Leases Contents - mca.gov.in

1 284 Accounting Standard (AS) 19 LeasesContentsOBJECTIVE 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 ILLUSTRATION 260 AS 19 (issued 2001) Accounting Standard (AS) 19 Leases * (This Accounting Standard includesparagraphsset inbolditalic typeand plain type, which have equal authority.)

2 Paragraphs in bold italic typeindicate the main principles. This Accounting Standard should be read inthe context of its objective and the General Instructions contained inpart A of the Annexure to the Notification.) Objective The objective of this Standard is to prescribe, for lessees and lessors, theappropriate accounting policies and disclosures in relation to finance leasesand operating Leases . Scope 1. This Standard should be applied in accounting for all Leases otherthan: (a) lease agreementstoexplorefororuse naturalresources, suchas 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 agreementsto use This Standard applies to agreements that transferthe right to use assetseven though substantial services by the lessor may be called for inconnection with the operation or maintenance of such assets.

3 On the otherhand, this Standard does not apply to agreements that are contracts forservices that do not transfer the right to use assets from one contractingparty to the other. * In respect of assets leased prior to the effective date of the notification prescribingthis Standard under Section 211 of the Companies Act, 1956, the applicability of thisStandard would be determined on the basis of the Accounting Standard (AS) 19, is-sued by the ICAI in 2001. 286 AS 19 Definitions 3. The following terms are used in this Standard with the meanings specified: A lease is an agreement whereby the lessor conveys to the lesseein return for a payment or series of payments the right to use anasset for an agreed period of A finance lease isaleasethattransfers substantiallyallthe risksand rewards incident to ownership of an An operating leaseis a lease otherthan afinance A non-cancellable leaseis a lease thatis cancellable only:(a) upon the occurrence ofsome remote contingency;or(b) with the permission ofthe lessor;or(c) if the lessee enters into a new lease for the same or anequivalentassetwith the same lessor.

4 Or(d) upon paymentbythelesseeofan additionalamount suchthat, at inception, continuation of the lease is reasonablycertain. The inception ofthe leaseis 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-cancellableperiodforwhich the lessee has agreed to take on lease the asset together with any furtherperiods for which the lessee has the option to continue the lease ofthe asset, with or without further payment, which option at theinception of the lease it is reasonably certain that the lessee willexercise. Minimum lease paymentsare the payments over the lease term that the lessee is, or can be required, to make excluding contingentrent, costs for services and taxes to be paid by and reimbursed tothe lessor, together with: Leases 287 (a) in the case ofthe lessee,anyresidualvalueguaranteed byor on behalf of the lessee; or (b) in the case ofthe lessor,anyresidualvalueguaranteed tothe lessor:(i) by oron behalfofthe lessee; or(ii) by an independent third party financially capable ofmeeting this guarantee.

5 However, if the lessee has an optiontopurchase the assetataprice whichis expected to be sufficiently lower than the fair value at the date the option becomes exercisable that, at t h e i n c e p t i o n o f t h e l e a s e , i s 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 Fair value is the amountforwhichanassetcould be exchanged or aliability settled between knowledgeable, willing parties in an arm slength 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.

6 Useful life of a leased assetis either:(a) the period overwhich the leased assetis expectedtobe usedby the lessee; or(b) the number of production or similar units expected to be obtained from the use of the asset by the Residual value ofaleasedassetis the estimatedfairvalue of theasset at the end of the lease term. Guaranteed residual value is: 288 AS 19 (a) in the case of the lessee, that part of the residual value which is guaranteed by the lessee or by a party on behalfof the lessee (the amount of the guarantee being themaximum amount that could, in any event, becomepayable); 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 anindependent third party who is financially capable of discharging the obligations under the Unguaranteed residual valueof a leased asset is the amount by which the residual value of the asset exceeds its guaranteed residualvalue.

7 Gross investmentintheleaseistheaggregateofthe minimum leasepayments under a finance lease from the standpoint of the lessorand any unguaranteed residual value accruing to the lessor. Unearned finance incomeisthedifference between:(a) the gross investmentinthelease; and(b) the presentvalue 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 Net investment in the leaseisthegross investmentinthelease lessunearned finance The interest rate implicitintheleaseisthediscountrate that, at theinception 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, Leases 289 to be equal to thefairvalue ofthe leased asset.

8 The lessee s incremental borrowing rate of interest is the rate ofinterest the lessee would have to pay on a similar lease or, if that isnot determinable, the rate that, at the inception of the lease, thelessee would incur to borrow over a similar term, and with a similarsecurity, the funds necessary to purchase the Contingent rent isthatportion ofthe leasepayments thatisnot fixedin amount but is based on a factor other than just the passage oftime ( , percentage of sales, amount of usage, price indices,market rates of interest).4. The definition of a lease includes agreements forthe hire of an asset which contain a provision giving the hirer an option to acquire title to theasset upon the fulfillment of agreed conditions.

9 These agreements arecommonly known as hire purchase agreements. Hire purchase agreementsinclude agreements under which the property in the asset is to pass to thehirer on the payment of the last instalment and the hirer has a right toterminate the agreement at any time before the property so passes. Classification of Leases 5. The classification of Leases adopted in this Standard is based on theextent to which risks and rewards incident to ownership of a leased asset liewith the lessor or the lessee. Risks include the possibilities of losses fromidle capacity or technological obsolescence and of variations in return due to changing economic conditions. Rewards may be represented by theexpectation of profitable operation over the economic life of the asset and of gain from appreciation in value or realisation of residual value.

10 6. A lease is classifiedas a finance lease if it transfers substantially all therisks and rewards incident to ownership. Title may or may not eventuallybe transferred. A lease is classified as an operating lease if it does nottransfer substantially all the risksandrewards incident to ownership. 7. Since the transactionbetween a lessorandalesseeisbasedon a lease agreement common to both parties, it is appropriate to use consistentdefinitions. The application of these definitions to the differing circum-stances of the two parties may sometimes result in the same lease beingclassified differently by the lessor and the lessee. 290 AS 19 8. Whether a lease is a finance lease oran operating lease depends on the substance of the transaction rather than its form.