Lease Accounting

case is an agree ment which is entered into by the owne r

ofan asset (lessor)_with the intc
ss~t (lc_sscc) in return for a payment or series of paym
e_nts for a_n agree_d penod of tirnc. ~~C<l \Iser
h1ch gives the lease the right to use an asset for a specified 1
penod of time. a ltan 0f11~
It is to ne noted here that the defin ition of a lease
includes agreements for the hire of an asset . Saci11-!l
provision giving th e hirer an option 10 acquire title to
the asset upon the fulfillment of agreed c;~~'.c~ conta·
agreements are comm only know n as hire purchase agree
ments. 11
t ons. ~~1
In India , acco unting for leases is covered unde
r Accounting Standard (AS) 19 Leases.
~
Objective
The objective of AS J 9 is to prescribe the appropriate
Ieases and operdfi'tif(T~ acco unting policies and disclosures in .
for both lessees and lessors. re 1at1011
to fin
Applicability a~
1,,--f\ '-.,A\/V\ /J'f')
----------
AS 19 should be applied in acco untin g for all lease
s other than:
(a) lease agreements to explo re for or use natural resou
rights· rces, such as oil, gas, timber, metals a d
•'
,

'
( b) licen sing agreement s for items such as moti
- rights; and on picture films. video recordings , plays man .
n Other ,,,.
··~
and copy ------ , uscnPls, Paten~
( c) lease agreements to use lands.

Important Definition s
The following term s are used in this Standard with
the meanings specified:
A lease is an agreement whereby the lesso r conv
. eys to the lessee in return for a payment or scr·
the rig ht to use an asset for an agreed period of time. ICS of p
ayrnen~
A finance lease is a lease that trans fers subs tantia
lly all the risks and rewa rds incident to owncrsh· f
1
An operating lease is a lease other than a finance lease Po an as1e
. L
A non-cancellable lease is a lease that is canccllable
• only: (a) upon the occurrence of some remote c .
or (b) w H11 the penm.ss,on
.
of the lesso r; or (c) 1.f the lesse e enters mto
.
a new lease for the same or anontingc nl\
. ·1,
asse t with the same lessor; or (d) upon paym ent
. . by the lesse e of an additional amo unt such that a/qui
contrnuat1on of the lease is reaso nabl y certain . ,·a~eri
, incepti~
The ince ptio n of the lease is the earli er of the date
of the lease agre emen t and the date of a commitment
pa rties to the princ ipal prov ision s of the lease. b~
Y

The Institute of Cost Accountantso:J,:.;

 J1\ is the non-cancellable period for
c ter which the lessee has ag d
.-1 c 1c11S r periods for whi.ch the lessee has the opti.on rec to take on le
furtI,e to continue the lea ase the asset togct 11er
11
1
. h 00y · • f · f h
. h option at the mcept1on o the 1ease 1t 1s reasonab
• se O l e asse
t with O • h r. h
,1t•• t w111c ly certain that th •. r ~ll out ,urt er
~)!l,,cn ' e 1essee will exercise
tease payments are the payments over the
r , »um " lease tenn that u1e lessee •
~t1t1•• • ·
J 11diOg con
tingent rent, costs 1or services and taxes to be paid •
by and reimbursedts,toorthcan be required, l0 mak
e
,~cl . case of the lessee, any residual value guarante c 1essor, together with:
1•o the ed by or on behalf of the lessee·
(B) case of the lessor, any residual value guarante , or
iO the ed to the lessor:
tb) . by or on behalf of the lessee; or
('.~ by an independent third party financiaJly
(11) capable of meeting this guarantee. However
an option to purehase t he asset at a price whi. . d ,
if th 1
e essee as
h
· b ch 1s expe cte to be sufficiently lowe r than
at the date the option ecomes exercisable that . . the fair
, at the inception of the lease, is reasonably certa va1ue
exercised, the minimum lease payments com in to b
prise minimum payments payable over U1e lease
the payment required to exercise this purchase term an~
option.
. alue is the amount for which an asset coul
f111r d be exchanged or a liability settled between
. varties 10 . an arm 's 1ength
tran sact .
ion.
knowledgeable
1 vilhng P '
omic life is either: (a) the period over which an
asset is expected to be economically usable
Ec~~r (b) the number of production or simi by one or more
us~rs, lar units expe cted to be obtained from the asset by one or
more users.
U cful life of a leased asset is either: (a) the peri
od over which the leased asset is expected
s . or (b) the number of produclion or similar to be used by the
lessee, uni ls expected to be obtained from the use
of the asset by the
lessee.
Residual value of a leased asset is the estimated
fair value of the asset at the end of the lease
tenn.
Guaranteed residual value is:
(o) in the case of the lessee, that part of the
residual value which is guaranteed by the lesse
behalf of the lessee (the amount of the guar e or by a party on
antee being the maximum amount that coul
become payable); and d, in any event,
(b) in the case of the lessor, that part of the resid
ual value which is guaranteed by or on behalf
by an independent third party who is finan of the lessee, or
cially capable of discharging the cSbligations
under the guarantee.
Ungunrnntccd residual value of a leased asse
t is the amount by which the residual value
its guaranteed residual value. of the asset exceeds
Gross inn stm cnt in the lease is the aggregat
e of the minimum lease payments under a fina
stMdpoint of the lessor and any unguaranteed nce lease from the
residual value accruing to the lessor.
Unearned finance income is the difference betw
een:
(a) the gross investment in the lease; and
(b) the present value of (i) the minimum leas
e payments under a finance lease from the stan
and (ii) any unguaranteed residual value accr dpoint of the lessor;
uing to the lessor, at the interest rate implicit
in the lease.
Net in, estm ent in the lease is the gross investme
1
nt in the lease less unearned finance income.
The interest rate implicit in the lease is the disc
ount rate that, at the inception of the lease, caus
present value of (a) the minimum lease paym es the aggregate
ents under a finance lease from the standpoint
any unguaranteed residual value accruing to the of the lessor; and (b)
lessor, to be equal to the fair value of the leas
ed asset.

The Institute of Cost Accountants of India

 Flnanciul ,\ccou ntin,:
. f. t · the rate of .interefsththe lessee would ha"c to
al borro wmg rate o mtcr es is .
The lessee's incre ment
. lh 1
l, al the inceptton o t e ease, the lessee Would~• ,·~
nmab le, 1
tie rate a h •noIt ,.1
similar lease or' if thal is not deten
. . • ar security, · the funds necessary to pure ase the asset
borrow over a similar tenn, and with a s1m1l
ts that is not fixed in. amou nt but is based 0 n a fa,.._
lease paym en . d' k
Contingent rent is that portion of the nt of usage - ~ r ''h
, pnce tn ices, mar et rates Ofintc
O f I amou r '~
than just the passage of time (e.g., percentage sa es, ~ ).

. .
Classification of Leases to which risks and rewa rds mc1dent to ownen;h·
. . of leases 1s · based on the extent - 1p of a~
The class1fical1 on ~
asset lie with the lessor or the lessee .
ity or technological obso lesc_ence and of\ . .
Risks include the possibilities of losses from idle capac
~e ~epr~seoted by e ~xp~ctauon o~prof itab ~l!a ~
th
return due to changing economic cond itions. Rewards may
ciation 10 value or rea1t5at1on of l"eSlduat vaJne PG""<11lijn
over the economic life of the asset and of gain from appre
Leases are classified into two types:
J. Finance lease: A lease is classified as a finan
ce lease if it tranSfers substantially all the risks aiid
transferred. ~~
incident to ownership. Title may or may not eventually be
lease if ~doe s ~ transfer ~ ... r,
2. Operating lease: A lease is class ified as an operating ------ - Cll1 the,
14..
. 'dent to ownershi p.
and rewards mc1
It is important to note that lease classification is made
at the inception of the lease. If at any time th
than by renewing the lease, in a lllan:ni e ~ 1r!Q
the lessor agree to change the provisions of the lease, other
have result ed in a different classificati on of the lease the
revised agreement is considered as a ~ - ;::waurfl.
ple, changes in estimates of the econonu; ~ ta,~
its revised tenn. However, Changes in estimates (for exam 0
ces (for exam ple, default by the lessee). do noc ~aftftt
residual value of the leased asset) or changes in circumstan ~ 1e,-!c
to a new class ificat ion of a lease for accounting purposes.
I. Finan ce Lease
risks and rewards incident to ownership
Finance lease is a lease that trans fers substantia lly all the
depends on the substance of the ~ ~f an~
Whether a lease is a finance lease or an operating lease nn. CUht;-
than its fonn.
ce lease
Situations which lead to a lease being classified as a finan
by the end of the lea..,;e term:
(a) the lease trans fers ownership of the asset to the lessee
(b) the lessee has the option to purchase the asset at a price which is e.,pected
to be sufficient!
e sucb that at the in.cqmoc of~ fower:nzi:
the fair value at the date the optio n becomes exercisabl fe:t."s!. 11 .i:
fI reaso nably certain that the option will be exercised:
(c) the lease tenn is for the major pan of the economic
life of lhe asset even if title is n0<
~
~ .
.. fh um lease paymems amouos ro
(d) t e mceptron o t e lease the present value of the minim
at h ell: .fl!!"
substantially all of the fair value of the leased asset; and
the lessee can u..,~ il v.ithO<U or ~ -
(e) the leased asset is of a specialised nature such that only lI:aJ aIOC!IIc:Inm:J
being made.
Indicators of situations leading to finance lease
s .. .,..~ .... ~ 'i\ith = ~n-
(a) if the lessee can cancel the lease' the lessor's losse ~L< llC\J
. t. _
O!L .'-=OC ~..,._ ,.,.,_, -
= · ""WI.
the lessee:
 w losses from the flue\ , .
, 1
,, ~·11" · • .,...,, ""b" t ,.
11 •111,111 ) 1 :\ •~ 1 • ~
" c . \lll\lon 111 the ln,r value of the rcsidun l foll to the lessee
1 cqun\hn o . (for exa mpl e ,n the
• "' n,ost ol the snlcs proceeds nl the end of the lcns
1 . 1c,~cc can eont111uc the ,
111 1 . c): and
1, , ,n:11-'· :, rent. cnsc lur n seco ndary period nl n rent
"~ whi ch is sub stantially lower than
,n,rnt of finance \cnse in ltnn
,,,-:, .. nclnl sl11teme11t of lessee
1 11 111•111 ol finance lease transact'
rrc: .. lr\hncc sheet the cco ' .'0 "s is.
,cc ~ · '
11·~- ·l . distorting fina'ncial ratio non11c res very significant bcoz if such trnn suctions urc not refle cted in the
1 s . ourccs and the leve l of obli gati
,1icrt :_ sheet both as an asset a,,d· 1tis th ons of nn ente rpri se ure understated
1-,n1:1 ercfore appropriate that n finance leas
1,., · .: . f fl as an ob\' • e be recogni sed in the lessee's
'cl°11gni11on o mance Iease by lessee: iga\\on to pay future lease payments.
R . • p·1yn1ents are recogni sed A I . .
11-,,~t ' in ti b t t ,e inception of the lease, . ..
.. ,e the asse t and the hab1ltty for the futu
.111·h rccogmllon should be at an am alan ce sheet at the same amounts. re
:, .. Howeve r, if the fair
1~-,~1.- value ofth 0 unt equal lo the fair valu
e e of the leased asse t at the inceptio
. • the standpoint of the
tr11111 lessee the 1eased asset exceeds the pre n of the
.
lif ihe mimmum lease payments 'fromUl\\ount re d sent value of the minimum lease pay
the • ·· ments
co~ as an asset and a ltab
. standpomted of the lessee
thty should be the present value
In calculatm~ th~ ~resent value of the
. the lease, 1f this is.practicable to det minim · _
111 . u':1' lease payments the discount rate . . . . .
ent s should b enn me· 1f n 0I h 1s the mte rest rate 1mp hc1t
Ll!ase paym . , t e 1essee's incremental
e apportioned betw' borrowing rate should be used.
\1·ability. The fina• nce charge should be ll een the finance
eriodic rate of mterest on the remain a ocated to pe · d d cha ·
rge and the reduction of the outstan
ding
p in bal no _s ~~m g the lease
. term so as to produc e a constant
finance lease and Depreciati.on: A g ance of the hab1hty for each period.
fina nce expense for each accounting fina nce leas e . .
. d gives nse to a depreciation expense for
a,itli that for deprec iable assets which the asset as well as
" arpen o · The depreciation policy for a leas
wnership by the end of the lease term e owned lf the · ed asse t sho uld be consistent
th · re ts no reas ona ble cert
~ife, whichever is shorter. ainty that the lessee will obtain
' e asset should be full y depreciated
over the lease term or its use ful
Disclosure of financial lease by less
ee:
The lessee should , in addition to the
Accounting, and the governing statute requirements of AS A .
mak th 10 . . .
. ' ~countmg for Fixed Assets, AS
, e e following disclosures for finance 6, Depreciation
(a) assets acquired under finance lease as leases:
segregated f th
(b) for each class of assets, the net rom e assets owned·
carrying amount at the balance sheet
(c) a reconciliation between the tota dat~·
.. l of min imu m leas e pay men ts at th b I ' h d
value. In addition,_an enterpn.se sho · e a e s eel ate an d thetr · pre
uld disclose the total of minimumanc leas
sent
sheet date, and theJr present value, e pay men ts at the balance
for each of the foll owing periods: (i) not
than one year and not later than five later than one year; (ii) later
years; (iii) later than five years;
(d) contingent rents recognised as
expense in the statement of profit and
(e) the total of future minimum sub loss for the period;
lease payments expected to be received
at the balance sheet date; and under non-cancellable subleases
(0 a general description of the lessee's sign
ificant leasing arrangements includin
following: (i) the basis on which con g, but not limited to, the
tingent rent payments are determined;
renewal or purchase options and esca (ii) the existence and tem,s of
lation clauses; and (iii) restrictions imp
such as those concerning dividends, osed by tense armi,gements.
additional debt, and further leasing.
Provided that a Small and Medium
Sized Company, as defined in the Not
ification, may not comply with sub -
paragra phs (c), (e) and ( f).

TheInstitute or Cost Accountant s of Indi

a
 \ IV V\\

l" flnnm•lnl ,\l'\'011111111~

1tc . . I ·I 1c111enf of lessor ,
11Cmc111 of l1111111ce ten se In llnnncln s 11 •, ise nssets given under n f1nuncc I ·, .
'I I •ssor should ,ccogn . c,,sc 111 .11
Recognition or fl nnnce lensc by lessor: 1 ic c · · lnvest mcnl in the lease. ,
, I •qunl to t1,c ne1 ,
bnlnnce sheet ns II receivnble nt 1111 11111° 1111 c •. necting u constnnt periodic r· t,
• bnsed on n puller n re ,1 c of rc1u
The recognition of 11nnncc income sho11id Jc . I t of the fi nnnce lense. rn
on the net investment of'the lessor 011ts1n11 cting 111 respec
Disclosure of f1111111cl11t tense by· lessor: . · • I ses·
The lessor should mukc the following disclosures lor .hnnnce ca · b td l
. t . the lease nt the a 1ance s11ee a e, and the p
. . I I oss rnvestrncn 111 dd' . rcscn
(n) n rcconcrlintron between t 1e totu gr , _ b· lance sheet dote. In a 1t1on, an enterprise 1 • 1
I t. recc1vnble at 1 u
tie d the present value o 111111,mum lease pay iould
. . f . . s
vulue o f 11111111m1111 ense puymen s .
disclose the totol gross investment •~1 1he : ; ;
1 0
t~:
following periods: (i) not later than one Yca~-c~~~
receivnblc at the balnnce she~t date, for eacars· (iii) later than five yenrs; ' (II)
later than one year and not later than five ye ,
(b) unearned finance income;
. t the benefit of the 1essor;
(c) the unguaranteed residual values accruing O . bl
.bl . 1. um lease payments rece1va e;
(d) the accumulated provision for uncollect1 e m111 m .
f fit and loss for the period;
(e) contingent rents recognised in the statement o pro ' .
. . angements of the lessor, and
(t) a general description of the sig111ficant 1easing arr
(g) accounting policy adopted in respect of initial direct costs. . .
Provided that a Small and Medium Sized Company, as defined in th e Notification, may not comply With sub.
paragraphs (a) and (t).

2. Operating Lease
Operating lease is a lease other than a finance lease.

Treatment n1 financial statement of lessee

Recognition of operating lease:
Lease payments under an operating lease should be recognised as an e~pens~ i~ the statement of profit and
loss on a straight line basis over the lease tenn unless another systematic basis is more representative of the
time pattern of the user's benefit.
Disclosure of.operating lease:
The lessee should make the following disclosures for operating leases:
(a) the total of future minimum lease payments under noncancellable 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 tlian 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, 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) a 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 detennined; (ii) the existence and termsof

The Institute of Cost Accountants of India

 ~ncwal or purchase op lt aw Ac.counting
tions and escalation cla
such as ti1ose concemino0 ct·1 1·d uses; and (iii) restriction
s im posed by ,..... a
v ends , additional debt, 6

·d d that a Sm all an and further leasing. _,......., mm~ernent<,.

pto''' e d Med
raphs (a). (b) and (e). iums·11.ed Company d fi d . h N .fi
pafllg , as e ne m t .e ot, ·
catio n, may not comply with
<,ub-
-rrr:itnicnt in financial
statement of lessor
{lcCO g nirion of operating \ease·
._ '
;:; le ss or should presen
t an asset given under op
erating lease in its balan
1,ease income from oper ce sheet under fixed ass
ating \eases should be rec cts .
basis over ~he \ease ten ognised in the statemen
n, unless another syste t of profit and loss on a straig
benefit denved from th matic basis is more rep ht line
e use of the leased asset resentative of the time
is dimini shed . pattern in which
operating leas~ ~d De
~reciation: The depreciat
norrnal de~rec iation_po ion of \eased assets shou
hcy ld be on a basis consist
on the basis set out m AS of the lessor for similar assets, and the deprec ent with the
6, Depreciation Accoun iation charge should be
Disclosur tin g. calculated
e of operating lease:
~ s or should, in
addition ~o the requirem
for Fixed Assets, and th ents of AS 6, Depreciat
e governing statute, ma ion Accounting ~d AS
ke the fo\Imving disclo I0, Accounting
(a) for each class of sures for operating lease
assets, the gross ~arry s:
impairment losses at ing amount, the accumu
the balance sheet date; lated depreciation and
profit and loss for the and (i) the depreciation accumulated
period; (ii) impa irment recognised in the statem
period; (iii) impairmen losses recognised in the ent of
t losses reversed in the statement of profit and
statement of profit and los s for the
(b) the future minimum loss for the period;
lease payments under no
of the following perio n-cancel\ab\e operating
ds: (i) not later than one \eases in the aggregate
(iii) later than five years year; (ii) later than one and for each
; year and not later than
five years:
(c) total contingent ren
ts recognised as income
(d) a genera\ descriptio in the statement of prof
it and loss for the perio
n of the lesso r 's signific d;
(e) accounting policy an t \easing arrangements; and
adopted in respect of ini
Provided that a Small tial direct costs .
and Medium Sized Comp
paragraphs (b) and (d) any, as defined in the No
. tification, may not comp
ly with sub-
Sale and Leaseback Tr
ansactions
A sale and leaseback tra
nsaction involves the sa
back to the vendor. Th le of an asset by the ve
e \ease payments and the ~dor and the leasing of
sale price are usually mt the same ~ et
as a package. erdependent as they are
negotiated
Accounting of sale and
leaseback transaction
. 0
The accountm
~
°
treatment fa sale and leaseback transaction de
pends upon the type of lease
_
b k transac tio mvo\ved.
When a sale and leas~ n results in a finance \ease:
ac h An y excess
proceeds over the carrymg amount s ou\d not be immediately recognised as incom or deficiency of sales
statements of a seller-l e or loss in the financia
essee. lnstead' it. shou\d be deferred and amortised ov . .
l
the de reciation of the er the lease term m propomon
to leased asset.
p
tion results in an oper
When a sale and lease
back ~ans\ac ating \ease: ln such a ca . . .
. . stab\ished se , 1f 1t 1s clear that the
0 at fair va ue , any profit or loss should be recognised imm
ediately. \f the sale price

~~
is

~
Thcl: :,:c:: : :ccoum
: 0 ~•of lodio
 ., 1,1 ,\l•,io11111l11J,\
..-i1111m: be recognised imm ediately except that , ·r1 th I
Id d
. 1 ofil or lossmarket price, it sho uld be efierre and amortised i c oss iRc.
s I
1ou d
below fair vn ue, nny pr Portio °lllrien
e pay men ts al beloh \~ I the asse t is expected to be used . If the sale pricenyrois ab 11 lo L let..
by futu re leas 1 • d over ti1e pen·od r,or which lh ovc f: . 1,,~, ~
payments over te
ti period for w d1c fi ed' and amortise c va,~/~~
e asset is •Irr
excess over fair valu e shou ld be e err XPecte ti/~
d leas eback tran sactio . d~,,
· . t the time of a sale and 18 tha th 1
use th 1 the differen ce betw een the cam.,~ less 11
fair va uel a amo unt of e
For operating leases, if eequ al tot 1e h d' ·•Jing ani
necessa ou111and t_ar~1
f t a loss fina nce leases, no sue a ~ust men t is
I
amount o t 1e as~e , . . . el For
to recoverab1; Unless thcr/a1rvat1
should ~e reco~nis ed im~1 ed1a _tc;~ase the carrying amount is reduced aniount in hasi-..~
impairment of assets.
an impamnent tn value, m whid 1. with accord~
with the Acc oun ting Stan dard ea mg it~

r th · 5
Jllustr:ition I t on operating lease ,or e commg
years. As per th
. have top c agrecrnc111
lease rentals for the first 2 years, and will
Arun Ltd. has taken an equ1pmen fi case ay t 21,0o,oO(J~ith ~
r, it will not mak e any p~ ym : o{td on accounting for the lease rentals in this ntl(I
lesso . ~
g 3 years. Advise n . ------ - -----
of the followin
Id b ·
Solution: e shou e recognis ed ~ . th
as an expe·nse in
der an ope rating leas h
ts un c Slaternen1tf
systematic basis is rn ore repre
As per AS-19 lease paymen I
basis over the lease term un ess anot er
__ _.! . ht 1.
profit and loss on a stra1g me seolathetf
the time pattern of the user 's bene fit.
is arising toward
not follow straight line ~asis,_ rather it
The pattern of payment, in this case, does :3lhe e111tf
unti ng purp ose, such effect shou !d be neutrahz~d i.e. the total payment on
the lease period. For acco 0,000 should b ,00,~ .
entire lease penod of 5 years 1.e. t 12,6 e chargedlo t~~
the last 3 years should be spread over the
.
statement of profit and loss for each year

Illustration 2
Garur Ltd . for a period of 3 years. The useful I'" th .
Vishnu Ltd. leased a printing machine from ,..._.,.._.....,...the .,r::-:--~:-::-:-~ ,-~~ that the amounttie of . ePnn1~
s. It was agreed between lessor and lessee 1 '
hine . The foll, I be. P.aid ~)
w
machine is kno wn to be of 5 year k b k h ·
of the lessee, Gar ur Lt d. w1·11 ta e ac l e said mac
instalments and at the tenninat ion ow,ngdetai11
mac hine less ee: - ------
are availabl e in respect of the

0 Cost of the printing machine is

t 15,00,000;
the end of the lease period is t 2,00 ,000
;
0 Uoguaranteed residual value at
0 Fair value of the machine is t 15,0
0,000;

0 The internal rate of return of the

You are required to:
investment is 10%.
- -
lease or an operating lease?
(a) State whether the lease is a finance
nce income.
(b) Ascertain the amount of unearned fina
3 = 2.4868.
Given: PVFIO¾ , 3 = 0.7513; PVAFIO¾,
Solution:
dual val ue= t 2,00,000 x 0.7513 = t 1,50
,260
(a) Present value ofunguaranteed resi
(15 ,00 ,00 0-1 ,50,260) = t 13,49,740
-'· Present value ofle ase payments= t

The Institute of Cost Accountantsofl·:i