We know that every business needs assets to operate, like buildings, vehicles, or machinery. But not every business wants or can afford to buy them. This is where the concept of leasing was introduced. Leasing is when a business (called the lessee) uses an asset owned by someone else (called the lessor) and pays them regularly for it. To make sure all businesses record leases in the same clear and correct way, the Institute of Chartered Accountants of India (ICAI) created Accounting Standard (AS) 19 – Leases. This standard explains how both the business using the asset and the owner of the asset should record lease transactions in their financial statements. Following AS 19 helps show the true financial position of a company, making the accounts accurate and transparent.
What is a Lease?
A lease is an agreement between the two parties, namely:
- Lessor: The owner of the asset, and
- Lessee: The person or business that uses the asset for a specific period in exchange for payment.
The lease agreement specifies:
- The duration of the lease,
- The amount to be paid (lease rent),
- The terms for renewal or purchase, and
- Responsibilities for maintenance and insurance.
What is AS 19?
When a company uses someone else’s property or equipment for a period of time by paying rent, it is called a lease.
AS 19 is an Accounting Standard issued by the Institute of Chartered Accountants of India, which gives the rules for:
- How to classify the lease (finance or operating),
- How to show it in the balance sheet and profit & loss account, and
- What information should be disclosed about it?
Main objectives of AS 19
- Ensure transparency in how leases are recorded in financial statements,
- Make sure companies don’t hide assets or liabilities through leasing arrangements, and
- Help investors, banks, and stakeholders understand the real financial obligations of the company.
Scope of AS 19
AS 19 applies to all the leases except:
- Leases for exploring or using natural resources (like oil, gas, or minerals),
- Licensing agreements for films, patents, or copyrights, and
- Land-only leases where land ownership is not transferred
Types of Leases under AS 19
AS 19 classifies leases into two main types: Finance Lease and Operating Lease.
1. Finance Lease
A finance lease is one in which almost all the risks and rewards of ownership of the asset are transferred to the lessee.
Even though legal ownership remains with the lessor, the lessee treats the asset as if it owns it.
Example:
A company takes a machine for 7 years, the full useful life of the machine. The company maintains it, uses it fully, and pays regular instalments. Here, the company is practically the owner, so it is a finance lease.
Indicators of a finance lease:
- The lease period covers most of the asset’s useful life.
- The lessee can buy the asset at a low (bargain) price at the end.
- The present value of lease payments is almost equal to the asset’s fair value.
- The asset is made only for the lessee’s use.
2. Operating Lease
An operating lease is one where the ownership risks and rewards remain with the lessor. The lessee only uses the asset for a short time and returns it later.
Example:
A company takes office space on rent for 2 years. The ownership remains with the landlord, and the company just pays rent. This is an operating lease.
Accounting Treatment for Lessee
In a Finance Lease
1. The lessee records the leased asset as an asset in its books.
2. The same amount is recorded as a liability, representing the lease obligation.
3. Lease payments are divided into two parts:
- Interest expense – for the cost of finance, and
- Principal repayment – which reduces the lease liability.
4. The leased asset is depreciated over its useful life.
In an Operating Lease
- The lease rent paid is treated as an expense in the Profit & Loss account.
- The asset is not shown in the balance sheet.
- The rent expense is spread evenly over the lease period.
Accounting Treatment for Lessor
- Finance Lease: The lessor removes the asset from its books and recognises a lease receivable equal to the present value of lease payments. Lease income is recognised as finance income over the period. This shows that the lessor has financed the purchase rather than rented out an asset.
- Operating Lease: The lessor keeps the asset in its books and shows it under fixed assets. Lease rent received is recorded as income in the Profit & Loss account. The lessor continues to depreciate the asset like any other asset.
Sale and Leaseback Transactions
Sometimes, a company sells an asset (say, a building or machinery) to another party and immediately leases it back for use.
This is called a sale and leaseback arrangement.
- If it is a finance lease, the gain or loss from the sale is not recognised immediately.
- If it is an operating lease, the gain or loss is recognised immediately or over the lease term, depending on the sale price and fair value.
Disclosures Required under AS 19
AS 19 requires both lessees and lessors to provide certain information in their financial statements.
For Lessee:
1. Description of leased assets.
2. Total future lease payments, divided into:
- Less than one year,
- One to five years, and
- More than five years.
3. Total expense recognised during the year.
4. Details of significant terms and conditions (like renewal options, restrictions, etc.).
For Lessor:
- Total lease income for the year.
- Future lease payments to be received.
- Description of leasing arrangements and terms.
Conclusion
Leasing helps businesses use the assets they need without having to buy them outright. AS 19 makes sure that both the business using the asset and the owner record the lease correctly in their accounts. This helps everyone – business owners, investors, and banks – understand the company’s real financial situation. By following AS 19, companies can show their assets and liabilities clearly, avoid confusion, and maintain trust with stakeholders. Whether it’s a short-term rental or a long-term finance lease, proper accounting under AS 19 ensures transparency, accuracy, and better financial decision-making.
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