AS 19: Leases

AS 19 coves the policies for accounting in regards to leases.

What is a lease?

According to the accounting standard, a lease is a transactional agreement between the lessor and the lessee. The lessor transacts with the lessee for the right to use an asset in exchange for payment or for a series of payments over a period of time agreed to by both the lessor and lessee.

All types of leases are covered by accounting standard 19 except the following below:

1. Natural resource lease agreements; ex. Oil, timbers, metals and gas
2. Licensing agreements; ex. Plays, patents, motion pictures, and other media
3. Land-use leases and agreements

The two types of leases are the following:

1. Finance Lease
2. Operating Lease

In AS 19, a finance lease is one in which the rewards and risks of the lease are transferred to the owner of asset. This may or may not affect the title, which can be transferred or withheld from transfer.

The following are examples of a Finance Lease:

1. A lease in which, at the end of the lease term, the assets are transferred to a lessee
2. A lease term stating that the lessee can purchase the assets from a lessor at a lower than fair price on the date in which the option became available
3. The total economic life of the asset is covered by the lease term even if the title isn’t transferred
4. The lease term in which the value of the minimum lease payments is the same as the fair value of a leased asset

Lessee accounting in the books in the case of finance lease should take the following steps below:

1. At the beginning of a lease, the lessee will recognize the lease as assets or liability at a rate equal to the fair value of lease assets.
2. Apportioning the payments of the lease into a finance charge
3. Allocating the finance charge to the periods during the lease term
4. Pass the journal entry in regards to depreciation

Finance Lease disclosure

1. The assets acquired on a lease need to be displayed separately
2. Each of the leased assets much display the net carrying amount on the balance sheet date
3. The Finance Lease at the balance sheet date must provide a reconciliation between the Minimum Lease Payment and their current value
4. The Finance Lease must disclose a minimum lease payment total by the balance sheet date, as well as the present value in the following time frames:
   • No later than a year
   • No later than a year but not later than five years
   • Later than five years
5. The upcoming minimum sublease payment is expected to be received at the balance sheet date
6. A general description of the lessee is significant to leasing arrangements

Operating Lease: Disclosures and accounting in the books

According to AS 19, a lease payment is documented in the profit and loss account as an expense. In case of Operating Lease, the following are necessary for a disclosure:

1. The future lease payment for the subsequent period must be
   • No later than a year
   • Later than a year but no later than five years
   • Later than five years
2. Total expected future lease payment
3. Lease payment is seen in the statement of Profit and Loss for the period
4. Impairment check should be written in the accounting book as per GAAP.

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