List of Accounting Standards

Best summary note on Accounting Standard 19, you can learn finance lease accounting,Operating lease and more, to read full AS -19 on Leases as issued by ICAI , and this Accounting standard is one which is mandatory as on 1 July 2017.

It should be applied in accounting for all leases other than:

1. lease agreements to explore for or use natural resources;
   
2. licensing agreements for items such as plays, manuscripts, patents and copyrights; and
   
3. lease agreements to use lands.

Definitions

Lease : A lease is an 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.

Finance Lease : All risks and rewards incident to ownership of an asset is transferred.

Operating Lease : Lease other than finance lease; i.e. which does not transfer all the risk and   reward incidental to ownership.


Minimum Lease Payments :

For lessor –

Total Lease rent to be paid over the lease term

+

Any Guaranteed Residual Value by or on behalf of Lessee

+

Residual Value Guaranteed by Third Party

-

Contingent Rent

-

Cost for Service and tax to be paid by and reimbursed to lessor.

For lessee -

Total Lease rent to be paid over the lease term

+

Any Guaranteed Residual Value by or on behalf of Lessee

-

Contingent Rent

-

Cost for Service and tax to be paid by and reimbursed to lessor

Accounting for Finance Lease – In the books of lessee

The lessee should recognize the lease as an asset at lower of the following

• Fair Value of the leased asset
• Present value of minimum lease payment

(In calculating the present value of the minimum lease payments, the discount rate is the interest rate implicit in the lease. If implicit rate is not known, the lessee’s incremental borrowing rate should be used.)

Entry required to be passed:

Lease Assets A/c                    Dr

To Lessor

All lease payments should then be apportioned between the finance charge and the reduction of the outstanding liability. Finance charge should be debited to P&L A/c.

Lessor A/c                                            Dr

P&L A/c                                               Dr

(With the amount of finance charge)

To Bank A/c

(With the amount of lease payment)

The lessee as per Accounting Standard 6 should depreciate the leased asset.

Accounting for Finance Lease – In the books of lessor

The lessor should recognize the transaction as sale with the cash price. If artificially low rates of interest are quoted, profit on sale should be restricted to that which would apply if a commercial rate of interest were charged.

The cost of sale recognized at the commencement of the lease term is the cost/carrying amount less the present value of the unguaranteed residual value.

Accounting for Operating Lease – In the books of lessee

Lease payments (excluding costs for services such as insurance and maintenance) are recognized as an expense in the statement of profit or loss on a straight-line basis unless another systematic basis is more appropriate.

Accounting for Operating Lease – In the books of lessor

Lease receipts are recognized as an income in the statement of profit or loss on a straight-line basis unless another systematic basis is more appropriate. The lessor should present an asset given under operating lease in its balance sheet under fixed assets.

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 of income

Or,

Recognized as an expense in the statement of current year profit and loss.

SALE AND LEASEBACK TRANSACTIONS

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.

If sale and leaseback transaction results in finance lease:

Excess or deficiency of sale proceeds over the carrying amount should be deferred and amortised over the lease term in proportion to the depreciation of the leased asset. It should not be immediately recognized as income or  loss in the financial statements.

If sale and leaseback transaction results in operating lease:

• If the sale price is equal to fair value

• Any profit or loss should be recognized immediately.

• If the sale price is below fair value
  
• Any profit or loss should be recognized immediately, except that, if the loss is compensated by future lease payments at below market price

If the loss is compensated by future lease payments at below market price, the profit or loss should be deferred and amortised in proportion to the lease payments.

• If the sale price is above fair value

• The excess over fair value should be deferred and amortised over the period for asset is expected to be used.

Further, if the fair value at the time of a sale and leaseback transaction is less than the carrying amount of the asset, a loss equal to the amount of the difference between the carrying amount and fair value should be recognized immediately.

Disclosure Requirements:

In the books of lessee in case of financial lease

1. Assets acquired under finance lease

2. Reconciliation between the total of minimum lease payments and their present value as at the balance sheet date with following segregation
1. Not later than one year
2. later than one year and not later than five years
3. later than five year

3. Contingent rents recognized as expenses.

4. Future minimum sublease payments expected to be received under non-cancellable subleases.

5. General description of the leasing arrangements

In the books of lessor in case of financial lease

1. General description of the significant leasing arrangement

2. Accounting policy for initial direct cost

3. Reconciliation of total gross investment in lease and present value of minimum lease payment (MLP) receivable at the balance sheet date.

4. MLP receivable in following categories
1. Not later than one year
2. Later than one year and not later than five years
3. Later than five years

In the books of lessee in case of operating lease

1. General description of the significant leasing arrangement

2. Total of future minimum lease payments in the following period
1. Not later than one year
2. Later than one year and not later than five years
3. Later than five years

3. Lease payments recognized in profit & loss account for the period

In the books of lessor in case of operating lease

1. General description of the significant leasing arrangement

2. Accounting policy for the initial direct payment

3. Future lease payments in aggregate classified as :
1. Not later than one year
2. Later than one year and not later than five years
3. Later than five years

Also Read Notes on :

1. Accounting Standard 14 :Accounting for Amalgamation

2. Accounting Standard 10 : Property , Plant and Equipment

3. Accounting Standard 2 : Valuation of Inventory

4. Accounting Standard 13 : Accounting for Investment