Reporting requirements for lease AS19

AS-19 deals with the accounting policies applicable for all types of leases except certain listed below.
A lease is a transaction whereby an agreement is entered into by the lessor with the lessee for the right to use an asset by the lessee in return for a payment or series of payments for an agreed period of time.
What kind of leases are not covered under this standard?
This Standard is not applicable to:
(a) Lease agreements for exploring or using natural resource. Ex Oil, gas, timber, metals and other mineral rights
(b) Licensing agreements. Ex Motion picture films, video recordings, plays, manuscripts, patents and copyrights
(c) Lease agreements for use land
There are two types of leases:
1. Finance Lease
2. Operating Lease
Finance Lease: A lease in which all risks and rewards are transferred to the owner of assets. The title may or may not eventually be transferred.
Examples of Finance Lease are:
1. Lease in which Assets is transferred to lessee at the end of lease term
2. Lease term in which lessee has the option to purchase the assets form lessor at the price which is lower than fair price on the date when option become exercisable
3. Lease term Covers complete economic life of the asset even if title is not transferred
4. Lease term in which present value of the minimum lease payments is equal to or substantially covers the  fair value of the leased asset
5. Leased asset is of a specialized nature. Ex Ambulance (the lessee can use it without major modifications being made)
Operating Lease: Any other lease other than finance lease is considered as an Operating Lease.

Accounting in the books of Lessee in case of Finance Lease

1. At the inception of lease, lessee will recognize the lease as assets or liability at an amount equal to the fair value of leased assets
2. Apportion the lease payments into finance charge and reduction in outstanding liability
3. Allocate finance charge to the periods during lease term
4. Pass journal entry for depreciation
Disclosure in case of Finance Lease
1. Assets acquired on Lease should be shown separately
2. For each leased assets, show net carrying amount at the balance sheet date
3. Provide reconciliation between Minimum Lease Payment at balance sheet date and their present value
4. Disclose total of minimum lease payment at balance sheet date and their present value for:
a)Not later than one year
b) Later than one year but not later than five year
c) Later than five years
5. Future minimum sublease payment expected to receive at balance sheet date
6. General description of lessee significant leasing arrangements

Accounting in the books of Lessee in case of Operating Lease

Lease payment is recognized as an expense in the profit and loss account.
Disclosure in case of Operating Lease
1. Future lease payment for the following period
a) Not later than one year
b) Later than one year but not later than five years
c) Later than five years
2. Total Expected future lease payment
3. Lease payment recognized in the statement of Profit and Loss for the period
4. General Description of Lessee significant leasing arrangements

Accounting in the books of Lessor in case of Finance Lease

1. Lessor to record assets in the books of account at an amount equal to net investment in Lease
2. Record finance income based on pattern reflecting constant periodic rate of return
3. Estimate unguaranteed residual value used in computing lessor gross investment in lease
4. If there is any reduction in estimated unguaranteed residual value then revise the income allocation over the remaining lease term. Reduction in respect to amount already recognized to be recognized immediately. Upward adjustment to be ignored
5. Initial direct cost associated with the lease to be recognized immediately in the profit and loss account or can be spread over the lease term
Disclosure in case of Finance Lease
1. Provide reconciliation between gross investment in lease at balance sheet date and present value of minimum lease payment. Also disclose the same as
a) Not later than one year
b) Later than one year, but not later than five year
c) Later than five year
2. Unearned finance income
3. Unguaranteed residual value
4. Accumulated provision for uncollectible minimum lease payment receivable
5. Contingent rent recognized in statement of profit and loss account
6. General description of leasing arrangement
7. Accounting policy adopted for in respect of initial direct cost
Accounting in the books of Lessor in case of Operating Lease
1. Lessor should record assets in balance sheet under fixed assets
2. Lease income to recognize in statement of profit and loss account
3. Cost incurred including depreciation to be recognized in statement of profit and loss account
4. Check for impairment and provide for in book as per GAAP
Disclosure in case of Operating Lease
1. For each class of assets accumulated depreciation, accumulated impairment and carrying amount at the balance sheet date.
2. Depreciation recognized in the statement of profit and loss account.
3. Impairment losses recognized in the statement of profit and loss account.
4. Impairment loss reversed in the statement of profit and loss account.
5. Future minimum lease payment under for each of the following periods:
a) Not later than one year
b) Later than one year but not later than five year
c) Later than five years
6. Total contingent recognized in the statement of profit and loss account.
7. General description of leasing arrangement
Sale and Leaseback Transaction
1. If sale and leaseback transaction results in finance lease: Any excess or deficiency over carrying amount should be deferred and amortized over the lease term in proportion to depreciation of the leased assets.
2. If sale and leaseback transaction results in operating lease: Any excess or deficiency over carrying amount should be recorded immediately in book of account:
a) If the sale price is below fair value, the loss is compensated by future lease payments at below market price, it should be deferred and amortized in proportion to the lease payments over the period for which the asset is expected to be used
b) If the sale price is above the fair value, the excess over fair value should be deferred and amortized over the period for which the asset is expected to be used
Difference between AS19 and IAS17
BasisAS 19IAS 17
Lease of landsAS 19 is not applicable to lease of landsIAS17 contains specific provisions dealing with leases of land and building
Residual valueThe term “Residual Value” is defined in AS 19IAS 17 does not define “Residual Value”
Inception and commencementThough both the terms are used at some places in AS 19, these terms are not defined and distinguishedIAS 17 makes a distinction between inception of lease and commencement of lease
Recognition of leaseAS 19, such recognition is at the inception of the leaseAs per IAS 17, the lessee shall recognize finance leases as assets and liabilities in balance sheet at the commencement of the lease term
Adjustment of lease paymentsNot Dealt by AS 19IAS 17 deals with adjustment of lease payments made during the period between inception of the lease and the commencement of the lease term
GuidanceNo GuidanceIAS 17 provides guidance on accounting for:
·         incentives in the case of operating leases, and
Evaluating the substance of transactions having the legal form of a lease and determining whether such an arrangement contains an element of lease
Upward revisionAS 19 prohibits upward revision of unguaranteed residual value, during the term of the leaseIAS 17 permits upward revision of unguaranteed residual value, during the term of the lease
Method of AmortizationIn case of a sale and leaseback transaction (in case of finance lease), AS 19 requires the excess of sale proceeds, over the carrying amount of the asset, to be deferred and amortized by the seller (lessee) over the tenure of lease, in proportion to depreciation of the leased assetIAS 17 also specifies that in case of a sale and leaseback transaction (in case of finance lease), the excess of sale proceeds, over the carrying amount of the asset, to be deferred and amortized by the seller (lessee), but it does not specify the method of amortization
Classification of leaseThese matters are not addressed in the existing standardIAS 17 requires current/non-current classification of lease liabilities if such classification is made for other liabilities also
Attribution of lease rentalsAS 19 does not provide for the sameIAS 17 states that in case of operating lease, if escalation of lease rentals is attributable to the expected general inflation so as to compensate the lessor for expected inflationary costs shall not be straight lined
Initial direct costsAS 19 requires the initial direct costs, incurred by the lessor(in case of operating lease), to be either charged off, at the time of incurrence or to be amortized over the lease periodIAS 17 states that the initial direct costs, incurred by the lessor (in case of operating lease), shall be included in the carrying amount of leased asset and amortized as an expense, over the lease period

Difference between IAS 17 and IFRS 16:

IAS17 requires all lease rentals to be charged to the statement of profit and loss account on straight line basis in case of operating lease unless another systematic basis is more appropriate if payment to lessor is not made on straight line basis.
IFRS 16: In case of operating lease, all lease rentals shall be charged to the statement of profit and loss as per the lease agreement unless the payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor‘s expected inflationary cost associated with the lease . If payments to the lessor vary because of factors other than general inflation, then this condition is not met.
Conclusion: In case of IAS17 if there is inflation component in the lease rentals then we must calculate all the expected rentals and have to charge the same in statement of profit and loss equally over the term of lease and we have to transfer that excess/deficient to lease equalization account.

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