As 19
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Transcript of As 19
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
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