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Thread: 19 Accounting Standard 19 - Leases - AS 19

  1. #21
    Accounting Standards
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    Default Disclosures of Accounting Standard 19 Leases – AS 19

    Disclosures of Accounting Standard 19 Leases – AS 19


    31 Lessees shall, in addition to meeting the requirements of AS 32(Revised 20XX) Financial Instruments: Disclosures, make the following disclosures for finance leases:


    (a) for each class of asset, the net carrying amount at the end of the reporting period.

    (b) a reconciliation between the total of future minimum lease payments at the end of the reporting period, and their present value. In addition, an entity shall disclose the total of future minimum lease payments at the end of the reporting period, 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.


    (c) contingent rents recognised as an expense in the period.

    (d) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period.


    (e) a general description of the lessee’s material leasing arrangements including, but not limited to, the following:


    (i) the basis on which contingent rent payable is determined;
    (ii) the existence and terms of renewal or purchase options and escalation clauses; and
    (iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and further leasing.

    32 In addition, the requirements for disclosure in accordance with AS 10(Revised 20XX), AS 28(Revised 20XX), AS 26(Revised 20XX), AS XX Investment Property and AS XX Agriculture apply to lessees for assets leased under finance leases.

  2. #22
    Accounting Standards
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    Default Operating leases of Accounting Standard 19 Leases – AS 19

    Operating leases of of Accounting Standard 19 Leases – AS 19


    33 Lease payments under an operating lease shall be recognised as an expense on a straight-line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.


    34 For operating leases, lease payments (excluding costs for services such as insurance and maintenance) are recognised as an expense on a straight-line basis unless another systematic basis is representative of the time pattern of the user’s benefit, even if the payments are not on that basis.

    Disclosures

    35 Lessees shall, in addition to meeting the requirements of AS 32(Revised 20XX), make the following disclosures for operating leases:

    (a) the total of future minimum lease payments under non-cancellable operating leases 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.


    (b) the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the reporting period.


    (c) lease and sublease payments recognised as an expense in the period, with separate amounts for minimum lease payments, contingent rents, and sublease payments.


    (d) a general description of the lessee’s significant leasing arrangements including, but not limited to, the following:

    (i) the basis on which contingent rent payable is determined;
    (ii) the existence and terms of renewal or purchase options and escalation clauses; and
    (iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt and further leasing.

  3. #23
    Accounting Standards
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    Default Leases in the financial statements of lessors of Accounting Standard 19 Leases – AS 19

    Leases in the financial statements of lessors of Accounting Standard 19 Leases – AS 19


    Finance leases

    Initial recognition

    36 Lessors shall recognise assets held under a finance lease in their balance sheets and present them as a receivable at an amount equal to the net investment in the lease.


    37 Under a finance lease substantially all the risks and rewards incidental to legal ownership are transferred by the lessor, and thus the lease payment receivable is treated by the lessor as repayment of principal and finance income to reimburse and reward the lessor for its investment and services.


    38 Initial direct costs are often incurred by lessors and include amounts such as commissions, legal fees and internal costs that are incremental and directly attributable to negotiating and arranging a lease. They exclude general overheads such as those incurred by a sales and marketing team. For finance leases other than those involving manufacturer or dealer lessors, initial direct costs are
    included in the initial measurement of the finance lease receivable and reduce the amount of income recognised over the lease term. The interest rate implicit in the lease is defined in such a way that the initial direct costs are included automatically in the finance lease receivable; there is no need to add them separately. Costs incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease are excluded from the definition of initial direct costs. As a result, they are excluded from the net investment in the lease and are recognised as an expense when the selling profit is recognised, which for a finance lease is normally at the commencement of the lease term.

    Subsequent measurement

    39 The recognition of finance income shall be based on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease.

    40 A lessor aims to allocate finance income over the lease term on a systematic and rational basis. This income allocation is based on a pattern reflecting a constant periodic return on the lessor’s net investment in the finance lease. Lease payments relating to the period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and the unearned finance income.

    41 Estimated unguaranteed residual values used in computing the lessor’s gross investment in the lease are reviewed regularly. If there has been a reduction in the estimated unguaranteed residual value, the income allocation over the lease term is revised and any reduction in respect of amounts accrued is recognised immediately.

    41A An asset under a finance lease that is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with AS 24(Revised 20XX) Non-current Assets Held for Sale and Discontinued Operations shall be accounted for in accordance with that Standard.


    42 Manufacturer or dealer lessors shall recognise selling profit or loss in the period, in accordance with the policy followed by the entity for outright sales. If artificially low rates of interest are quoted, selling profit shall be restricted to that which would apply if a market rate of interest were charged. Costs incurred by manufacturer or dealer lessors in connection with negotiating and arranging a lease shall be recognised as an expense when the selling profit is recognised.

    43 Manufacturers or dealers often offer to customers the choice of either buying or leasing an asset. A finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of income:

    (a) profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts; and


    (b) finance income over the lease term.


    44 The sales revenue recognised at the commencement of the lease term by a manufacturer or dealer lessor is the fair value of the asset, or, if lower, the present value of the minimum lease payments accruing to the lessor, computed at a market rate of interest. The cost of sale recognised at the commencement of the lease term is the cost, or carrying amount if different, of the leased property less the present value of the unguaranteed residual value. The difference between the
    sales revenue and the cost of sale is the selling profit, which is recognised in accordance with the entity’s policy for outright sales.

    45 Manufacturer or dealer lessors sometimes quote artificially low rates of interest in order to attract customers. The use of such a rate would result in an excessive portion of the total income from the transaction being recognised at the time of sale. If artificially low rates of interest are quoted, selling profit is restricted to that which would apply if a market rate of interest were charged.

    46 Costs incurred by a manufacturer or dealer lessor in connection with negotiating and arranging a finance lease are recognised as an expense at the commencement of the lease term because they are mainly related to earning the manufacturer’s or dealer’s selling profit.

    Disclosures


    47 Lessors shall, in addition to meeting the requirements in AS 32(Revised 20XX), disclose the following for finance leases:

    (a) a reconciliation between the gross investment in the lease at the end of the reporting period, and the present value of minimum lease payments receivable at the end of the reporting period. In addition, an entity shall disclose the gross investment in the lease and the present value of minimum lease payments receivable at the end of the reporting period, 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.

    (b) unearned finance income.

    (c) the unguaranteed residual values accruing to the benefit of the lessor.

    (d) the accumulated allowance for uncollectible minimum lease payments receivable.

    (e) contingent rents recognised as income in the period.

    (f) a general description of the lessor’s material leasing arrangements.


    48 As an indicator of growth it is often useful also to disclose the gross investment less unearned income in new business added during the period, after deducting the relevant amounts for cancelled leases.

  4. #24
    Accounting Standards
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    Default Operating leases of Accounting Standard 19 Leases – AS 19

    Operating leases of Accounting Standard 19 Leases – AS 19


    49 Lessors shall present assets subject to operating leases in their balance sheet according to the nature of the asset.

    50 Lease income from operating leases shall be recognised in income on a straight-line basis over the lease term, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.


    51 Costs, including depreciation, incurred in earning the lease income are recognised as an expense. Lease income (excluding receipts for services provided such as insurance and maintenance) is recognised on a straight-line basis over the lease term even if the receipts are not on such a basis, unless another systematic basis is more representative of the time pattern in which use benefit derived from the leased asset is diminished.


    52 Initial direct costs incurred by lessors in negotiating and arranging an operating lease shall be added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income.


    53 The depreciation policy for depreciable leased assets shall be consistent with the lessor’s normal depreciation policy for similar assets, and depreciation shall be calculated in accordance with AS 10(Revised 20XX) and AS 26 (Revised 20XX).


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


    55 A manufacturer or dealer lessor does not recognise any selling profit on entering into an operating lease because it is not the equivalent of a sale.


    Disclosures


    56 Lessors shall, in addition to meeting the requirements of AS 32(Revised 20XX), disclose the following for operating leases:

    (a) the future minimum lease payments under non-cancellable operating leases in the aggregate and 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.

    (b) total contingent rents recognised as income in the period.

    (c) a general description of the lessor’s leasing arrangements. 57 In addition, the disclosure requirements in AS 10(Revised 20XX), AS 28(Revised 20XX), AS 26 (Revised 20XX), AS 37 (Issued 20XX) Investment Property and AS XX Agriculture apply to lessors for assets provided under operating leases.

  5. #25
    Accounting Standards
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    Default Sale and leaseback transactions of Accounting Standard 19 Leases – AS 19

    Sale and leaseback transactions of Accounting Standard 19 Leases – AS 19

    58 A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. The lease payment and the sale price are usually interdependent because they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved.

    59 If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over the carrying amount shall not be immediately recognised as income by a seller-lessee. Instead, it shall be deferred and amortised over the lease term.


    60 If the leaseback is a finance lease, the transaction is a means whereby the lessor provides finance to the lessee, with the asset as security. For this reason it is not appropriate to regard an excess of sales proceeds over the carrying amount as income. Such excess is deferred and amortised over the lease term.

    61 If a sale and leaseback transaction results in an operating lease, and it is clear that the transaction is established at fair value, any profit or loss shall be recognised immediately. If the sale price is below fair value, any profit or loss shall be recognised immediately except that, if the loss is compensated for by future lease payments at below market price, it shall be deferred and
    amortised in proportion to the lease payments over the period for which the asset is expected to be used. If the sale price is above fair value, the excess over fair value shall be deferred and amortised over the period for which the asset is expected to be used.


    62 If the leaseback is an operating lease, and the lease payments and the sale price are at fair value, there has in effect been a normal sale transaction and any profit or loss is recognised immediately.

    63 For operating leases, if the fair value at the time of a sale and lease back transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value shall be recognised immediately.


    64 For finance leases, no such adjustment is necessary unless there has been an impairment in value, in which case the carrying amount is reduced to recoverable amount in accordance with AS 28(Revised 20XX).


    65 Disclosure requirements for lessees and lessors apply equally to sale and leaseback transactions. The required description of material leasing arrangements leads to disclosure of unique or unusual provisions of the agreement or terms of the sale and leaseback transactions.

    66 Sale and leaseback transactions may trigger the separate disclosure criteria in AS 1(Revised 20XX) Presentation of Financial Statements.

  6. #26
    Accounting Standards
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    Default Effective date of Accounting Standard 19 Leases – AS 19

    Effective date of Accounting Standard 19 Leases – AS 19

    69 An entity to which this Accounting Standard is applicable shall apply it for accounting periods commencing on or after the date (to be announced separately) and will be mandatory in nature3 from that date.

  7. #27
    Accounting Standards
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    Default Appendix A of Accounting Standard 19 Leases – AS 19

    Appendix A

    Operating Leases—Incentives

    (Corresponding to SIC15)

    This appendix is an integral part of the Standard.

    Issue


    1 In negotiating a new or renewed operating lease, the lessor may provide incentives for the lessee to enter into the agreement. Examples of such incentives are an up-front cash payment to the lessee or the reimbursement or assumption by the lessor of costs of the lessee (such as relocation costs, leasehold improvements and costs associated with a pre-existing lease commitment of the lessee). Alternatively, initial periods of the lease term may be agreed to be rent-free or at a
    reduced rent.

    2 The issue is how incentives in an operating lease should be recognised in the financial statements of both the lessee and the lessor.

  8. #28
    Accounting Standards
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    Default Principles of Appendix of Accounting Standard 19 Leases – AS 19

    Principles of Appendix of Accounting Standard 19 Leases – AS 19


    3 All incentives for the agreement of a new or renewed operating lease shall be recognised as an integral part of the net consideration agreed for the use of the leased asset, irrespective of the incentive’s nature or form or the timing of payments.

    4 The lessor shall recognise the aggregate cost of incentives as a reduction of rental income over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern over which the benefit of the leased asset is diminished.


    5 The lessee shall recognise the aggregate benefit of incentives as a reduction of rental expense over the lease term, on a straight-line basis unless another systematic basis is representative of the time pattern of the lessee’s benefit from the use of the leased asset.

    6 Costs incurred by the lessee, including costs in connection with a pre-existing lease (for example costs for termination, relocation or leasehold improvements), shall be accounted for by the lessee in accordance with the Standards applicable to those costs, including costs which are effectively reimbursed through an incentive arrangement.
    Last edited by Accounting Standards; 13-08-2010 at 04:46 PM.

  9. #29
    Accounting Standards
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    Default Example application of Appendix A of Accounting Standard 19 Leases – AS 19

    Example application of Appendix A of Accounting Standard 19 Leases – AS 19

    The following examples accompany, but are not part of, Appendix A.

    Example 1

    An entity agrees to enter into a new lease arrangement with a new lessor. The lessor agrees to pay the lessee’s relocation costs as an incentive to the lessee for entering into the new lease. The lessee’s moving costs are Rs. 1,000. The new lease has a term of 10 years, at a fixed rate of Rs. 2,000 per year.


    The accounting is:

    The lessee recognises relocation costs of Rs.1,000 as an expense in Year 1. Net consideration of Rs. 19,000 consists of Rs.2,000 for each of the 10 years in the lease term, less a Rs.1,000 incentive for relocation costs. Both the lessor and lessee would recognise the net rental consideration of Rs.19,000 over the 10 year lease term using a single amortisation method in accordance with paragraphs 4 and 5 of this appendix.




    Example 2

    An entity agrees to enter into a new lease arrangement with a new lessor. The lessor agrees to a rent-free period for the first three years as incentive to the lessee for entering into the new lease. The new lease has a term of 20 years, at a fixed rate of Rs. 5,000 per year for years 4 through 20.
    The accounting is:

    Net consideration of Rs.85,000 consists of 5,000 for each of 17 years in the lease term. Both the lessor and lessee would recognise the net consideration of Rs. 85,000 over the 20 year lease term using a single amortisation method in accordance with paragraphs 4 and 5 of this appendix.

  10. #30
    Accounting Standards
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    Default Appendix B of Accounting Standard 19 Leases – AS 19

    Appendix B of Accounting Standard 19 Leases – AS 19

    Evaluating the Substance of Transactions Involving the Legal

    Form of a Lease

    (Corresponding to SIC 27)

    (This appendix is an integral part of the Standard.)

    Issue


    1 An Entity may enter into a transaction or a series of structured transactions (an arrangement) with an unrelated party or parties (an Investor) that involves the legal form of a lease. For example, an Entity may lease assets to an Investor and lease the same assets back, or alternatively, legally sell assets and lease the same assets back. The form of each arrangement and its terms and conditions can vary significantly. In the lease and leaseback example, it may be that the arrangement is designed to achieve a tax advantage for the Investor that is shared with the Entity in the form of a fee, and not to convey the right to use an asset.


    2 When an arrangement with an Investor involves the legal form of a lease, the issues are:

    (a) how to determine whether a series of transactions is linked and should be accounted for as one transaction;

    (b) whether the arrangement meets the definition of a lease under AS 19 (Revised 20XX); and, if not,

    (i) whether a separate investment account and lease payment obligations that might exist represent assets and liabilities of the Entity (eg consider the example described in paragraph A2(a) of
    ‘Examples for linked transactions’ given at the end of this appendix);

    (ii) how the Entity should account for other obligations resulting from the arrangement; and

    (iii) how the Entity should account for a fee it might receive from an Investor.

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