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Thread: Accounting Standard (AS) 19 - Leases

  1. #1
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    Thumbs up Accounting Standard (AS) 19 - Leases

    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 Standards
    1.)

    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 nature
    2 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 1-4-2004
    3 , 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.

    Attached Files Attached Files

  2. #2
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    Thumbs up Accounting for equipments owned by an enterprise installed with another enterprise for use by the latter

    A. Facts of the Case

    1. A company is a Government of India enterprise engaged in the business of transmission of power generated by central public sector generating companies to different State Electricity Boards.

    2. The company has ventured into a state-of-art project, ‘Unified Load Despatch Centres’ (ULDC). The ULDC are highly sophisticated and are being implemented for the first time in India. The scheme is complex in nature and international consultants of repute were engaged to assist in all phases of work as per the advice of the World Bank. The benefits of the scheme are as given below:

    (i) Supervision, monitoring and control of power system on real-time basis.

    (ii) Optimal operation of power system (i.e., generation and associated resources).

    (iii) Minimisation and faster restoration of grid disturbance.

    (iv) Improvement in the quality of supply through better control of frequency, voltage and other parameters.

    3. The querist has stated that for effective implementation of the scheme it was necessary that equipments are installed in the facilities owned by the company as well as the facilities owned/operated by the State Electricity Boards. There is complexity involved in the project execution due to the state-of-art technology and paucity of funds and, therefore, the State Electricity Boards entrusted the responsibility to the company to install and implement the scheme in their units.

    4. In the MOU between the company and the various State Electricity Boards, it was agreed that "the recovery of cost/charges in respect ofequipment/system supplied/erected by the company in the jurisdiction of various Constituents other than Central Generating Companies shall also be recovered on fixed monthly basis apportioned to the cost incurred by company in respect of Load Despatch and Communication facilities provided for each Constituent". Presently, the ownership of equipment vests with the company and "the ownership of equipments installed at SLDC/Sub-LDCs Sub-stations and Power Stations shall be transferred to respective constituents on payment of book value to querist after full recovery of investment of the company including interest." Accordingly, levelised tariff for recovery of cost incurred by the company has been agreed to by the Regulatory Authority in principle considering life of the equipment as 15 years. For example, cost incurred by the querist in northern region is Rs. 311.93 crore and levelised tariff being allowed for 15 years is Rs. 44.37 crore per year.

    5. The equipments installed are in the physical possession of the State Electricity Boards and the benefits of the system are also being drawn by them. The operational and maintenance expenditures in respect of the same are being incurred by the concerned State Electricity Boards.

    6. The company has considered this as a finance lease in terms of Accounting Standard (AS) 19, ‘Leases’, issued by the Institute of Chartered Accountants of India. The following accounting treatment is proposed for this transaction:

    (a) Cost incurred on installation of ULDCs would be shown as amount recoverable from the State Electricity Boards.

    (b) The levelised tariff to be recovered in 15 years would be apportioned between the cost and interest income. Cost recovered would be reduced from the amount recoverable and interest income would be recognised as income

    (c) Since the cost incurred is being accounted for as amount recoverable no depreciation would be charged in the books of account of the company. The same would be claimed by the concerned State Electricity Boards.

    (d) Interest incurred for the borrowed loans for implementation of the above scheme would be charged to the profit and loss account.

    B . Query
    7. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) Whether considering the above transaction as a finance lease in terms of AS 19 is correct.

    (b) Whether the above accounting treatment is as per the requirements of AS 19.

    D. Opinion

    13. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 7:

    (a) Under the given facts and circumstances of the case, it would be correct to treat the transaction in question as finance lease, subject to complying with other requirements of AS 19.

    (b) The accounting treatment of finance lease proposed by the company in paragraph 6 is correct if the cost of equipments represents the net investment in the lease within the meaning of AS 19 and subject to the other requirements of AS 19, such as, disclosure requirements.


    Opinion finalised by the Committee on 25.3.2003.

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    Thumbs up Application of Accounting Standard (AS) 19, ‘Leases’, in respect of assets leased before 1.4.2001

    A. Facts of the Case

    1. A Government of India enterprise, incorporated as a public limited company in 1986, is engaged in leasing rolling stock assets to the Ministry of Railways (MOR). It raises funds from the capital market through issue of bonds, loans from banks/financial institutions (FI’s), and overseas markets for acquisition of rolling stock assets. During 1996-97 to 1999-2000, the company also obtained assets on lease from certain FI’s/banks and sub-leased the same to the MOR. All the lease and sub-lease transactions are in the nature of finance leases.

    2. Accounting treatment followed by the company:

    (i) Lease transactions

    · Upto the accounting year 2000-01, the company was following the ‘Guidance Note on Accounting for Leases’, issued by the Institute of Chartered Accountants of India. As per the provisions of the Guidance Note, the assets acquired by the company were capitalised in its books as fixed assets, depreciation was charged on such fixed assets, the gross lease rent received was accounted for in the profit and loss account, and lease adjustment account and lease equalisation account were operated from year to year.

    · Accounting Standard (AS) 19, ‘Leases’, issued by the Institute of Chartered Accountants of India, which came into effect in respect of all assets leased during accounting periods commencing on or after 01.04.2001, was adopted by the company from the accounting year 2001-02. The accounting policies with respect to leased assets were changed to correspond to the requirements of AS 19.

    · Since the application of AS 19 has been made optional for earlier years, the company adopted AS 19 for all the assets acquired and leased since inception, and reflected the change in accounting in its annual accounts for the year 2001-02.

    (ii) Lease and sub-lease transactions

    · In the case of assets obtained on lease from other FI’s/banks and sub-leased to the MOR, the gross lease rentals received and the lease rentals paid were accounted for as income and expenditure respectively in the profit and loss account, and the details of leases were explained in the ‘Notes to the accounts’.

    · Since all such transactions were entered into prior to 01.04.2001, the period for which the application of AS 19 was optional and also since the sub-leased assets were not capitalised in the books of account, the company continued with the accounting treatment provided in the ‘Guidance Note’. Sub-leasing was an off - balance sheet item and the details thereof were fully disclosed in the notes to accounts.

    3. For the year 2001-02, when the company adopted AS 19 for the first time, the statutory auditors agreed with the accounting treatment adopted by the company for lease and sub-lease transactions. However, the statutory auditors of the company, who conducted the audit for the year 2002-03, are of the opinion that the company is mandatorily required to comply with the accounting treatment provided in AS 19 in respect of sub-lease transactions also. The company has maintained that since all the sub- lease transactions were entered into prior to 01.04.2001, AS 19 is not mandatory and the company has continued to follow, according to the querist, the then mandatory ‘Guidance Note on Accounting for Leases’ for such sub-lease transactions.

    B . Query

    4. The querist has sought the opinion of the Expert Advisory Committee as to whether the following accounting treatment adopted by the company during 2001-02 and the subsequent years is in compliance with AS 19:

    (a) Accounting treatment provided in AS 19 for all assets acquired by the company as the lessor and leased to the MOR, including those acquired prior to 01.04.2001.

    (b) Accounting treatment provided in the ‘Guidance Note’ for assets taken on lease from other banks/financial institutions and sub- leased to the MOR prior to 01.04.2001 (No sub-lease transactions have been entered into by the company after 01.04.2001).

    C. Points considered by the Committee

    5. The Committee notes that the company in question has not entered into sub-lease transactions after 01.04.2001. Prima facie this appears to be a reason for not shifting to the method of accounting for finance leases as prescribed in AS 19 for this class of assets. The opinion of the Committee given hereafter is based on the presumption that the company has discontinued obtaining assets on finance lease for the purpose of giving it on sub-lease.


    D. Opinion

    On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 4 subject to the presumption stated in paragraph 5 above:

    (a) Accounting treatment adopted by the querist during 2001-02 and subsequent years is in compliance with AS 19 in respect of all assets acquired by it as the lessor and leased to the MOR, including those acquired prior to 1.4.2001.

    (b) An accounting policy cannot be adopted selectively for some of the transactions; however, since it appears that the company has discontinued its policy of obtaining assets on lease and then giving them on sub-lease, as a matter of exception in this particular case, accounting treatment recommended in the ‘Guidance Note’ can be continued to be followed for assets taken on lease from other banks/financial institutions and sub- leased to the MOR prior to 1.4.2001. The company should, however, give adequate disclosures in respect of the same.

    Opinion finalised by the Committee on 26.5.2004

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    Thumbs up Accounting treatment of profit on sale/lease of houses

    A. Facts of the Case

    1. A company is one of the leading steel producers with a turnover of over Rs. 16,000 crore. The company’s manpower strength in the nineties was about 2 lakh which has reduced to the prevailing level of 1.5 lakh. As part of its business restructuring, the company plans to further reduce its manpower strength to 1 lakh by the year 2005. The plants having been located at green sites with no facilities available, in order to attract manpower from across the country, the company developed large and comprehensive residential townships around its units. The company had targeted a satisfaction level of about 55% in providing housing facilities to its employees. Thus, there are about 1.3 lakh houses/flats at its townships. However, by the year 2005, with manpower strength almost halving, the steel plants would have houses and flats in excess of their requirements. Therefore, the company has launched a scheme offering specified number of constructed houses/ flats, i.e., quarters built for employees to its employees/ex-employees and spouses of deceased employees on long term lease for residential purposes at a value based on the recommendations of a valuer on ‘as is where is’ basis. The objectives of the scheme are to gainfully utilise assets created by the company while enabling welfare of employees and ex-employees and to mobilise additional resources.

    2. Other salient features of the scheme are as under:

    (a) The houses/flats in each category shall be leased to eligible persons within the number specified. The order of preference for the leasing of the houses/flats will be as under:

    - Employees (including those released under VRS-2001), i n occupation of the company’s houses/flats offered under the scheme.

    - Employees of the concerned steel plant not in occupation of the company’s houses/flats.

    - Employees of other plants/units/corporate office.

    - Spouses of deceased employees in authorised occupation of the houses/flats.

    - Ex-employees in authorised occupation of company’s houses/flats.

    - Ex-employees not in occupation of company’s houses/flats.

    (b) The houses/flats have been offered on long term lease on payment of one time lumpsum premium/consideration, initially for 33 years, renewable for two like periods. The successful allottee is required to enter into lease agreement with the lessor in the prescribed format on requisite stamp paper. The costs of documentation/ registration will be borne by the allottee.

    (c) On allotment, the allottee called ‘lessee’ is required to make all payments as specified in the offer letter within the stipulated time- frame of one month from the date of issue of the allotment order. Within three months of his making full payment, lease deed/ agreement to lease will be executed between the company and the lessee in prescribed format on requisite stamp paper at lessee’s own expenses and costs.

    (d) The company is not to entertain any complaints whatsoever regarding the cost of the flat, its design, the quality of material used, workmanship, etc. The premises will be leased on ‘as is where is basis’. The company is not responsible for any maintenance or repairs of the demised premises and of the fittings and fixtures thereto, prior to and after allotment.

    (e) The annual lease rent, service charges, etc., as prescribed by the lessor are payable during the pendency of the lease on annual basis in advance as prescribed in the lease deed to be executed between the lessee and the lessor and may be revised from time to time by the lessor. The annual lease rent shall be as indicated below:

    Plinth Area (Sq. Ft) Lease Rent/Annum (Rs.)
    Upto 400 85.00
    401-600 130.00
    601-900 200.00
    901-1400 300.00
    Above 1400 400.00

    (f) The lessee shall pay all duties, taxes and charges, as existing or
    as may be levied by the State Government, any statutory body and the lessor in future in respect of demised premises during the tenure of the lease including the duties/taxes being paid by the lessor in respect thereof.

    (g) The lessee shall pay proportionate amount as his share in respect of demised premises, as decided by the lessor, any tax/duty being paid or payable by the lessor for the entire property of the steel plant.

    (h) The lessor has the right to terminate the lease giving three months notice to the lessee in case of violation/breach of any of the terms and conditions of the lease and upon such termination, the lessor shall have the right to evict the lessee from the demised premises.

    (i) The leasehold interest in whole or in part cannot be transferred or sub-leased for a period of five years from the date of lease except under exceptional circumstances such as death of the lessee or on the lessee becoming insane and/or invalid, with the prior permission of the lessor in writing. In such cases, transfer could be considered, if it is in favour of spouse/legal heir/next of kin of the lessee.

    (j) Any transfer of the leasehold interest can only be effected with prior permission of the lessor on payment of the requisite transfer fee as may be prescribed by the lessor. In case of such transfer, the sub-lease shall be governed by the same terms and conditions as the original lease. In addition to the transfer fee, the lessee would also be required to pay to the lessor, 15% of the capital gain or 10% of the initial premium, whichever is higher, at the time of such transfer of leasehold interest in the property for executing the transfer. This will however, not be applicable to a transfer made to the spouse/legal heir/next of kin of the lessee.

    (k) The company is to maintain the common basic infrastructural facilities (wherever municipal services are not available) on payment of annual service charges by the lessee in advance for the full financial year, which shall be notified from time to time.

    (l) The company is to, subject to availability, supply water and electricity wherever municipal services/alternate arrangements are not available. The electricity charges shall be recovered from the lessee based on actual consumption. The charges towards water, electricity, service charges and lease rent, etc., shall be levied from the date of the lease agreement and will be reviewed by the company, as and when required.

    3. The houses are being leased based on the fair market value determined by the valuer by taking representative samples for various types of houses at each of the townships. For valuation of building, the cost of replacement of dwelling units has been considered on the basis of per square foot as per the present market rates of materials and labour in the neighbourhood. The cost per square foot for different types of dwelling units has been arrived at after considering the plan, type of structure and other features, which are relevant.

    4. As per the querist, Accounting Standard (AS) 19, ‘Leases’, may not be applicable to the scheme in question as the buildings are being transferred alongwith the land thereof, and the referred Standard does not apply to lease agreements for use of land. Further, the querist has made the following observations:

    (a) Finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. The ownership of houses is being immediately transferred to the lessee on receipt of consideration, whereas as per the Standard in respect of the finance lease the ownership of assets is transferred by the end of lease term.

    (b) As per the company’s scheme, the lessee has to purchase the house at a price based on fair value (present value) fixed by the valuer considering numerous factors and does not take into consideration any implicit interest rate to determine the discount rate for arriving at the aggregate present value of the dwelling unit.

    (c) Under the scheme, there is no consideration with regard to the economic life of asset which may vary from house to house.

    5. According to the querist, though legally, the house is given on lease basis, the period of lease is fairly long and, for all practical purposes, the transaction amounts to passing of the property to the lessee and the significant rights of ownership in the houses are passed on to the purchaser immediately on payment of the consideration and allotting the house to the employee/ex- employee. Thus, the company’s scheme may not fall under the category of operating lease also.

    6. The querist has further argued that the transactions and other events are required to be 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, the substance and financial reality are that the lessee acquires the economic benefits of the leased house for the major part of its economic life in return for payment of lumpsum consideration. Thus, it is substantially and effectively transfer of property (land and building) for all practical purposes.

    7. On the basis of the above, according to the querist, the transfer/leasing of houses is being considered by the company as outright sale and the treatment
    of profit arising thereon is as per the policy followed for normal sales. On the basis of issue of allotment letters to the applicants and premium/consideration received, the difference between the fair value and book value of the dwelling unit is being recognised as ‘Profit on sale/lease of houses’ in the accounts and the book value of the houses is removed from the fixed assets.

    B . Query

    8. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

    (a) Whether AS 19 is applicable to transactions relating to sale/lease of houses, alongwith the land, entered into by the company.

    (b) Whether the accounting practice followed by the company with regard to recognition of difference between the lumpsum consideration on sale of house and book value as income is proper.

    (c) What disclosure (including any specific accounting policy) should be made in the accounts of the company with regard to transactions relating to sale/lease of houses.

    D. Opinion

    On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 8:

    (a) The composite contract of land and building, viz., houses/flats should be bifurcated between the two components. AS 19 is applicable to transactions relating to lease of buildings, viz., houses/flats, on long term lease for residential purposes. However, AS 19 clearly provides that it does not apply to lease agreements to use lands.

    (b) The accounting practice followed by the company with regard to recognition of income on lease of houses is proper.

    (c) The following disclosures should be made in the accounts of the company with regard to transactions relating to sale/lease of houses:

    (i) a general description of the leasing arrangements of the lessor, and

    (ii) the accounting policy adopted in respect of initial direct costs, if any.




    Opinion finalised by the Committee on 26.4.2002.

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    Post Exposure Draft Accounting Standard 19 (Revised 20XX) Leases

    Exposure Draft
    Accounting Standard 19
    (Revised 20XX)

    (Corresponding to IAS 17)
    Leases
    The following is the Exposure Draft of the Accounting Standard (AS) 19 (Revised 20XX), Leases, issued by the Accounting Standards Board of the Institute of Chartered Accountants of India, for comments.
    This Exposure Draft of the revised Accounting Standard includes paragraphs set in
    bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles. This Exposure Draft of the revised Accounting Standard should be read in the context of its objective and the Preface to the Statements of Accounting Standards.

    Attached Files Attached Files

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