Prior to 1.04.

2001 the Guidance Note on Accounting for Leases

was applicable on leasing industries. This Guidance Note was

based on the matching principle i.e. the periodic costs comprising of depreciation and lease equalization charges were recommended

to be matched with lease rentals so that the net income from a

finance lease will show a true and fair view. For this Lease Equalization Reserve used to be created.

Lease means transfer of rights to use assets for a specified period of

time against the consideration or a series of consideration. Rights to Use Asset Lessee Lessor

Consideration

The objective of this accounting standard is to prescribe for lessees and lessors, the appropriate lease or operating lease. accounting policies and disclosures in relation to all assets leased that may be finance

Accounting provided in this AS is based on SUBSTANCE of the

transaction rather than on FORM.

AS-19 does not apply to the followings:(a) Lease agreement for natural resources such as oil, gas, timber, metals and mineral rights. (b) Licensing agreements for items such as motion picture films, video recordings, patents, manuscripts and copyrights. (c) Lease agreement to use land.

(d) Agreements for contracts for services that do not transfer the
right to use assets. Example- Use of Taxi

FINANCE LEASE
A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset.

INDICATORS OF FINANCE LEASE

Transfer of ownership at the end of lease term.

Where lessee has purchased the option at very reduced rates and lessee is
certain to opt for this purchase option at the inception. Where lease term covers substantial period of economic life of the asset. Where amount paid as lease rentals in terms of P.V. is equal to the fair value of the asset. Where asset is of specialized nature and cannot be used by person other than lessee without making major modifications.

INDICATORS OF FINANCE LEASE

Long term lease Where lease transfers substantially all the risks and rewards incidental to ownership. Title may or may not eventually be transferred. Where lease cannot be cancelled or can be cancelled only if the lessor is reimbursed for any losses. Where lessee is required to take the risk of obsolescence. Where cost of maintenance, taxes and insurance are to be incurred by the lessee unless the contract so provide for.

Minimum lease payments MLP from standpoint of Lessee= Minimum Rent + Residual value guaranteed by or on behalf of the lessee. MLP from standpoint of Lessor= Minimum Rent + Residual value guaranteed by or on behalf of the lessee or by an independent party.

Gross Investment in the lease Gross investment= MLP from the standpoint of lessor+ Unguaranteed residual value Unearned Finance Income Gross investment in the lease Less: P.V. of MLP from the standpoint of Lessor Less: P.V. of unguaranteed residual value

Net Investment in the lease:Gross Investment in the lease Unearned Finance Income

Interest rate implicit in the lease (IRR) It is a discount rate which equates Gross Investment in the lease to the fair value of the leased asset.

Contingent Rent

It is that portion of the lease payments that is not fixed in amount but is based on production or rendering of services. E.g. Percentage of sales.
NOTE- MLP from Lessee does not include Contingent Rent.

This can be explained with the help of an illustrationFair value of the machinery `2,35,500 Lease Term 3 years Lease Rent `1,00,000 Guaranteed Residual Value by lessee ` 17000 Implicit Rate of Interest 16% p.a. Method of Depreciation SLM
The amount of depreciation charged is equal to ` 72,833

(2,35,500-17,000/3)

Amount in ` Year 1 2 3 Lease receivable 2,35,500 1,73,180 1,00,890 Installment 1,00,000 1,00,000 1,00,000 Finance Income (Lease receivable x 16%) 37,680 27,710 16,140 Balance Sheet Principal 62,320 72,290 83,860 Closing Balance 1,73,180 1,00,890 17,030

Profit & Loss Account

Year 1 Year 2 Year 3 1,73,180

By Finance income 37,680 By Finance income 27,710 By Finance income 16,140

Asset (Year 1) Lease Rent Receivable 2,35,500 (-)Lease rent received 62,320

(Amount in `) Year Lease Rental payable 2,35,500 Installment Finance charges (Lease rental payable x 16%) 37,680 Repayment of liability 62,320 Closing balance 1,73,180

1,00,000

2
3

1,73,180
1,00,890

1,00,000
1,00,000

27,710
16,140

72,290
83,860

1,00,890
17,030

Charge in Profit and Loss Year 1 2 3 Finance Charges 37,680 27,710 16,140 GRAND TOTAL Depreciation 72,833 72,833 72,834

(Amount in `) Total 1,10,513 1,00,543 88,974 3,00,030

Balance Sheet
Liability Asset

1st year O/s Liability 2,35,500 (-) Repayment of Liab. 62,320 1,73,180 2nd year O/s Liability 1,73,180 (-) Repayment of Liab. 72,290 1,00,890 3rd year O/s Liability 1,00,890 (-) Repayment of Liab. 83,860 17,030

Machinery 2,35,500 (-)Depreciation 72,833 1,62,667 Machinery 1,62,667 (-)Depreciation 72,833 89,834 Machinery 89,834 (-)Depreciation 72,834 17,000

A lease other than a finance lease or where indicators of finance lease do not exist, such type of lease shall be classified as operating

lease.
INDICATORS OF OPERATING LEASE

Short term lease Where lease does not transfer substantially all the risks and rewards incidental to ownership. Where cost of maintenance, taxes and insurance are to incurred by the lessor. Where the lessee is protected against the risk of obsolescence.

Accounting treatment for operating lease:From Lessees point of view

Lease rental paid/payable by lessee should be recognized as an expense on systematic basis. Systematic basis means an expense should be recorded as and when benefits are availed. When systematic basis cannot be identified then

straight-line method is used for recording the expenses.

From Lessors point of view

Lease rental received/receivable by lessor should be recognized as an

income on systematic basis. If same cannot be identified then straight-line

method is used for recording the incomes.

A sale and leaseback transaction involves the sale of an asset by the vendor and leasing of the same asset back to the vendor.
SALE AND LEASEBACK

SALE AND FINANCE LEASEBACK

SALE AND OPERATING LEASEBACK

CASE I

CASE II

BOOT (Build, Own, Operate, Transfer) Contracts are executed with the Government which involves private sector entity constructing the infrastructure facility on the land owned by the government and operating and maintaining that infrastructure for specified period usually 20 to 25 years. This period is referred to as the Concession Period after which ownership is transferred to the government.

BOOT transactions are outside the purview of finance lease because of the
following reasonsIt does not cover the majority of the useful life of the asset. The element of ownership is totally missing in the contract. Major portion of expenditure is incurred by the lessee. Therefore, such transactions do not qualify for Finance Lease.

The manufacturer or dealer lessor should recognize the transaction of sale in the statement of profit and loss for the period, in accordance with the policy followed by the enterprise for outright sales. If artificially low rates of interest are quoted, profit on sale should be restricted to that which would apply if a commercial rate of interest were charged. If customer Example- opts for buying of an asset
Cost of an asset Outright Sale Profit ` 1,00,000 ` 1,20,000 ` 20,000

Since Income Tax Act does not recognize the concept of Finance lease, therefore, there will be timing difference and an adjustment for deferred tax will be carried out. However, in case of operating lease accounting treatment is same as per tax laws.

Hence ,there is no difference.

TREATMENT AS PER TAX LAWS

t LEASE RENT

Deductible expenditure in the hands of Lessee.

Taxable income in the hands of Lessor. Lessor will be entitled for depreciation.

Treatment as per books in case of FINANCE LEASE

LESSEE LESSOR

Depreciation and Finance charges are debited to P&L account instead of lease rent.

Finance income is credited to P&L account instead of lease rent. Lessor will not be entitled for depreciation.

(1) Assets acquired under finance lease as segregated from the assets owned. (2) For each class of assets, the net carrying amount at the balance sheet date. (3) Contingent rent recognized as an expense in the statement of Profit & loss for the period. (4)The total of future minimum sublease payments expected to be received under non-cancellable subleases at the balance sheet date.
PERIOD (5) Lease rentals payable should be shown AMOUNT as follows:-

Disclosures in finance lease by the lessee-

0-12 months
12-60 months More than 60 months

xxx
xxx xxx

(1) Unearned Finance Income (2) The unguaranteed residual values accruing to the benefit of the lessor. (3) A general description of the significant leasing arrangements of the lessor. (4) Contingent rent recognized as an income in the statement of Profit & loss for the period. (5) Accounting policy adopted in respect of initial direct costs. (6) The total gross investment in the lease and the present value of minimum
PERIOD AMOUNT Lease payments receivable should be shown as follows:-

Disclosures in finance lease by the lessor-

0-12 months

xxx
xxx xxx

12-60 months More than 60 months

Disclosures in operating lease by the lessor(1) Accounting policy adopted in respect of initial direct costs.
(2) For each class of assets, the gross carrying amount, the accumulated depreciation and accumulated impairment losses at the balance sheet date. (3) A general description of the significant leasing arrangements.

(4) Contingent rent recognized as an income in the statement of Profit & Loss
for the period. (5) Lease rentalsPERIODbe shown as follows:- AMOUNT should

0-12 months
12-60 months More than 60 months

xxx
xxx xxx

Disclosures in operating lease by the lessee(1) A general description of the significant leasing arrangements.
(2) The total of future minimum sublease payments expected to be received
under non-cancellable subleases at the balance sheet date. (3) Lease payments recognized in the statement of Profit & Loss for the period.

PERIOD AMOUNT (4) Lease rentals payable should be shown as follows:0-12 months xxx xxx xxx 12-60 months More than 60 months