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Overview on Accounting Standard AS 19 Leases


Overview on Accounting Standard AS 19 Leases

A tenant is granted the right to occupy a property for a predetermined amount of time under the terms of a lease in exchange for payment of rent. By agreeing to a lease, the owner gives the renter some control over the real estate or the asset which is leased out. Until the lease expires, the tenant has the right to continue using the space.

A lease may be expressed verbally between the owner and the renter or the lessor and it may also be in written contractual form.

An owner grants a licence to allow a third party to utilise his real estate for a certain purpose. A licence is a permission to do something on someone else’s property without granting ownership rights. The owner has the right to cancel the authorization to stay at any time, and no easement or other interest is granted over this land. In general, licenced agreements are used to hire out guest houses, party grounds and motels.

What Are the Differences Between Rental and Lease Agreements in India?

The obligations and rights of a landlord and tenant are laid forth in a lease agreement. However, it does not specify how long it will be in effect for. On the other hand, a rental agreement specifies the timing of rent payments as well as other terms pertaining to the tenancy, such as security deposits, fees, and taxes.

1. Lease Contract

A lease is a contract that permits one party (the lessor) to take possession of another party’s property (the lessee). At some point during the life of the lease, the lessor has the opportunity to purchase the asset from the lessee for a predetermined sum.

Except for some of those listed below, AS-19 deals with the accounting principles that apply to all different types of leases. A lease is an agreement between a lessor and a lessee that grants the lessee the right to use an asset in exchange for a payment or series of payments over a specified period of time.

2. Rental Contract

Rental agreements, on the other hand, are agreements between a homeowner and a renter who wants to reside in their home. The situation typically determines how long they last. For instance, if you wish to rent out your house for a few months while you are on vacation, it would be seen as a short-term rental arrangement. On the other hand, if you intend to rent out your house on a month-to-month basis, it will be a long-term rental agreement because it will last for a considerable amount of time.

What types of leases are excluded from this requirement?

The following do not apply to this Standard:

  1. Lease arrangements for the exploration or use of natural resources. Mineral rights such as gas, wood, oil, metals, and other minerals.
  2. License contracts. Movies, plays, videos, patents, manuscripts, and copyrights, for example.
  3. Land use lease agreements.

Two different kinds of leases exist:

  1. Finance Lease
  2. Operating Lease

1. Financial leasing or Finance Lease

A rental agreement where the asset owner bears all risks and benefits. Ultimately, the title may or may not be transferred.

Finance lease examples include:

  • A lease that transfers assets to the lessee at the conclusion of the lease period
  • Lease period where the lessee has the option to acquire the assets from the lessor at a price below fair market value on the day the option becomes exercisable.
  • Lease term even if title is not transferred, covers the asset’s whole economic life.
  • Lease term where the fair value of the leased asset is covered in full or substantially covered by the present value of the minimum lease payments.

2. Operating Lease

An operating lease is any other lease outside a financing lease.

Accounting for a finance lease in the lessee’s accounts

  • At the start of the lease, the lessee will classify the agreement as an asset or liability at the fair market value of the leased property.
  • Divide the lease payments between the financing charge and the outstanding debt.
  • Distribute the financing fee throughout the lease’s length.
  • Authorize the depreciation journal entry.

Disclosure in a Finance Lease Situation

  1. Lease-related assets should be listed individually.
  2. Display the net carrying amount for each leased asset as of balance sheet date.
  3. Present a comparison of the Minimum Lease Payment as of the balance sheet date and its current value.
  4. List the total minimum lease payments at the date of the balance statement and their current value for:
  • not later than 12 months
  • more than one year but not beyond, say a term of five years
  • more than five years later.
    1. At the balance sheet date, a future minimum sublease payment is anticipated to be received.
    2. An overview of the lessee’s most important leasing agreements.

Accounting for an Operating Lease in the Lessee’s books

Payment of the lease shall be recorded as an expense in the profit and loss or P&L statement or account.

Disclosure In case of Operating Lease

  1. The subsequent period’s upcoming lease payment
  • not later than 12 months
  • more than a year, but no more than five years in the future
  • more than five years later.
  1. The total anticipated lease payment.
  2. A lease payment was recorded in the period’s profit and loss statement.
  3. An overview of the Lessee’s key leasing agreements.

Accounting in Lessor’s accounts for a Finance Lease

  1. Lessor shall account for assets in the books of accounts at the net investment in the Lease.
  2. Using a pattern that reflects a consistent periodic rate of return, record financial income.
  3. Calculate the unguaranteed residual value used to determine the lessor’s gross lease investment.
  4. Update the revenue distribution throughout the remaining lease period if there is any decrease in the projected unguaranteed residual value. Reduction should be recognised right away in relation to the amount to the amount previously recognised. Neglect upward adjustment
  5. The initial direct cost of the lease will either be recorded immediately in the profit and loss account or spread out over the term of the lease.

Disclosure in a Finance Lease Situation

  1. Describe how the current value of the minimum lease payment compares to the gross investment in the lease as of the balance sheet date. Additionally, mention the same as
  • not later than 12 months
  • more than one year but not beyond, say a term of five years
  • beyond five years
  1. Finances that were not earned
  2. Residual value that is not certain
  3. Accumulated provision for minimum lease payments that are not recoverable
  4. Contingent rent is recorded in the profit and loss account statement
  5. General leasing agreement description
  6. Accounting procedure used for first direct costs.

Accounting on the Lessor’s books in the event of an Operating Lease

  1. The lessor must list assets under fixed assets on the balance sheet.
  2. Recognizing lease income in the statement of profit and loss
  3. Expenses must be included in the statement of profit and loss account, together with depreciation.
  4. Examine the book for impairment and make provisions as required by GAAP.

In case of Operating Lease, Disclosure

  1. Cumulative depreciation, accumulated impairment, and carrying amount as of the balance sheet date for each type of assets.
  2. Recognition of depreciation in the profit and loss account.
  3. Impairment losses recorded in the profit and loss account statement.
  4. The statement of profit and loss account’s impairment loss was reversed.
  5. For each of the following time periods, the future minimum lease payment should be:
  • not later than 12 months
  • more than one year but not beyond, say a term of five years
  • more than five years later.
  1. The total contingency that was recorded in the profit and loss account.
  2. General leasing agreement description.

Sales and Leaseback Agreement

  1. Any surplus or deficit over the carrying value should be deferred and amortised throughout the lease period in proportion to the depreciation of the leased assets if the sale and transactions for leaseback would be results in a financing lease.
  2. In the event that a sale and leaseback transaction results in an operating lease, any surplus or deficit above the carrying value should be promptly recorded in the book of accounts as follows:
  3. a) If the selling price is less than fair value and the loss is offset by future lease payments made at less than market value, the loss should be postponed and amortised proportionately to the lease payments throughout the anticipated useful life of the asset.
  4. b) If the sale price exceeds the fair value, the difference should be postponed and amortised over the anticipated use of the asset.

What separates AS19 from IAS17?

1. Residual value This term has been defined in the standard AS 19. But under IAS 17 there is no definite or specific definition provided for the term “Residual Value”.
2. Recognizing the lease transaction As per AS 19, this recognition occurs at the beginning of the lease. In accordance with IAS 17, the lessee must record finance leases as assets and liabilities at the start of the lease term.
3. Guidance No guidance is provided under AS 19. IAS 17 offers guidelines on how to account for incentives in operating leases and evaluate the substance of transactions with a lease-like legal structure to determine if they have a lease-like feature.
4. Commencement and Inception Even though AS 19 uses both terms occasionally, they are not defined or distinguished. IAS 17 distinguishes between the beginning of a lease and its beginning.
5. How to adjust the payments for lease It is not dealt by AS 19 in definite terms. Adjustment of lease payments made between the beginning of the lease and the start of the lease term is covered by IAS 17.
6. Leasing land For leasing of land AS 19 is not applicable. But in IAS 17 there are specific provisions dealing with the leasing of lands.
7. Method of amortization The excess of selling proceeds above the carrying price of the asset in a sale and leaseback transaction (in a financing lease) must be delayed and amortised by the seller (lessee) during the lease term, in proportion to the depreciation of the leased asset. The excess of selling proceeds above the asset’s carrying amount must be delayed and amortised by the seller (lessee) in a sale-and-leaseback transaction (in a financing lease), although the method of amortisation is not specified by IAS 17.
8. Classifying lease The current standard does not address these issues. If such classification is applied for other obligations as well, IAS 17 mandates the current/non-current classification of leasing liabilities.
9. Initial direct costs associated with lease transaction The first direct expenses spent by the lessor (in the case of an operating lease) must either be charged off at the time of occurrence or amortised throughout the term of the lease, according to AS 19. According to IAS 17, the lessor’s initial direct costs (in the case of an operating lease) must be accounted for in the asset’s carrying value and amortised as an expense over the lease term.

Inconsistency between IFRS 16 and IAS 17:

  • IAS 17:

IAS 17 mandates that, in the event of an operating lease, all lease rents be charged to the statement of profit and loss account on a straight-line basis unless another systematic approach is more suitable and payment to the lessor is not made on a straight-line basis.

  • IFRS 16:

Unless the payments to the lessor are structured to increase in line with expected general inflation to cover the lessor’s anticipated inflationary cost associated with the lease, all lease rentals in the case of an operating lease must be charged to the statement of profit and loss in accordance with the lease agreement. This requirement is not satisfied if the lessor’s payments change for reasons other than ordinary inflation.

If there is an inflation component in the lease rentals under IAS17, we must compute all predicted rentals, charge the same amount in the statement of profit and loss proportionally over the lease period, and transfer any excess or deficit to the lease equalisation account.


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