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Thread: 19 Accounting Standard 19 - Leases - AS 19

  1. #11
    Accounting Standards
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    Default Appendix of Accounting Standard (AS) 19 - Leases

    Appendix of Accounting Standard (AS) 19 - Leases


    Click Here For Appendix

    http://www.knowledgebible.com/forum/...(AS)-19-Leases

  2. #12
    Accounting Standards
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    Default 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.

  3. #13
    Accounting Standards
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    Default 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

  4. #14
    Accounting Standards
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    Default 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.

  5. #15
    Accounting Standards
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    Default Exposure Draft of Accounting Standard 19 - Leases - AS 19

    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. The Board invites comments on any aspect of this Exposure Draft. Comments are most helpful if they indicate the specific paragraph or group of paragraphs to which they relate, contain a clear rationale and, where applicable, provide a suggestion for alternative wording.


    Comments should be submitted in writing to the Secretary, Accounting Standards Board, The Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi – 110 002, so as to be received not later than April 22, 2010. Comments can also be sent by e-mail at edcommentsasb@icai.org or asb@icai.org.


    (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).

  6. #16
    Accounting Standards
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    Default Objective of Accounting Standard 19 Leases – AS 19

    Objective of of Accounting Standard 19 Leases – AS 19


    1 The objective of this Standard is to prescribe, for lessees and lessors, the appropriate accounting policies and disclosure to apply in relation to leases.

  7. #17
    Accounting Standards
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    Default Scope of Accounting Standard 19 Leases – AS 19

    Scope of Accounting Standard 19 Leases – AS 19


    2 This Standard shall be applied in accounting for all leases other than:


    (a) leases to explore for or use minerals, oil, natural gas and similar nonregenerative resources; and

    (b) licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and copyrights. However, this Standard shall not be applied as the basis of measurement for:

    (a) property held by lessees that is accounted for as investment property (see AS 37 (Issued 20XX) Investment Property);

    (b) investment property provided by lessors under operating leases (see AS 37 (issued Investment Property);

    (c) biological assets held by lessees under finance leases (see AS XX Agriculture); or

    (d) biological assets provided by lessors under operating leases (see AS XX Agriculture).


    3 This Standard 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. This Standard 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.

  8. #18
    Accounting Standards
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    Default Definitions of Accounting Standard 19 Leases – AS 19

    Definitions of Accounting Standard (AS) 19 - Leases

    4 The following terms are used in this Standard 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 incidental to ownership of an asset. Title may or may not eventually be transferred.


    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;
    (b) with the permission of the lessor;
    (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 such an additional amount that, at inception of the lease, 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 commitment by the parties to the principal provisions of the lease. As at this date:


    (a) a lease is classified as either an operating or a finance lease; and

    (b) in the case of a finance lease, the amounts to be recognised at the commencement of the lease term are determined.

    The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. It is the date of initial recognition of the lease (ie the recognition of the assets, liabilities, income or expenses resulting from the lease, as appropriate).


    The lease term is the non-cancellable period for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the
    lessee will exercise the option. 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) for a lessee, any amounts guaranteed by the lessee or by a party related to the lessee; or

    (b) for a lessor, any residual value guaranteed to the lessor by:

    (i) the lessee;
    (ii) a party related to the lessee; or
    (iii) a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee. However, if the lessee has an option to purchase the asset at a price that is
    expected to be sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised, the minimum lease payments comprise the minimum payments payable over the lease term to the expected
    date of exercise of this purchase option and the payment required to exercise it.


    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 is the estimated remaining period, from the commencement of the lease term, without limitation by the lease term, over which the economic benefits embodied in the asset are expected to be consumed by the entity.

    Guaranteed residual value is:

    (a) for a lessee, that part of the residual value that is guaranteed by the lessee or by a party related to the lessee (the amount of the guarantee being the maximum amount that could, in any event, become payable); and

    (b) for a lessor, that part of the residual value that is guaranteed by the lessee or by a third party unrelated to the lessor that is financially capable of discharging the obligations under the guarantee.
    Unguaranteed residual value is that portion of the residual value of the leased asset, the realisation of which by the lessor is not assured or is guaranteed solely by a party related to the lessor.
    Initial direct costs are incremental costs that are directly attributable to negotiating and arranging a lease, except for such costs incurred by manufacturer or dealer lessors.

    Gross investment in the lease is the aggregate of:

    (a) the minimum lease payments receivable by the lessor under a finance lease, and

    (b) any unguaranteed residual value accruing to the lessor. Net investment in the lease is the gross investment in the lease discounted at the interest rate implicit in the lease.
    Unearned finance income is the difference between:

    (a) the gross investment in the lease, and

    (b) the net investment in the 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 and (b) the unguaranteed residual value to be equal to the sum of (i) the fair value of the leased asset and (ii) any initial direct costs of the lessor.


    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 the future amount of a factor that changes other than with the passage of time (eg percentage of future sales, amount of future use, future price indices, future market rates of interest).


    5 A lease agreement or commitment may include a provision to adjust the lease payments for changes in the construction or acquisition cost of the leased property or for changes in some other measure of cost or value, such as general price levels, or in the lessor’s costs of financing the lease, during the period between the inception of the lease and the commencement of the lease term. If so, the effect of any such changes shall be deemed to have taken place at the inception of the lease for the purposes of this Standard.


    6 The definition of a lease includes contracts for the hire of an asset that contain a provision giving the hirer an option to acquire title to the asset upon the fulfilment of agreed conditions. These contracts are sometimes known as hire purchase contracts.

  9. #19
    Accounting Standards
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    Default Classification of leases of Accounting Standard 19 - AS 19

    Classification of leases


    7 The classification of leases adopted in this Standard is based on the extent to which risks and rewards incidental 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 because of changing economic conditions. Rewards may be represented by the expectation of profitable operation over the asset’s economic life and of gain from appreciation in value or realisation of a residual value.

    8 A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.


    9 Because the transaction between a lessor and a lessee is based on a lease agreement between them, it is appropriate to use consistent definitions. The application of these definitions to the differing circumstances of the lessor and lessee may result in the same lease being classified differently by them. For example, this may be the case if the lessor benefits from a residual value
    guarantee provided by a party unrelated to the lessee.

    10 Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract.* Examples of situations that individually or in combination 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 that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised;

    (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 assets are of such a specialised nature that only the lessee can use them without major modifications.

    11 Indicators of situations that 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 from the fluctuation in the fair value of the residual accrue 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 has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent.

    12 The examples and indicators in paragraphs 10 and 11 are not always conclusive. If it is clear from other features that the lease does not transfer substantially all risks and rewards incidental to ownership, the lease is classified as an operating lease. For example, this may be the case if ownership of the asset transfers at the end of the lease for a variable payment equal to its then fair value, or if there are contingent rents, as a result of which the lessee does not have substantially all
    such risks and rewards.

    13 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 7-12 if the changed terms had been in effect at the inception of the lease, the revised agreement is regarded as a new agreement over its term. However, changes in estimates (for example, changes in
    estimates of the economic life or of the residual value of the leased property), or changes in circumstances (for example, default by the lessee), do not give rise to a new classification of a lease for accounting purposes.

    14 [Deleted].

    15 [Deleted].

    15A When a lease includes both land and buildings elements, an entity assesses the classification of each element as a finance or an operating lease separately in accordance with paragraphs 7–13. In determining whether the land element is an operating or a finance lease, an important consideration is that land normally has an indefinite economic life.

    16 Whenever necessary in order to classify and account for a lease of land and buildings, the minimum lease payments (including any lump-sum upfront payments) are allocated between the land and the buildings elements in proportion to the relative fair values of the leasehold interests in the land element and buildings element of the lease at the inception of the lease. If the lease payments
    cannot be allocated reliably between these two elements, the entire lease is classified as a finance lease, unless it is clear that both elements are operating leases, in which case the entire lease is classified as an operating lease.

    17 For a lease of land and buildings in which the amount that would initially be recognised for the land element, in accordance with paragraph 20, is immaterial, the land and buildings may be treated as a single unit for the purpose of lease classification and classified as a finance or operating lease in accordance with paragraphs 7-13. In such a case, the economic life of the buildings is regarded as
    the economic life of the entire leased asset.

    18 Separate measurement of the land and buildings elements is not required when the lessee’s interest in both land and buildings is classified as an investment property in accordance with AS 37 (Issued 20XX) Investment Property and the fair value model is adopted. Detailed calculations are required for this assessment only if the classification of one or both elements is otherwise uncertain.

    19 In accordance with AS 37 (Issued 20XX) Investment Property, it is possible for a lessee to classify a property interest held under an operating lease as an investment property. If it does, the property interest is accounted for as if it were a finance lease and, in addition, the fair value model is used for the asset recognised. The lessee shall continue to account for the lease as a finance lease, even if a subsequent event changes the nature of the lessee’s property interest so that it is no longer classified as investment property. This will be the case if, for example, the lessee:

    (a) occupies the property, which is then transferred to owner-occupied property at a deemed cost equal to its fair value at the date of change in use; or

    (b) grants a sublease that transfers substantially all of the risks and rewards incidental to ownership of the interest to an unrelated third party. Such a sublease is accounted for by the lessee as a finance lease to the third party, although it may be accounted for as an operating lease by the third party.

  10. #20
    Accounting Standards
    Guest

    Default Leases in the financial statements of lessees Finance leases of Accounting Standard 19 Leases – AS 19

    Leases in the financial statements of lessees Finance leases of Accounting Standard 19 Leases – AS 19


    Initial recognition

    20 At the commencement of the lease term, lessees shall recognise finance leases as assets and liabilities in their balance sheets at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease. The discount rate to be used in calculating the present value of the minimum lease
    payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee’s incremental borrowing rate shall be used. Any initial direct costs of the lessee are added to the amount recognised as an asset.


    21 Transactions and other events are accounted for and presented in accordance with their substance and financial reality and not merely with legal form. Although 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, at the inception of the lease, the fair value of
    the asset and the related finance charge.

    22 If such lease transactions are not reflected in the lessee’s balance sheet, the economic resources and the level of obligations of an entity are understated, thereby distorting financial ratios. Therefore, it is appropriate for a finance lease to be recognised in the lessee’s balance sheet both as an asset and as an obligation to pay future lease payments. At the commencement of the lease term, the asset and the liability for the future lease payments are recognised in the balance sheet at the same amounts except for any initial direct costs of the lessee that are added to the amount recognised as an asset.

    23 It is not appropriate for the liabilities for leased assets to be presented in the financial statements as a deduction from the leased assets. If for the presentation of liabilities in the balance sheet a distinction is made between current and noncurrent liabilities, the same distinction is made for lease liabilities.

    24 Initial direct costs are often incurred in connection with specific leasing activities, such as negotiating and securing leasing arrangements. The costs identified as directly attributable to activities performed by the lessee for a finance lease are added to the amount recognised as an asset.

    Subsequent measurement

    25 Minimum lease payments shall be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge shall be allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

    Contingent rents shall be charged as expenses in the periods in which they are incurred.

    26 In practice, in allocating the finance charge to periods during the lease term, a lessee may use some form of approximation to simplify the calculation.


    27 A finance lease gives rise to depreciation expense for depreciable assets as well as finance expense for each accounting period. The depreciation policy for depreciable leased assets shall be consistent with that for depreciable assets that are owned, and the depreciation recognised shall be calculated in accordance with AS 10(Revised 20XX) Property, Plant and Equipment and AS 26(Revised 20XX) Intangible Assets. If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the asset shall be fully depreciated over the shorter of the lease term and its useful life.

    28 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 shorter of the lease term and its useful life.


    29 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. Accordingly, the asset and the related liability are unlikely to be equal in amount after the commencement of the lease term.

    30 To determine whether a leased asset has become impaired, an entity applies AS 28(Revised 20XX) Impairment of Assets.

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