Statements of Accounting Standards (AS 19)

Leases
(In this Accounting Standard, the standard portions have been set in bold italic type. These
should be read in the context of the background material which has been set in normal type, and
in the context of the !reface to the Statements of Accounting Standards".#
The following is the text of Accounting Standard (AS) 19, Leases, issued by the ouncil of the
!nstitute of hartered Accountants of !ndia" This Standard co#es into effect in res$ect of all
assets leased during accounting $eriods co##encing on or after 1"%"&''1 and is #andatory in
nature fro# that date" Accordingly, the (uidance )ote on Accounting for Leases issued by the
!nstitute in 199*, is not a$$licable in res$ect of such assets" +arlier a$$lication of this Standard is,
howe,er, encouraged"
Objective
The ob-ecti,e of this State#ent is to $rescribe, for lessees and lessors, the a$$ro$riate
accounting $olicies and disclosures in relation to finance leases and o$erating leases"
Scope
1. This Statement should be applied in accounting for all leases other than:
a. lease agreements to explore for or use natural resources, such as oil, gas, timber,
metals and other mineral rights; and
b. licensing agreements for items such as motion picture films, video recordings,
plays, manuscripts, patents and copyrights; and
c. lease agreements to use lands.
&" This State#ent a$$lies to agree#ents that transfer the right to use assets e,en though
substantial ser,ices by the lessor #ay be called for in connection with the o$eration or
#aintenance of such assets" .n the other hand, this State#ent does not a$$ly to agree#ents
that are contracts for ser,ices that do not transfer the right to use assets fro# one contracting
$arty to the other"
Definitions
/" The following ter#s are used in this State#ent with the #eanings s$ecified0
A lease is an agree#ent whereby the lessor con,eys to the lessee in return for a $ay#ent or
series of $ay#ents the right to use an asset for an agreed $eriod of ti#e"
A finance lease is a lease that transfers substantially all the ris1s and rewards incident to
ownershi$ of an asset"
An operating lease is a lease other than a finance lease.
A non-cancellable lease is a lease that is cancellable only:
1. upon the occurrence of some remote contingency; or
2. ith the permission of the lessor; or
!. if the lessee enters into a ne lease for the same or an e"uivalent asset ith the
same lessor; or
#. upon payment by the lessee of an additional amount such that, at inception,
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
a commitment by the parties to the principal provisions of the lease.
The lease term is the non-cancellable period for hich the lessee has agreed to ta$e on
lease the asset together ith any further periods for hich the lessee has the option to
continue the lease of the asset, ith or ithout further payment, hich option at the
inception of the lease it is reasonably certain that the lessee ill exercise.
%inimum lease payments are the payments over the lease term that the lessee is, or can
be re"uired, to ma$e excluding contingent rent, costs for services and taxes to be paid by
and reimbursed to the lessor, together ith:
a. in the case of the lessee, any residual value guaranteed by or on behalf of the
lessee; or
b. in the case of the lessor, any residual value guaranteed to the lessor:
i. by or on behalf of the lessee; or
ii. by an independent third party financially capable of meeting this
guarantee.
&oever, if the lessee has an option to purchase the asset at a price hich is
expected to be sufficiently loer than the fair value at the date the option becomes
exercisable that, at the inception of the lease, is reasonably certain to be
exercised, the minimum lease payments comprise minimum payments payable
over the lease term and the payment re"uired to exercise this purchase option.
'air value is the amount for hich an asset could be exchanged or a liability
settled beteen $noledgeable, illing parties in an arm(s length transaction.
)conomic life is either:
a. the period over hich 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.
*seful life of a leased asset is either:
a. the period over hich the leased asset is expected to be used by the lessee; or
b. the number of production or similar units expected to be obtained from the use of
the asset by the lessee.
+esidual value of a leased asset is the estimated fair value of the asset at the end of the
lease term.
,uaranteed residual value is:
a. in the case of the lessee, that part of the residual value hich is guaranteed by the
lessee or by a party on behalf of the lessee -the amount of the guarantee being the
maximum amount that could, in any event, become payable.; and
b. in the case of the lessor, that part of the residual value hich is guaranteed by or
on behalf of the lessee, or by an independent third party ho is financially capable
of discharging the obligations under the guarantee.
*nguaranteed residual value of a leased asset is the amount by hich the residual value
of the asset exceeds its guaranteed residual value.
,ross investment in the lease is the aggregate of the minimum lease payments under a
finance lease from the standpoint of the lessor and any unguaranteed residual value
accruing to the lessor.
*nearned finance income is the difference beteen:
a. the gross investment in the lease; and
b. the present value of
i. the minimum lease payments under a finance lease from the standpoint of
the lessor; and
ii. any unguaranteed residual value accruing to the lessor, at the interest rate
implicit in the lease.
/et investment in the lease is the gross investment in the lease less unearned finance
income.
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 under a finance lease from the standpoint of the
lessor; and
b. any unguaranteed residual value accruing to the lessor, to be e"ual to the fair
value of the leased asset.
The lessee(s incremental borroing rate of interest is the rate of interest the lessee ould
have to pay on a similar lease or, if that is not determinable, the rate that, at the inception
of the lease, the lessee ould incur to borro over a similar term, and ith a similar
security, the funds necessary to purchase the asset.
0ontingent rent is that portion of the lease payments that is not fixed in amount but is
based on a factor other than 1ust the passage of time -e.g., percentage of sales, amount of
usage, price indices, mar$et rates of interest..
$. The definition of a lease includes agreements for the hire of an asset which contain a provision
giving the hirer an option to ac%uire title to the asset upon the fulfillment of agreed conditions.
These agreements are commonly known as hire purchase agreements. &ire purchase
agreements include agreements under which the property in the asset is to pass to the hirer on
the payment of the last instalment and the hirer has a right to terminate the agreement at any
time before the property so passes.
0lassification of 2eases
*" The classification of leases ado$ted in this State#ent is based on the extent to which ris1s and
rewards incident to ownershi$ of a leased asset lie with the lessor or the lessee" 2is1s include the
$ossibilities of losses fro# idle ca$acity or technological obsolescence and of ,ariations in return
due to changing econo#ic conditions" 2ewards #ay be re$resented by the ex$ectation of
$rofitable o$eration o,er the econo#ic life of the asset and of gain fro# a$$reciation in ,alue or
realisation of residual ,alue"
3" A lease is classified as a finance lease if it transfers substantially all the ris1s and rewards
incident to ownershi$" Title #ay or #ay not e,entually be transferred" A lease is classified as an
o$erating lease if it does not transfer substantially all the ris1s and rewards incident to ownershi$"
4" Since the transaction between a lessor and a lessee is based on a lease agree#ent co##on
to both $arties, it is a$$ro$riate to use consistent definitions" The a$$lication of these definitions
to the differing circu#stances of the two $arties #ay so#eti#es result in the sa#e lease being
classified differently by the lessor and the lessee"
5" 6hether a lease is a finance lease or an o$erating lease de$ends on the substance of the
transaction rather than its for#" +xa#$les of situations which would nor#ally lead to a lease
being classified as a finance lease are0
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 which is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable such
that, at the inception of the lease, it is reasonably certain that the option will be exercised'
c. the lease term is for the ma(or 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 asset is of a specialised nature such that only the lessee can use it without
ma(or modifications being made.
9" !ndicators of situations which indi,idually or in co#bination could also lead to a lease being
classified as a finance lease are0
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 fall to the lessee (for
example in the form of a rent rebate e%ualling most of the sales proceeds at the end of
the lease#' and
c. the lessee can continue the lease for a secondary period at a rent which is substantially
lower than market rent.
*+. ,ease 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 -
to . had the changed terms been in effect at the inception of the lease, the revised agreement is
considered as a new agreement over its revised term. /hanges in estimates (for example,
changes in estimates of the economic life or of the residual value of the leased asset# or changes
in circumstances (for example, default by the lessee#, however, do not give rise to a new
classification of a lease for accounting purposes.
2eases in the 'inancial Statements of 2essees
'inance 2eases
11. 3t the inception of a finance lease, the lessee should recognise the lease as an asset
and a liability. Such recognition should be at an amount e"ual to the fair value of the
leased asset at the inception of the lease. &oever, if the fair value of the leased asset
exceeds the present value of the minimum lease payments from the standpoint of the
lessee, the amount recorded as an asset and a liability should be the present value of the
minimum lease payments from the standpoint of the lessee. 4n calculating the present
value of the minimum lease payments the discount rate is the interest rate implicit in the
lease, if this is practicable to determine; if not, the lessee(s incremental borroing rate
should be used.
)xample
(a# An enterprise (the lessee# ac%uires a machinery on lease from a leasing
company (the lessor# on 0anuary *, 1+2+. The lease term covers the entire
economic life of the machinery, i.e. 3 years. The fair value of the machinery on
0anuary *, 1+2+ is 4s.1,3-,-++. The lease agreement re%uires the lessee to
pay an amount of 4s.*,++,+++ per year beginning 5ecember 3*, 1+2+. The
lessee has guaranteed a residual value of 4s.*6,+++ on 5ecember 3*, 1+21
to the lessor. The lessor, however, estimates that the machinery would have a
salvage value of only 4s.3,-++ on 5ecember 3*, 1+21.
The interest rate implicit in the lease is *7 per cent (approx.#. This is
calculated using the following formula8
9air value :
A,4
;
A,4
;
............
;
A,4
;
4<
(*;r#* (*;r#1 (*;r#n (*;r#n
where A,4 is annual lease rental,
4< is residual value (both guaranteed and unguaranteed#,
n is the lease term,
r is interest rate implicit in the lease.
The present value of minimum lease payments from the stand point of the
lessee is 4s.1,3-,-++.
The lessee would record the machinery as an asset at 4s.1,3-,-++ with a
corresponding liability representing the present value of lease payments over
the lease term (including the guaranteed residual value#.
(b# In the above example, suppose the lessor estimates that the machinery
would have a salvage value of 4s.*6,+++ on 5ecember 3*, 1+21. The lessee,
however, guarantees a residual value of 4s.-,+++ only.
The interest rate implicit in the lease in this case would remain unchanged at
*7= (approx.#. The present value of the minimum lease payments from the
standpoint of the lessee, using this interest rate implicit in the lease, would be
4s.1,16,>+-. As this amount is lower than the fair value of the leased asset
(4s. 1,3-,-++#, the lessee would recognise the asset and the liability arising
from the lease at 4s.1,16,>+-.
In case the interest rate implicit in the lease is not known to the lessee, the
present value of the minimum lease payments from the standpoint of the
lessee would be computed using the lessee)s incremental borrowing rate.
*1. Transactions and other events are accounted for and presented in accordance with their
substance and financial reality and not merely with their legal form. ?hile the legal form of a
lease agreement is that the lessee may ac%uire no legal title to the leased asset, in the case of
finance leases the substance and financial reality are that the lessee ac%uires the economic
benefits of the use of the leased asset for the ma(or part of its economic life in return for entering
into an obligation to pay for that right an amount approximating to the fair value of the asset and
the related finance charge.
*3. If such lease transactions are not reflected in the lessee)s balance sheet, the economic
resources and the level of obligations of an enterprise are understated thereby distorting financial
ratios. It is therefore appropriate that a finance lease be recognised in the lessee)s balance sheet
both as an asset and as an obligation to pay future lease payments. At the inception of the lease,
the asset and the liability for the future lease payments are recognised in the balance sheet at the
same amounts.
*$. It is not appropriate to present the liability for a leased asset as a deduction from the leased
asset in the financial statements. The liability for a leased asset should be presented separately
in the balance sheet as a current liability or a long@term liability as the case may be.
*-. Initial direct costs are often incurred in connection with specific leasing activities, as in
negotiating and securing leasing arrangements. The costs identified as directly attributable to
activities performed by the lessee for a finance lease are included as part of the amount
recognised as an asset under the lease.
15. 2ease payments should be apportioned beteen the finance charge and the reduction
of the outstanding liability. The finance charge should be allocated to periods during the
lease term so as to produce a constant periodic rate of interest on the remaining balance
of the liability for each period.
)xample
In the example (a# illustrating paragraph **, the lease payments would be
apportioned by the lessee between the finance charge and the reduction of
the outstanding liability as follows.
Aear 9inance
charge
(4s.#
!ayment
(4s.#
4eduction in
outstanding
liability (4s.#
Butstanding
liability
(4s.#
Aear * (0anuary *# 1,3-,-++
(5ecember 3*# 36,7>+ *,++,+++ 71,31+ *,63,*>+
Aear 1 (5ecember 3*# 16,6+. *,++,+++ 61,1.* *,++,>>.
Aear 3 (5ecember 3*# *7,*$1 *,++,+++ >3,>-> *6,+3*C
*6. In practice, in allocating the finance charge to periods during the lease term, some form of
approximation may be used to simplify the calculation.
16. 3 finance lease gives rise to a depreciation expense for the asset as ell as a finance
expense for each accounting period. The depreciation policy for a leased asset should be
consistent ith that for depreciable assets hich are oned, and the depreciation
recognised should be calculated on the basis set out in 3ccounting Standard -3S. 5,
7epreciation 3ccounting. 4f there is no reasonable certainty that the lessee ill obtain
onership by the end of the lease term, the asset should be fully depreciated over the
lease term or its useful life, hichever is shorter.
*.. 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 lease term or its useful life, whichever is
shorter.
1+. 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 in the statement of profit and
loss. Accordingly, the asset and the related liability are unlikely to be e%ual in amount after the
inception of the lease.
1*. To determine whether a leased asset has become impaired, an enterprise applies the
Accounting Standard dealing with impairment of assets, that sets out the re%uirements as to how
an enterprise should perform the review of the carrying amount of an asset, how it should
determine the recoverable amount of an asset and when it should recognise, or reverse, an
impairment loss.
22. The lessee should, in addition to the re"uirements of 3S 18, 3ccounting for 'ixed
3ssets, 3S 5, 7epreciation 3ccounting, and the governing statute, ma$e the folloing
disclosures for finance leases:
a. assets ac"uired under finance lease as segregated from the assets oned;
b. for each class of assets, the net carrying amount at the balance sheet date;
c. a reconciliation beteen the total of minimum lease payments at the balance sheet
date and their present value. 4n addition, an enterprise should disclose the total of
minimum lease payments at the balance sheet date, and their present value, for
each of the folloing periods:
i. not later than one year;
ii. later than one year and not later than five years;
iii. -iii. later than five years;
d. contingent rents recognised as income in the statement of profit and loss for the
period;
e. the total of future minimum sublease payments expected to be received under
non-cancellable subleases at the balance sheet date; and
f. a general description of the lessee(s significant leasing arrangements including,
but not limited to, the folloing:
i. the basis on hich contingent rent payments are determined;
ii. the existence and terms of reneal or purchase options and escalation
clauses; and
iii. restrictions imposed by lease arrangements, such as those concerning
dividends, additional debt, and further leasing.
9perating 2eases
2!. 2ease payments under an operating lease should be recognised as an expense
in the statement of profit and loss 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.
1$. 9or operating leases, lease payments (excluding costs for services such as
insurance and maintenance# are recognised as an expense in the statement of profit and
loss on a straight line basis unless another systematic basis is more representative of the
time pattern of the user)s benefit, even if the payments are not on that basis.
2:. The lessee should ma$e the folloing disclosures for operating leases:
a. the total of future minimum lease payments under non-cancellable
operating leases for each of the folloing 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 balance sheet date;
c. lease payments recognised in the statement of profit and loss for the
period, ith separate amounts for minimum lease payments and
contingent rents;
d. sub-lease payments received -or receivable. recognised in the statement of
profit and loss for the period;
e. a general description of the lessee(s significant leasing arrangements
including, but not limited to, the folloing:
i. the basis on hich contingent rent payments are determined;
ii. the existence and terms of reneal or purchase options and
escalation clauses; and
iii. restrictions imposed by lease arrangements, such as those
concerning dividends, additional debt, and further leasing.
2eases in the 'inancial Statements of 2essors
'inance 2eases
25. The lessor should recognise assets given under a finance lease in its balance
sheet as a receivable at an amount e"ual to the net investment in the lease.
16. Dnder a finance lease substantially all the risks and rewards incident to legal
ownership are transferred by the lessor, and thus the lease payment receivable is treated
by the lessor as repayment of principal, i.e., net investment in the lease, and finance
income to reimburse and reward the lessor for its investment and services.
26. The recognition of finance income should be based on a pattern reflecting a
constant periodic rate of return on the net investment of the lessor outstanding in
respect of the finance lease.
1.. 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 net investment of the lessor outstanding in respect of the finance lease.
,ease payments relating to the accounting period, excluding costs for services, are
reduced from both the principal and the unearned finance income.
3+. Estimated unguaranteed residual values used in computing the lessor)s gross
investment in a lease are reviewed regularly. If there has been a reduction in the
estimated unguaranteed residual value, the income allocation over the remaining lease
term is revised and any reduction in respect of amounts already accrued is recognised
immediately. An upward ad(ustment of the estimated residual value is not made.
3*. Initial direct costs, such as commissions and legal fees, are often incurred by lessors
in negotiating and arranging a lease. 9or finance leases, these initial direct costs are
incurred to produce finance income and are either recognised immediately in the
statement of profit and loss or allocated against the finance income over the lease term.
!2. The manufacturer or dealer lessor should recognise the transaction of sale in
the statement of profit and loss for the period, in accordance ith the policy
folloed by the enterprise for outright sales. 4f artificially lo rates of interest are
"uoted, profit on sale should be restricted to that hich ould apply if a
commercial rate of interest ere charged. 4nitial direct costs should be recognised
as an expense in the statement of profit and loss at the inception of the lease.
33. Fanufacturers or dealers may 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 income8
(a# the profit or loss e%uivalent 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# the finance income over the lease term.
3$. The sales revenue recorded at the commencement of a finance lease term by a
manufacturer or dealer lessor is the fair value of the asset. &owever, if the present value
of the minimum lease payments accruing to the lessor computed at a commercial rate of
interest is lower than the fair value, the amount recorded as sales revenue is the present
value so computed. The cost of sale recognised at the commencement of the lease term
is the cost, or carrying amount if different, of the leased asset less the present value of
the unguaranteed residual value. The difference between the sales revenue and the cost
of sale is the selling profit, which is recognised in accordance with the policy followed by
the enterprise for sales.
3-. Fanufacturer or dealer lessors sometimes %uote artificially low rates of interest in
order to attract customers. The use of such a rate would result in an excessive portion of
the total income from the transaction being recognised at the time of sale. If artificially
low rates of interest are %uoted, selling profit would be restricted to that which would
apply if a commercial rate of interest were charged.
37. Initial direct costs are recognised as an expense at the commencement of the lease
term because they are mainly related to earning the manufacturer)s or dealer)s selling
profit.
!;. The lessor should ma$e the folloing disclosures for finance leases:
a. a reconciliation beteen the total gross investment in the lease at the
balance sheet date, and the present value of minimum lease payments
receivable at the balance sheet date. 4n addition, an enterprise should
disclose the total gross investment in the lease and the present value of
minimum lease payments receivable at the balance sheet date, for each of
the folloing 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 provision for uncollectible minimum lease payments
receivable;
e. contingent rents recognised in the statement of profit and loss for the
period;
f. a general description of the significant leasing arrangements of the lessor;
and
g. accounting policy adopted in respect of initial direct costs.
3>. As an indicator of growth it is often useful to also disclose the gross investment less
unearned income in new business added during the accounting period, after deducting
the relevant amounts for cancelled leases.
9perating 2eases
!<. The lessor should present an asset given under operating lease in its balance
sheet under fixed assets.
#8. 2ease income from operating leases should be recognised in the statement of
profit and loss on a straight line basis over the lease term, unless another
systematic basis is more representative of the time pattern in hich benefit
derived from the use of the leased asset is diminished.
$*. /osts, including depreciation, incurred in earning the lease income are recognised as
an expense. ,ease income (excluding receipts for services provided such as insurance
and maintenance# is recognised in the statement of profit and loss 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 benefit derived from
the use of the leased asset is diminished.
$1. Initial direct costs incurred specifically to earn revenues from an operating lease are
either deferred and allocated to income over the lease term in proportion to the
recognition of rent income, or are recognised as an expense in the statement of profit
and loss in the period in which they are incurred.
#!. The depreciation of leased assets should be on a basis consistent ith the
normal depreciation policy of the lessor for similar assets, and the depreciation
charge should be calculated on the basis set out in 3S 5, 7epreciation 3ccounting.
$$. To determine whether a leased asset has become impaired, an enterprise applies the
Accounting Standard dealing with impairment of assets that sets out the re%uirements for
how an enterprise should perform the review of the carrying amount of an asset, how it
should determine the recoverable amount of an asset and when it should recognise, or
reverse, an impairment loss.
$-. A manufacturer or dealer lessor does not recognise any selling profit on entering into
an operating lease because it is not the e%uivalent of a sale.
#5. The lessor should, in addition to the re"uirements of 3S 5, 7epreciation
3ccounting and 3S 18, 3ccounting for 'ixed 3ssets, and the governing statute,
ma$e the folloing disclosures for operating leases:
h. for each class of assets, the gross carrying amount, the accumulated
depreciation and accumulated impairment losses at the balance sheet
date; and
i. the depreciation recognised in the statement of profit and loss for
the period;
ii. impairment losses recognised in the statement of profit and loss
for the period;
iii. impairment losses reversed in the statement of profit and loss for
the period;
i. the future minimum lease payments under non-cancellable operating
leases in the aggregate and for each of the folloing periods:
i. not later than one year;
ii. later than one year and not later than five years;
iii. later than five years;
1. total contingent rents recognised as income in the statement of profit and
loss for the period;
$. a general description of the lessor(s significant leasing arrangements; and
l. accounting policy adopted in respect of initial direct costs.
Sale and 2easebac$ Transactions
$6. A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing
of the same asset back to the vendor. The lease payments and the sale price are usually
interdependent as they are negotiated as a package. The accounting treatment of a sale and
leaseback transaction depends upon the type of lease involved.
#6. 4f a sale and leasebac$ transaction results in a finance lease, any excess or deficiency
of sales proceeds over the carrying amount should not be immediately recognised as
income or loss in the financial statements of a seller-lessee. 4nstead, it should be deferred
and amortised over the lease term in proportion to the depreciation of the leased asset.
$.. If the leaseback is a finance lease, it is not appropriate to regard an excess of sales proceeds
over the carrying amount as income. Such excess is deferred and amortised over the lease term
in proportion to the depreciation of the leased asset. Similarly, it is not appropriate to regard a
deficiency as loss. Such deficiency is deferred and amortised over the lease term.
:8. 4f a sale and leasebac$ transaction results in an operating lease, and it is clear that the
transaction is established at fair value, any profit or loss should be recognised
immediately. 4f the sale price is belo fair value, any profit or loss should be recognised
immediately except that, if the loss is compensated by future lease payments at belo
mar$et price, it should be deferred and amortised in proportion to the lease payments
over the period for hich the asset is expected to be used. 4f the sale price is above fair
value, the excess over fair value should be deferred and amortised over the period for
hich the asset is expected to be used.
-*. If the leaseback is an operating lease, and the lease payments and the sale price are
established at fair value, there has in effect been a normal sale transaction and any profit or loss
is recognised immediately.
:2. 'or operating leases, if the fair value at the time of a sale and leasebac$ transaction is
less than the carrying amount of the asset, a loss e"ual to the amount of the difference
beteen the carrying amount and fair value should be recognised immediately.
-3. 9or finance leases, no such ad(ustment is necessary unless there has been an impairment in
value, in which case the carrying amount is reduced to recoverable amount in accordance with
the Accounting Standard dealing with impairment of assets.
-$. 5isclosure re%uirements for lessees and lessors apply e%ually to sale and leaseback
transactions. The re%uired description of the significant leasing arrangements leads to disclosure
of uni%ue or unusual provisions of the agreement or terms of the sale and leaseback
transactions..
--. Sale and leaseback transactions may meet the separate disclosure criteria set out in
paragraph *1 of Accounting Standard (AS# -, Get !rofit or ,oss for the !eriod, !rior !eriod Items
and /hanges in Accounting !olicies..
3ppendix
Sale and 2easebac$ Transactions that +esult in 9perating 2eases
The appendix is illustrative only and does not form part of the accounting standard. The purpose
of this appendix is to illustrate the application of the accounting standard.
A sale and leaseback transaction that results in an operating lease may give rise to profit or a
loss, the determination and treatment of which depends on the leased asset)s carrying amount,
fair value and selling price. The following table shows the re%uirements of the accounting
standard in various circumstances.
Sale price
established at
fair value
-paragraph :8.
0arrying amount
e"ual to fair
value
0arrying amount
less than fair
value
0arrying amount
above fair value
=rofit Go profit 4ecognise profit
immediately
Got applicable
2oss Go loss Got applicable 4ecognise loss
immediately
Sale price belo
fair value
-paragraph :8.
=rofit Go profit 4ecognise profit
immediately
Go profit (note *#
2oss not
compensated by
future lease
payments at
belo mar$et
price
4ecognise loss
immediately
4ecognise loss
immediately
(note *#
2oss
compensated by
future lease
payments at
belo mar$et
price
5efer and
amortise loss
5efer and
amortise loss
(note *#
Sale price above
fair value
-paragraph :8.
=rofit 5efer and
amortise profit
5efer and
amortise profit
5efer and amortise
profit (note 1#
2oss Go loss Go loss (note *#
Gote *. These parts of the table represent circumstances that would have been dealt with under
paragraph -1 of the Standard. !aragraph -1 re%uires the carrying amount of an asset to be
written down to fair value where it is sub(ect to a sale and leaseback.
Gote 1. The profit would be the difference between fair value and sale price as the carrying
amount would have been written down to fair value in accordance with paragraph -1.