Accounting Standard 19 SA R AN S H

AS 19 “Leases”
Introduction
The objective of AS 19 is to Prescribe, for Lessees and Lessors, the appropriate Accounting Policies and Disclosures in
relation to Finance Leases and Operating Leases.

series of
periodic
payments
(Lease
in return rents).
for a
payment
conveys to or
the
Lessee
(another
whereby the
party)
Lessor (legal
owner of an
asset)
A Lease
is an
agreement

Scope
Lease agreements to explore for or use of natural resources such as
oil, gas, timber, metals and other mineral rights.

Licensing agreements for items such as motion picture films, video

AS 19 applies to recordings, plays, manuscripts, patents and copyrights.
all leases other
than:
Lease agreements to use lands.

Agreements that are contracts for services, that do not transfer right
to use assets from one contracting party to the other.

Key Terms
Non-cancellable Lease is a lease that is cancellable:

Upon the occurrence of With the permission of the

some remote contingency; lessor; or
or

Upon payment by the lessee of an

If the lessee enters into a new lease for the
additional amount such that, at inception,
same or an equivalent asset with the
continuation of the lease is reasonably
same lessor; or
certain.

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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.

Minimum Lease Payments

Minimum Lease Payments are

the payments over the Lease Term

that the Lessee is

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.

However, if the Lessee has an 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 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 required to exercise this purchase option.

Fair Value
Fair Value

in an arm’s length
transaction. is the amount

knowledgeable,
willing parties for which an asset

a liability settled could be exchanged

between or

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Economic Life
the number of
production or
the period over which an asset is similar units
Economic
expected to be economically usable or expected to be
Life is either:
by one or more users; obtained from
the asset by one
or more users.

Useful Life

Useful Life of a OR
leased asset is
either:

Period over Number of production or

which the leased similar units expected to be
asset is expected obtained from the use of the
to be used by the Lessee; asset by the Lessee.

Residual Value

is the
estimated Fair
Value

Residual
Value: at the end
of the Lease
Term.

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Guaranteed Residual Value

Guaranteed residual value is: 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 in the case of the lessor, that part of
(the amount of the guarantee the residual value which is guaranteed
being the maximum amount by or on behalf of the lessee, or by
that could, in any event, become an independent third party who is
payable). financially capable of discharging the
obligations under the guarantee

Unguaranteed Residual Value

Amount Its
by which guaranteed
of the asset Exceeds
the Residual Residual
Value Value.

Gross Investment

Minimum From the

Under a
Aggregate Lease standpoint
Finance
of Payments of the
Lease
Lessor.

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Unearned Finance Income

Difference between:

Gross Investment in the lease; and

Present value of
(i) 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.

Net Investment in the Lease is the Gross Investment in the lease less unearned finance income.

Interest Rate Implicit in the Lease

1 Discount rate that, at the inception of the lease, causes the

aggregate present value of

2 Minimum Lease Payments under a finance lease from

the standpoint of the Lessor; and

3 Any Unguaranteed Residual Value accruing to the

Lessor, to be equal to the Fair Value of the leased asset.

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Lessee’s Incremental Borrowing Rate of Interest

...is the rate of the lessee would have to

interest pay on a similar lease or,

and with a similar security,

if that is not
the funds necessary to
determinable,
purchase the asset.

the lessee would incur to the rate that, at the

borrow over a similar term inception of the lease,

Contingent Rent

Contingent Rent is that

portion of the lease
payment

that is not fixed in amount

but is based on a factor

other than just the

passage of time

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Types of Leases

For Accounting purposes, Leases are classified as:

Finance 01
Leases

02 Operating
Leases
A lease that transfers
substantially, all the risks
and rewards incident to
ownership of an asset.
Title may or may not be
eventually transferred.

A lease is classified as an
Operating Lease, if it does
not transfer substantially
all the risks and rewards
incident to ownership.

Indicators of Finance Lease

Lessee has
the option to At the
purchase the inception
Situations, asset at a Lease term of the lease,
which Lease price which is is for Leased
present
would transfers expected to be
the major asset is of a
sufficiently
value of the
normally ownership of part specialised
lower than the minimum
lead to a the asset to of the nature such
Fair Value at the lease
lease the economic that only the
date the payment
being lessee by the option becomes life of the lessee can
amounts
classified end exercisable
asset use it without
such that, at
to at least
as a Finance of the lease even if title is major
the inception substantially
Lease term. not modifications
of the lease, it all of the Fair
are transferred. being made.
is reasonably Value of the
certain that the leased
option will be
exercised.
asset.

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Indicators of situations which individually or in combination could also lead to a lease being classified as a Finance
Lease are:

If the lessee can If the lessee can continue

cancel the lease and If gains or losses from the lease for a secondary
the lessor’s losses the fluctuations in the period at a rent, which is
associated with the residual value accrue substantially lower
cancellation are to the lessee than market rent.
borne by the lessee.

Lease 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 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.

Accounting for Finance Leases (Books of Lessee)

On the date of inception of lease, lessee should

show it as an asset and corresponding liability at
lower of:
(i) Fair Value of leased asset at the inception of
the lease
(ii) Present value of minimum lease payments
from the standpoint of the lessee (present
value to be calculated with discount rate
equal to interest rate implicit in the lease, if this
is practicable to determine; if not, the lessee’s
incremental borrowing rate should be used). A finance lease gives rise to a depreciation expense
Lease payments to be apportioned between for the asset as well as a finance expense for
the finance charge and the reduction of the each accounting period. The depreciation policy
outstanding liability. for a leased asset should be consistent with that
for depreciable assets which are owned, and the
depreciation recognised should be calculated
on the basis set out in AS 10 (Revised), Property,
Plant and Equipment. If there is no reasonable
certainty that the lessee will obtain ownership by
the end of the lease term, the asset should be fully
depreciated over the lease term or its useful life,
Finance charges to be allocated to periods whichever is shorter.
during the lease term so as to produce a
constant rate of interest on the remaining
balance of liability for each period.

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.

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Computation of Interest Rate implicit on Lease

Minimum
Lease Payments
under a Finance
Lease from the
standpoint of the
lessor; and

The interest rate

implicit in the lease
is the discount rate
that, at the inception
of the lease, causes
the aggregate
present value of

Any
Unguaranteed
Residual Value
accruing to the
lessor, to be equal
to the Fair Value
of the Leased
Asset.

Disclosures made by the Lessee in case of Finance Lease

The lessee should, in addition to the requirements of AS 10 (Revised) and the governing Statute, make the following
disclosures for Finance Leases:

(a) Assets acquired under finance lease as segregated from the assets owned;

(b) For each class of assets, the net carrying amount at the Balance Sheet date;

(c) Reconciliation between the total of minimum lease payments at the Balance Sheet date and their present value.
In addition, an enterprise should disclose the total of minimum lease payments at the Balance Sheet date, and
their present value, for each of the following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;

(d) Contingent rents recognised as expense in the Statement of Profit and Loss for the period;

(e) Total of future minimum sublease payments expected to be received under non-cancellable subleases at the
Balance Sheet date; and

(f) General description of the lessee’s significant leasing arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation clauses; and
(iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and
further leasing.

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Accounting for Finance Leases (Books of Lessor)

The lessor should recognise assets given under a Finance Lease in its Balance Sheet as a receivable at an amount
equal to the net investment in the lease.
In a Finance Lease, the lessor recognises the net investment in lease which is usually equal to Fair Value as receivable
by debiting the Lessee A/c.

Recognition of Finance Income

The unearned Finance Income is recognised over the Lease Term based on a pattern reflecting a constant periodic
return on the net investment in lease outstanding.

Initial Direct Costs

For Finance Leases, Initial Direct Costs incurred to produce Finance Income are either recognised immediately in the
Statement of Profit and Loss or allocated against the Finance Income over the Lease Term.

Review of Unguaranteed Residual Value by Lessor

AS 19 requires a lessor to review Unguaranteed Residual Value used in computing the Gross Investment in Lease
regularly. In case any reduction in the estimated Unguaranteed Residual Value is identified, the income allocation
over the remaining Lease Term is to be revised. An upward adjustment of the estimated Residual Value is not made.

Manufacturer or Dealer Lessor

The Manufacturer or Dealer Lessor should recognise 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.

Initial direct costs should be recognised as an expense in the Statement of Profit and Loss at the inception of the
lease.

Disclosures
The lessor should make the following Disclosures for Finance Leases:

(a) Reconciliation between 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. In 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 following 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) Unguaranteed Residual Values accruing to the benefit of the lessor;

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(d) Accumulated provision for uncollectible minimum lease payments receivable;

(e) Contingent rents recognised in the Statement of Profit and Loss for the period;

(f) General description of the significant Leasing Arrangements of the lessor;

(g) Accounting policy adopted in respect of initial direct costs.

Accounting for Operating Leases

Accounting treatment in the Books of lessee

Lease payments under an Operating Lease should be recognised as an expense in the Statement of Profit and Loss of
a lessee 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.

Disclosures by Lessees
Lessees are required to make following disclosures for Operating Leases:

(a)Total of future minimum lease payments under non-cancellable Operating Leases for each of the following
periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii)later than five years;

(b)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, with 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) General description of the lessee’s significant Leasing Arrangements including, but not limited to, the following:
(i) the basis on which contingent rent payments are determined;
(ii) the existence and terms of renewal or purchase options and escalation clauses; and
(iii) restrictions imposed by Lease Arrangements, such as those concerning dividends, additional debt, and
further leasing.

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Accounting Treatment in the Books of Lessor

Lease income from Operating Leases should be

recognised in the Statement of Profit and
Loss on a straight line basis over the lease The impairment losses
term, unless another systematic basis is more on assets given on
representative of the time pattern in which Operating Leases are
benefit derived from the use of the determined and treated
leased asset is diminished. as per AS 28.

2 4

1 3
The lessor should Depreciation of leased assets
present an asset given should be charged in Books
under Operating Lease of Lessor on a basis consistent
as fixed assets in its with the normal depreciation
Balance Sheets. policy of the lessor for similar
assets.

Disclosures by Lessors
As per AS 19, the lessor should, in addition to the requirements of AS 10 (Revised) and the governing Statute, make the
following disclosures for Operating Leases:

(a) 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;

(b) Future minimum lease payments under non-cancellable operating leases in the aggregate and for each of the
following periods:
(i) not later than one year;
(ii) later than one year and not later than five years;
(iii) later than five years;

(c) Total contingent rents recognised as income in the Statement of Profit and Loss for the period;

(d) General description of the lessor’s significant leasing arrangements; and

(e) Accounting policy adopted in respect of initial direct costs.

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Sale and Leaseback

One vendor sells an asset Lessee or seller receives cash

for cash and then takes it immediately and makes
back from the buyer on lease. periodic payment in the
form of lease rents for right to
use the property.

Accounting treatment of a sale

and leaseback depends upon
Lease payments and the
the type of lease involved.
sale price are generally
interdependent as they are
negotiated as a package.

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Where Sale and Leaseback results in Finance Lease

The excess or deficiency of sales proceeds over the Carrying Amount should not be recognized immediately but
deferred and amortised over the Lease Term in proportion to the depreciation of the Leased Asset.

Where Sale and Leaseback results in Operating Lease

Case 3:
Case 2: Sale Price > Fair Value
The excess over Fair
Sale Price < Fair Value
Value should be
Profit should be deferred and amortised
recognised immediately. over the period for which
Case 1: The Loss should also be the asset is expected to
recognised immediately be used. If the Fair Value
Sale Price = Fair Value except that, if the Loss at the time of a Sale and
Profit or Loss should is compensated by Leaseback transaction
Future Lease Payments is less than the Carrying
be recognised
at below market price, it Amount of the asset,
immediately.
should be deferred and a Loss equal to the
amortised in proportion amount of the difference
to the Lease Payments between the Carrying
over the period for which Amount and Fair Value
the asset is expected to should be recognised
be used. immediately.

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Sale Price established at Fair Carrying Carrying Amount Carrying Amount above Fair Value
Value Amount equal less than Fair Value
to Fair Value
Profit No Profit Recognise Profit Not applicable
immediately
Loss No Loss Not applicable Recognise Loss immediately

Sale price below fair value (paragraph 50)

Profit No Profit Recognise Profit No Profit (Note 1)
immediately

Loss not compensated by future Recognise Loss Recognise Loss (Note 1)

lease payments at below Market immediately immediately
Price

Loss compensated by future Defer and Defer and amortise (Note 1)

lease payments at below Market amortise Loss Loss
Price

Sale Price above Fair Value (paragraph 50)

Profit Defer and Defer and amortise Defer and amortise Profit (Note 2)
amortise Profit Profit

Loss No Loss No Loss (Note 1)

Note 1: Circumstances that require the Carrying Amount of an asset to be written down to Fair Value where it is subject
to a Sale and Leaseback.
Note 2: 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 AS 19.

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