Accounting Standard 19
Leases
What is a Lease?
Agreeme
-
..
nt
Lesse
e
-
Conveys right In return for a
Lessor (legal owner of an to use an payment or series of
asset) asset for an periodic payments
agreed period (Lease Rents)
of time
A Lease is an agreement whereby the Lessor (legal owner of an
asset) conveys to the Lessee (another party) in return for a payment
or series of periodic payments (Lease rents), the right to use an asset
for an agreed period of time.
1) Lease Term
C
Any further period for
which lessee has
option to continue the
lease of asset (with or
·
without further
.
*
Non-Cancellable payment) and lessee is
Period reasonably certain to
excercise this option
(at inception of lease)
2) Minimum lease payments
!
A. Lease B. Lease
payments for payments for
the Lessors the Lessees
Lease payments for the Lessors
Lease payments for the Lessees
↑ -
X X
Fixed Exercise of Termination Expected
payments a purchase Any residual
penalties residual
over the option if value
for value
lease term lessee is guaranteed
terminating guarantees
reasonably by an
the lease, if payable by
certain to independent
lessee is the lessee
exercise third party
reasonably
that option certain to
terminate
the lease
Lease payments exclude a) Contingent Rent & b) costs for services and taxed to be paid by lessee
and reimbursed by lessor
3) Economic life 4) Useful Life
& &
Period over which Period over which
an asset is the leased asset is
expected to be expected to be
economically used by the lessee
usable by one or
more users
5) Residual Value
2
of a leased asset is the
estimated fair value of the
asset at the end of the lease
term.
6) Gross Investment in the lease
Minimum lease Any
payment (from unguaranteed
standpoint of residual value
lessor) accruing to the
lessor
7) Net Investment in the lease
Present value of Gross
Investment
8) Unearned finance income
*
9) Interest rate implicit in the lease Calculated from point of view
of lessor
Discount rate at which ;
Present Value of Cash Inflow = Fair
value of the asset
Cash Inflow = Lease payments +
Residual Value (GRV & UGRV)
If IRR not given then Lessee’s
incremental borrowing rate will be
used.
10) Contingent Rent
The 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).
Types of Leases
1) Finance Leases
A lease classified as Finance Lease if it
transfers substantially all the risks and
rewards incident to ownership of an asset.
Title may or may not be eventually
transferred.
Indicators of Finance Lease
Parameters to
decide
8 B whether it is a
finance lease
or not
Deterministic Conditions
1) The lease transfers ownership of the asset to the lessee by the
end of the lease term;
2) The lessee has the option to purchase the asset at a price which is
expected to be sufficiently lower than the fair value
3) The lease term is for the major part of the economic life of the
asset even if title is not transferred;
4) At the inception of the lease, present value of the minimum lease
payments amounts to at least substantially all of the fair value of the
leased asset; and
5) The leased asset is of a specialized nature such that only the
lessee can use it without major modifications being made.
Suggestive Conditions
(c) If the lessee
(b) If gains or losses from can continue the
(a) If the lessee can the fluctuations in the
residual value accrue to
lease for a
cancel the lease
the lessee (for example if secondary period
and the lessor’s
losses associated the lessor agrees to allow at a rent, which is
rent rebate equaling most substantially lower
with the
of the disposal value of
cancellation are leased asset at the end of
than market rent
borne by the the lease); and
lessee;
Lease classification is made at the inception of the
lease.
Accounting for Finance Leases
(Books of Lessee)
Lessee’s Books
Y
On the date of inception,
Lessee show asset and corresponding lease liability at
lower of :-
• Fair Value of the leased asset
• PV of Minimum lease payments from the
standpoint of the lessee
Journal Entry
Asset A/c. Dr.
To Lessor (Lease Liability)
Depreciation on the asset recorded
Example
Entity ABC (lessee) enters into a three-year lease of equipment. Entity ABC
agrees to make the following annual payments at the end of each year :
Rs.20,000 in year one
Rs.30,000 in year two
Rs.50,000 in year three.
Assume a discount rate of 12%.
Entity ABC depreciates Lease asset on a SLM basis over the lease term.
How would Entity ABC would account for the said lease under AS 19?
Example
Example
RTP NOV 23
Computation of interest rate implicit on lease
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.
Rate at which
PV of
1) Minimum lease
payments (standpoint of
lessor) FV of the
And leased asset
2) any UGRV (accruing to
Lessor)
Disclosures made by the Lessee
(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;
(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-cancelable subleases at the balance sheet date
Accounting for Finance Leases
(Books of Lessor)
Lessor’s Books
Y
> should recognise
Lessor asset given on
finance lease as a
> receivable
asset in its
Balance Sheet
at an amount equal
to the net
investment in the
lease
Recognition of Finance Income
The unearned finance
income is recognised over
the lease term on a
systematic and rational
basis.
2) Operating Leases
Treatment in the Books of Lessee
Lessee’s Books
Lease payments should be recognised
as an expense in the statement of profit
and loss on a SLM basis over the lease
term.
Treatment in the Books of Lessor
Lessor’s Books
1) Asset - PPE in BS
2) Lease Income - Profit & Loss (SLM basis)
3) Depreciation on PPE as per AS 10
Manufacturer or Dealer Lessor (Operating Lease)
1) Asset given on operating lease - PPE Dr. And Cr.
Cost of Production
2) No selling profit should be recognised (operating
lease not equivalent Sales)
Sale and LeaseBack
Sale of Property
Payment of the
purchase price
Seller Buyer
Payment of
A Lease Rent
Leaseback