Accounting Standard 19

Accounting for Lease

Definition of Lease

 A Lease is a contract between two parties called

Lessor (giver) and the lessee (taker) whereby
the lessor conveys to the lessee in return for
rent the right to use an asset for an agreed
period of time. The ownership of the asset
continues to rest with the lessor whereas the
lessee enjoys the right of the use of the asset in
consideration of the rent paid to the lessor.
Example

 “A” purchases machinery worth Rs. 02 crores

from “B” on lease for 03 years against the
monthly rent of Rs. 60,000/-, Hence, “B” is a
Lessor and “A” is a Lessee. Ownership of
machinery lies with B but A can use it for
agreed period (03 years) in consideration of
the rent paid to Lessor.
 Types of Lease

Financial Lease Operating Lease

It is lease under which present
value of the minimum lease
payment at the inception of lease
exceed or is equal to substancially
the whole of fair value of leased
asset.

A lease other than financial lease

Is an operating lease. In it the
period of contract between the
lessor and the lessee is less than
the full expected useful life of the
asset.
Leases in the Financial Statement of Lessees

 Transactions pertaining to lease account should be with their financial

reality.
 If Lease transactions are not reflected in lessee’s B/S, the economic
resources and the level of obligations of an lessee are understated thereby
distorting financial ratios.
 The Liability for a leased asset should be presented seperately in the B/S
as a Current or Long term Liability as the case may be.
 The depreciation policy for a leased asset should be consistent with that
for depreciable asset which are owned, and the depreciation recognised
should be calculated on the basis set out in AS-06, Depreciating
Accounting.
 It is inappropriate to show depreciable expense for the same period as
finanacial expense as both are rarely the same lease payment.
Leases in the Financial Statement of Lessor

 The lessor should recognise assets given under lease in its B/S as
amount receivables equal to net invstmt in the lease.
 Manufacturer or dealer lessors should not quote artificially low rates of
interest to attract customers as selling profit would be restricted to that
which would apply if a commercial rates are charged.
 Initial Direct cost are recognised as an expense at the commencement
of the lease term because they are mainly related to earning the
manufacture’s or dealer’s selling profit.
 The depreciation of leased assets should be consistent with the normal
depreciation policy of the lessor for similar assets and the depreciation
charge should be calculated on the basis set out in AS- 06,
Depreciation Accounting.
Thank you

Prepared by

Patil Kiran S.
Khan Sadik Jahid
Kaswan Sunil R.
Mehta Mehul