an obligation to pay for that right an amount

approximating to the fair value of the asset and the related finance charge.

13. If such lease transactions are not reflected in the lessee’s balance

sheet, the economic resources and the level of obligations of an enterprise

are understated thereby distorting financial ratios. It is therefore appropriate

that a finance lease be recognised in the lessee’s balance sheet both as an

asset and as an obligation to pay future lease payments. At the inception of

the lease, the asset and the liability for the future lease payments are

recognised in the balance sheet at the same amounts.

14. It is not appropriate to present the liability for a leased asset as a

deduction from the leased asset in the financial statements. The liability for

a leased asset should be presented separately in the balance sheet as a

current liability or a long-term liability as the case may be.

15. Initial direct costs are often incurred in connection with specific leasing

Year Finance Payment

370 AS 19 (issued 2001)

activities, as in negotiating and securing leasing arrangements. The costs

identified as directly attributable to activities performed by the lessee for a

finance lease are included as part of the amount recognised as an asset

under the lease.

16. Lease payments should be apportioned between the finance

charge and the reduction of the outstanding liability. 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.

Example

In the example (a) illustrating paragraph 11, the lease payments would be

apportioned by the lessee between the finance charge and the reduction

of the outstanding liability as follows:

Reduction Outstandcharge

(Rs.) in ing

(Rs.) outstanding liability

liability (Rs.) (Rs.)

Year 1 (January 1) 2,35,500

(December 31) 37,680 1,00,000 62,320 1,73,180

Year 2 (December 31) 27,709 1,00,000 72,291 1,00,889

Year 3 (December 31) 16,142 1,00,000 83,858 17,031*

17. In practice, in allocating the finance charge to periods during the lease

term, some form of approximation may be used to simplify the calculation.

18. A finance lease gives rise to a depreciation expense for the asset

as well as a finance expense for each accounting period. 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 Accounting Standard (AS)

6, Depreciation Accounting. 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.

* The difference between this figure and guaranteed residual value (Rs.17,000) is

due to approximation in computing the interest rate implicit in the lease.

Leases 371

19. The depreciable amount of a leased asset is allocated to each

accounting period during the period of expected use on a systematic basis

consistent with the depreciation policy the lessee adopts for depreciable

assets that are owned. If there is reasonable certainty that the lessee will

obtain ownership by the end of the lease term, the period of expected use is

the useful life of the asset; otherwise the asset is depreciated over the lease

term or its useful life, whichever is shorter.

20. The sum of the depreciation expense for the asset and the finance

expense for the period is rarely the same as the lease payments payable for

the period, and it is, therefore, inappropriate simply to recognise the lease

payments payable as an expense in the statement of profit and loss.

Accordingly, the asset and the related liability are unlikely to be equal in

amount after the inception of the lease.

21. To determine whether a leased asset has become impaired, an

enterprise applies the Accounting Standard dealing with impairment of

assets4, that sets out the requirements as to howan enterprise should perform

the review of the carrying amount of an asset, how it should determine the

recoverable amount of an asset and when it should recognise, or reverse, an

impairment loss.

22. The lessee should, in addition to the requirements of AS 10,

Accounting for Fixed Assets, AS 6, Depreciation Accounting, and the

governing statute, make the following disclosures for finance leases:

(a) assets acquired under finance lease as segregated from the

assets owned;

(b) for each class of assets, the net carrying amount at the

balance sheet date;

(c) a reconciliation between the total of minimum lease

payments at the balance sheet date and their present value.

In addition, an enterprise should disclose the total of

minimum lease payments at the balance sheet date, and their

present value, for each of the following periods:

(i) not later than one year;

4 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements

relating to impairment of assets.

372 AS 19 (issued 2001)

(ii) later than one year and not later than five years;

(iii) later than five years;

(d) contingent rents recognised as expense in the statement of

profit and loss for the period;

(e) the total of future minimum sublease payments expected to

be received under non-cancellable subleases at the balance

sheet date; and

(f) a general description of the lessee’s significant leasing

arrangements including, but not limited to, the following:

(i) the basis on which contingent rent payments are

determined;

(ii) the existence and terms of renewal or purchase options

and escalation clauses; and

(iii) restrictions imposed by lease arrangements, such as

those concerning dividends, additional debt, and further

leasing.

Operating Leases

23. Lease payments under an operating lease should be recognised

as an expense 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 of the user’s benefit.

24. For operating leases, lease payments (excluding costs for services such

as insurance and maintenance) are recognised as an expense in the

statement of profit and loss on a straight line basis unless another systematic

basis is more representative of the time pattern of the user’s benefit, even if

the payments are not on that basis.

25. The lessee should make the following disclosures for operating

leases:

(a) the total of future minimum lease payments under nonLeases

373

cancellable operating leases for each of the following

periods:

(i) not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(b) the total of future minimum sublease payments expected to

be received under non-cancellable subleases at the balance

sheet date;

(c) lease payments recognised in the statement of profit and loss

for the period, with separate amounts for minimum lease

payments and contingent rents;

(d) sub-lease payments received (or receivable) recognised in

the statement of profit and loss for the period;

(e) a general description of the lessee’s significant leasing

arrangements including, but not limited to, the following:

(i) the basis on which contingent rent payments are

determined;

(ii) the existence and terms of renewal or purchase options

and escalation clauses; and

(iii) restrictions imposed by lease arrangements, such as

those concerning dividends, additional debt, and further

leasing.

Leases in the Financial Statements of Lessors

Finance Leases

26. 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.

374 AS 19 (issued 2001)

27. Under a finance lease substantially all the risks and rewards incident to

legal ownership are transferred by the lessor, and thus the lease payment

receivable is treated by the lessor as repayment of principal, i.e.,

net investment in the lease, and finance income to reimburse and reward

the lessor for its investment and services.

28. The recognition of finance income should be based on a pattern

reflecting a constant periodic rate of return on the net investment of the

lessor outstanding in respect of the finance lease.

29. A lessor aims to allocate finance income over the lease term on a

systematic and rational basis. This income allocation is based on a pattern

reflecting a constant periodic return on the net investment of the lessor

outstanding in respect of the finance lease. Lease payments relating to the

accounting period, excluding costs for services, are reduced from both the

principal and the unearned finance income.

30. Estimated unguaranteed residual values used in computing the lessor’s

gross investment in a lease are reviewed regularly. If there has been a

reduction in the estimated unguaranteed residual value, the income allocation

over the remaining lease term is revised and any reduction in respect of

amounts already accrued is recognised immediately. An upward adjustment

of the estimated residual value is not made.

31. 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 incurred to produce finance income

and are either recognised immediately in the statement of profit and loss or

allocated against the finance income over the lease term.

32. The manufacturer or dealer lessor should recognise 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. Initial direct costs should be recognised as an expense

in the statement of profit and loss at the inception of the lease.

33. Manufacturers or dealers may offer to customers the choice of either

buying or leasing an asset. A finance lease of an asset by a manufacturer or

dealer lessor gives rise to two types of income:

Leases 375

(a) the profit or loss equivalent to the profit or loss resulting from an

outright sale of the asset being leased, at normal selling prices,

reflecting any applicable volume or trade discounts; and

(b) the finance income over the lease term.

34. The sales revenue recorded at the commencement of a finance lease

term by a manufacturer or dealer lessor is the fair value of the asset.

However, if the present value of the minimum lease payments accruing to

the lessor computed at a commercial rate of interest is lower than the fair

value, the amount recorded as sales revenue is the present value so

computed. The cost of sale recognised at the commencement of the lease

term is the cost, or carrying amount if different, of the leased asset less the

present value of the unguaranteed residual value. The difference between

the sales revenue and the cost of sale is the selling profit,which is recognised

in accordance with the policy followed by the enterprise for sales.

35. Manufacturer or dealer lessors sometimes quote artificially low rates

of interest in order to attract customers. The use of such a rate would result

in an excessive portion of the total income from the transaction being

recognised at the time of sale. If artificially low rates of interest are quoted,

selling profit would be restricted to that which would apply if a commercial

rate of interest were charged.

36. Initial direct costs are recognised as an expense at the commencement

of the lease term because they are mainly related to earning the

manufacturer’s or dealer’s selling profit.

37. The lessor should make the following disclosures for finance

leases:

(a) a reconciliation between the total gross investment in the

lease at the balance sheet date, and the present value of

minimum lease payments receivable at the balance sheet

date. In addition, an enterprise should disclose the total

gross investment in the lease and the present value of

minimum lease payments receivable at the balance sheet

date, for each of the following periods:

(i) not later than one year;

376 AS 19 (issued 2001)

(ii) later than one year and not later than five years;

(iii) later than five years;

(b) unearned finance income;

(c) the unguaranteed residual values accruing to the benefit of

the lessor;

(d) the accumulated provision for uncollectible minimum lease

payments receivable;

(e) contingent rents recognised in the statement of profit and loss

for the period;

(f) a general description of the significant leasing

arrangements of the lessor; and

(g) accounting policy adopted in respect of initial direct costs.

38. As an indicator of growth it is often useful to also disclose the gross

investment less unearned income in new business added during the

accounting period, after deducting the relevant amounts for cancelled leases.

Operating Leases

39. The lessor should present an asset given under operating lease in

its balance sheet under fixed assets.

40. Lease income from operating leases 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.

41. Costs, including depreciation, incurred in earning the lease income are

recognised as an expense. Lease income (excluding receipts for services

provided such as insurance and maintenance) is recognised in the statement

of profit and loss on a straight line basis over the lease term even if the

receipts are not on such a basis, unless another systematic basis is more

representative of the time pattern in which benefit derived from the use of

the leased asset is diminished.

Leases 377

42. Initial direct costs 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.

43. The depreciation of leased assets should be on a basis

consistent with the normal depreciation policy of the lessor for similar

assets, and the depreciation charge should be calculated on the basis

set out in AS

6, Depreciation Accounting.

44. To determine whether a leased asset has become impaired, an

enterprise applies the Accounting Standard dealing with impairment of

assets5 that sets out the requirements for how an enterprise should perform

the review of the carrying amount of an asset, how it should determine the

recoverable amount of an asset and when it should recognise, or reverse, an

impairment loss.

45. A manufacturer or dealer lessor does not recognise any selling profit

on entering into an operating lease because it is not the equivalent of a sale.

46. The lessor should, in addition to the requirements of AS 6,

Depreciation Accounting and AS 10, Accounting for Fixed Assets, and

the governing statute, make the following disclosures for operating

leases:

(a) for each class of assets, the gross carrying amount, the

accumulated depreciation and accumulated impairment

losses at the balance sheet date; and

(i) the depreciation recognised in the statement of profit

and loss for the period;

(ii) impairment losses recognised in the statement of profit

and loss for the period;

(iii) impairment losses reversed in the statement of profit

and loss for the period;

5 Accounting Standard (AS) 28, ‘Impairment of Assets’, specifies the requirements

relating to impairment of assets.

378 AS 19 (issued 2001)

(b) the future minimum lease payments under non-cancellable

operating leases in the aggregate and for each of the

following periods:

(i) not later than one year;

(ii) later than one year and not later than five years;

(iii) later than five years;

(c) total contingent rents recognised as income in the statement

of profit and loss for the period;

(d) a general description of the lessor’s significant leasing

arrangements; and

(e) accounting policy adopted in respect of initial direct costs.

Sale and LeasebackTransactions

47. 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. The lease

payments and the sale price are usually interdependent as they are

negotiated as a package. The accounting treatment of a sale and leaseback

transaction depends upon the type of lease involved.

48. If a sale and leaseback transaction results in a finance lease, any

excess or deficiency of sales proceeds over the carrying amount should

not be immediately recognised as income or loss in the financial

statements of a seller-lessee. Instead, it should be deferred and

amortised over the lease term in proportion to the depreciation of the

leased asset.

49. If the leaseback is a finance lease, it is not appropriate to regard an

excess of sales proceeds over the carrying amount as income. Such excess

is deferred and amortised over the lease term in proportion to the

depreciation of the leased asset. Similarly, it is not appropriate to regard a

deficiency as loss. Such deficiency is deferred and amortised over the lease

term.

50. If a sale and leaseback transaction results in an operating lease,

Leases 379

and it is clear that the transaction is established at fair value, any profit

or loss should be recognised immediately. If the sale price is below fair

value, any profit or loss should be recognised immediately except that,

if the loss is compensated by future lease payments at below market

price, it should be deferred and amortised in proportion to the lease

payments over the period for which the asset is expected to be used. If

the 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.

51. If the leaseback is an operating lease, and the lease payments and the

sale price are established at fair value, there has in effect been a normal sale

transaction and any profit or loss is recognised immediately.

52. For operating leases, 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.

53. For finance leases, no such adjustment is necessary unless there has

been an impairment in value, in which case the carrying amount is reduced

to recoverable amount in accordance with the Accounting Standard dealing

with impairment of assets.

54. Disclosure requirements for lessees and lessors apply equally to sale

and leaseback transactions. The required description of the significant

leasing arrangements leads to disclosure of unique or unusual provisions of

the agreement or terms of the sale and leaseback transactions.

55. Sale and leaseback transactions may meet the separate disclosure

criteria set out in paragraph 12 of Accounting Standard (AS) 5, Net Profit or

Loss for the Period, Prior Period Items and Changes in Accounting Policies.

380 AS 19 (issued 2001)

Appendix

Sale and Leaseback Transactions that Result in Operating

Leases

The appendix is illustrative only and does not form part of the

accounting standard. The purpose of this appendix is to illustrate the

application of the accounting standard.

A sale and leaseback transaction that results in an operating lease may give

rise to profit or a loss, the determination and treatment of which depends on

the leased asset’s carrying amount, fair value and selling price. The

following table shows the requirements of the accounting standard in various

circumstances.

Sale price

established at

fair value

(paragraph 50)

Carrying

amount

equal to

fair value

Carrying

amount less

than fair value

Carrying

amount

above fair

value

Profit No profit Recognise profit

immediately

Not applicable

Los s No loss Not applicable Recognise loss

immediately

Sale price below

fair value

(paragraph 50)

Profit No profit Recognise profit

immediately

No profit

(note 1)

Loss not

compensated by

future lease

payments at below

market price

Recognise

loss

immediately

Recognise loss

immediately

(note 1)

Loss compensated

by future lease

payments at below

market price

Defer and

amortise loss

Defer and

amortise loss

(note 1)

Leases 381

Sale price above

fair value

(paragraph 50)

Profit Defer and

amortise profit

Defer and

amortise profit

Defer and

amortise

profit

(note 2)

Los s No loss No loss (note 1)

Note 1. These parts of the table represent circumstances that would have

been dealt with under paragraph 52 of the Standard. Paragraph 52 requires

the carrying amount of an asset to be written down to fair value where it is

subject to a sale and leaseback.

Note 2. The profit would be the difference between fair value and sale

price as the carrying amount would have been written down to fair value in

accordance with paragraph 52.

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