AS 19 Accounting for Leases

Introduction

The objective of AS 19 is to prescribe, for lessees and lessors, the appropriate accounting
policies and disclosures in relation to finance and operation leases. This standard is the best
example of substance over form

Lease – meaning

Lease is an arrangement by which the “Lessor” gives the right to use an asset for given
period of time to the “Lessee” on rent. It involves two parties, a Lessor and a Lessee and an asset
which is to be leased. The Lessor, who owns the asset, agrees to allow to the Lessee to use it for
a specified period of time in return for periodic rent payments.

Scope / Applicability
This Statement should be applied in accounting for all leases other than:

1. Lease agreements to explore for or use natural resources, such as oil, gas, timber,
metals and other mineral rights; and
2. Licensing agreements for items such as motion picture films, video recordings, plays,
manuscripts, patents and copyrights; and
3. Lease agreements to use lands.

Definitions

1. A lease is 3an agreement whereby the lessor conveys to the lessee in return for a payment
or series of payments the right to use an asset for an agreed period of time.
2. A finance l3ease is a lease that transfers substantially all the risks and rewards incident to
ownership of an asset.
3. An operating lease is a lease other than a finance lease.
4. A non-cancellable lease is a lease that is cancellable only:
a. upon the occurrence of some remote contingency; or
b. with the permission of the lessor; or
c. if the lessee enters into a new lease for the same or an equivalent asset with the
same lessor; or
d. upon payment by the lessee of an additional amount such that, at inception,
continuation of the lease is reasonably certain.
5. The lease term is the non-cancellable period for which the lessee has agreed to take on
lease the asset together with any further periods for which the lessee has the option to
 continue the lease of the asset, with or without further payment, which option at the
inception of the lease it is reasonably certain that the lessee will exercise.
6. Minimum lease payments are the payments over the lease term that the lessee is, or can
be required, to make excluding contingent rent, costs for services and taxes to be paid by
and reimbursed to the lessor, together with:
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.
7. Fair value is the amount for which an asset could be exchanged or a liability settled
between knowledgeable, willing parties in an arm’s length transaction.
8. Economic life is either:
a. the period over which 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.
9. Useful life of a leased asset is either:
a. the period over which 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.
10. Residual value of a leased asset is the estimated fair value of the asset at the end of the
lease term.
11. Guaranteed residual value is:
a. in the case of the lessee, that part of the residual value which 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 which is guaranteed by or
on behalf of the lessee, or by an independent third party who is financially
capable of discharging the obligations under the guarantee.
12. Unguaranteed residual value of a leased asset is the amount by which the residual value
of the asset exceeds its guaranteed residual value.
13. Gross 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.
14. Unearned finance income is the difference between:
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.
15. Net investment in the lease is the gross investment in the lease less unearned finance
income.
16. 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 equal to the fair
value of the leased asset.
17. Contingent rent is that portion of the lease payments that is not fixed in amount but is
based on a factor other than just the passage of time (e.g., percentage of sales, amount of
usage, price indices, market rates of interest)
Types of lease
1. Financial lease
2. Operating lease
Financial lease
It is a lease, which transfers substantially all the risks and rewards incidental to
ownership of an asset to the Lessee by the Lessor but not the legal ownership. In following
situations, the lease transactions are called Finance Lease

1. The lessee will get the ownership of leased asset at the end of the lease term.
2. The lessee has an option to buy the leased asset at the end of term at price, which is lower
than its expected fair value at the date on which option will be exercised.
3. The lease term covers the major part of the life of asset.
4. At the beginning of lease term, present value of minimum lease rental covers
substantially the initial fair value of the leased asset.
5. The asset given on lease to lessee is of specialized nature and can only be used by the
lessee without major modification
Operating Lease
 Operating lease is a contract wherein the owner, called the Lessor, permits the user,
called the Lesse, to use of an asset for a particular period which is shorter than the economic life
of the asset without any transfer of ownership rights. The Lessor gives the right to the Lesse in
return for regular payments for an agreed period of time.

Accounting treatment for Financial Leases

Following is the accounting treatment of Financial Lease in the books of Lessee

1. On the date of inception of lease, lessee should show it as an asset and corresponding
liability at lower of:
a. Fair value of leased asset at the inception of the lease
b. Present value of minimum lease payments from the standpoint of the lessee
2. Lease payments to be apportioned between the finance charge and the reduction of the
standing liability.
3. Finance charges to be allowed to periods during the lease term so as to produce a constant
rate of interest on the remaining balance of liability for each period.
4. 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 recognized as an asset under the lease.

2. Books of lessor

The lessor should recognize assets given under a finance lease in its balance sheet as a
receivable at an amount equal to the net investment in the leasing.

In a financial lease, the lessor recognizes the net investment in lease (which is usually
equal to fair value, i.e. usual market price of the asset, as shown below) as receivable by debiting
the Lessee A/c

Accounting treatment for Operating Lease

1. Books of lessee

Lease payments under an operating lease should be recognized as an expense in the

Lease payments may be tailor made to suit the payment capacity of the lessee. For
example, a lease term may provide for low initial rents and high terminal rent. Such payment
patterns do not reflect the pattern of benefit derived by the lessee from the use of leased asset. To
have better matching between revenue and cost, AS19 requires lessees to recognize operating
lease payments as expense in the statement of profit and loss on a straight line basis over the
lease terms unless another systematic basis is more representative of the time pattern of the
user’s benefit.

2. Books of lessee
a. The lessor should present an asset given under operating lease as fixed assets in
its balance sheet
b. Lease income from operating lease should be recognized in the statement of profit
and loss on a straight line basis over the lease term.
c. Depreciation should be recognized in the books of lessor. The depreciation of
leased asset should be on the basis consistent with the normal depreciation policy
of the lessor for similar assets, and the depreciation charge should be calculated
on the basis set out in AS10
d. The impairment losses on assets given on operating leases are determined and
treated as per AS28

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