PRESENTATION

ON
ACCOUNTING
STANDARD - 19

LEASES
 LEASE
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.
 PARTIES IN THE LEASES

LEASOR :

●
A person or entity who owns property (for example, real estate or equipment) to
which a lessee receives use and possession in exchange for a payment of funds.

LESSEE :

●
A person or entity who receives the use and possession of leased property (e.g., real
estate or equipment) from a leasor in exchange for a payment of funds. The person to
whom a lease is made.
 SCOPE
Applies to leases
commencing on and
from 1st April 2001.
Excludes

Lease agreements to explore for or use natural resources (oil, gas,

timber, metals & other mineral rights)

Licensing agreements for such items as motion picture films, video

recordings, plays, manuscripts, patents & copyrights.

Lease agreements to use lands.

 TERMS

ECONOMIC LIFE: It 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.

USEFUL LIFE : it 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.
 CONT…………..

RESIDUAL VALUE:

●
It is the estimated fair value of the asset at the end of the
lease term.

GUARANTEED RESIDUAL VALUE: It 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
 CONT…………..

(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.

UNGUARANTEED RESIDUAL VALUE:

●
It is the amount by which the residual value of the asset
exceeds its guaranteed residual value.
 FINANCIAL LEASE

TYPES
●
A finance lease is a lease that transfers substantially all the risks and rewards incident to
ownership of an asset.
●
Risks include the possibilities of losses from idle capacity or technological obsolescence and
of variations in return due to changing economic conditions.
●
Rewards may be represented by the expectation of profitable operation over the economic
life of the asset and of gain from appreciation in value or realization of residual value.
 OPERATING LEASE

• Operating Lease is a lease other than a

finance lease which does not transfers
substantially any risk and rewards incident to
ownership of an asset.
• Operating Lease is also called Service Lease.
• It is generally used for computers, office
equipments, automobiles, trucks, telephones
and other equipments.
HOW TO IDENTIFY FINANCE LEASE

Lessor’s Lessee can The lease

losses Gains or continue term is for
associated losses from lease for a the major
with fluctuation secondary part of the
cancellation in fair value period at a economic
(if lessee of residual rent life of the
can cancel fall on substantially asset even if
lease) borne lessee. lower than its title is not
by lessee. market rent. transferred.
 FEATURES OF
OPERATING
LEASE
• An operating lease is for a shorter period
other than the economic life of the asset.
• The lease rentals are not sufficient to
totally amortize the cost of the assets.
• Operating leases normally include
maintenance clause requiring the lessor to
maintain the leased asset.
 MODES OF TERMINATING LEASE

The lease is terminated at the end of

the lease period and any one course is
possible, namely

●
The lease is renewed on a perpetual basis or for a definite period
●
The asset reverts to the lessor
●
Above, if the asset reverts to the lessor and the lessor sells it to a third
party
●
The lessor sells the asset to the lessee
●
All the above conditions applies only when both the parties mutually
agree.
ACCOUNTING FOR FINANCE LEASES LESSEE’S BOOKS

At inception of a Liability for a leased

finance lease, lessee asset should be
should recognize lease
presented separately
as an asset and a
in balance sheet as a
liability on the basis of
fair value or present current liability or a
value of minimum long-term liability as
lease payments . case may be.

A finance lease gives If there is no reasonable

rise to depreciation certainty that lessee will
expense for asset (on obtain ownership by
the basis of lessee’s end of lease term, asset
depreciation policy for should be fully
owned assets) as well as depreciated over lease
a finance expense for term or its useful life
each accounting period. whichever is shorter.
ACCOUNTING FOR FINANCE LEASES-LESSOR`S BOOKS

Lessor should recognize assets given under a finance lease in its

balance sheet as a receivable at an amount equal to net
investment in the lease.
ACCOUNTING FOR OPERATING LEASES LESSEE’S BOOKS

Lease payments
(excluding costs for
services such as
insurance &
maintenance) under
operating lease should
be recognized as an
expense in profit and
loss on a straight line
basis over lease term
unless another
systematic basis is
more representative
of time pattern of
user’s benefit.
 ACCOUNTING FOR OPERATING
LEASES LESSOR’S BOOKS
• Lease income from operating leases should be
recognized in profit and loss on a straight line
basis over lease term unless another systematic
basis more representative of time pattern in which
benefit derived from use of leased asset
diminished.

• Leased asset to be disclosed under fixed assets.

• Depreciation of leased assets should be on a basis

consistent with normal depreciation policy of
lessor for similar assets.