TaxTMI 
TaxTMI 
Leases
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.... for in connection with the operation or maintenance of such assets. On the other hand, this Standard does not apply to agreements that are contracts for services that do not transfer the right to use assets from one contracting party to the other. Definitions 3. The following terms are used in this Standard with the meanings specified: 3.1 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. 3.2 A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. 3.3 An operating lease is a lease other than a finance lease. 3.4 A non-cancellable lease is a lease that is cancellable only: (a) upon the occurrence of some remote contingency; or (b) with the permission of the lessor; or (c) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or (d) upon payment by the lessee of an additional amount such that, at inception, continuation of the lease is reasonably certain. 3.5 The inception of the lease is the earlier of the date of the lease agreement and the da....
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....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. 3.13 Unguaranteed residual value of a leased asset is the amount by which the residual value of the asset exceeds its guaranteed residual value. 3.14 Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor. 3.15 Unearned finance income is the difference between: (a) the gross investment in the lease; and (b) the present value of (i) the minimum lease payments under a finance lease from the standpoint of the lessor; and (ii) any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease. 3.16 Net investment in the lease is the gross investment in the lease less unearned finance income. 3.17 The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of (a) the minimum lease payments under a finance lease from ....
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....or and the lessee. 8. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than its form. Examples of situations which would normally lead to a lease being classified as a finance lease are: (a) the lease transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred; (d) at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and (e) the leased asset is of a specialised nature such that only the lessee can use it without major modifications being made. 9. Indicators of situations which individually or in combination could also lead to a lease being classified as a finance lease are: (a) if the lessee can cancel the lease, the....
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.... to the lessor. The lessor, however, estimates that the machinery would have a salvage value of only ₹ 3,500 on December 31, 20X2. The interest rate implicit in the lease is 16 per cent (approx.). This is calculated using the following formula: Fair Value = ALR + ALR +….. ALR + RV (1+r)1 (1+r)2 (1+r)n (1+r)n Where ALR is annual lease rental, RV is residual value (both guaranteed and unguaranteed), n is the lease term, r is interest rate implicit in the lease. The present value of minimum lease payments from the standpoint of the lessee is ₹ 2,35,500. The lessee would record the machinery as an asset at ₹ 2,35,500 with a corresponding liability representing the present value of lease payments over the lease term (including the guaranteed residual value). (b) In the above example, suppose the lessor estimates that the machinery would have a salvage value of ₹ 17,000 on December 31, 20X2. The lessee, however, guarantees a residual value of ₹ 5,000 only. The interest rate implicit in the lease in this case would remain unchanged at 16% (approx.). The present value of the minimum lease payments from the standpoint of the lessee....
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....rm so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Example In the example (a) illustrating paragraph 11, the lease payments would be apportioned by the lessee between the finance charge and the reduction of the outstanding liability as follows: Year Finance charge (Rs.) Payment (Rs.) Reduction in outstanding liability (Rs.) Outstanding liability (Rs.) Year 1 (January 1) 2,35,500 (December 31) 37,680 1,00,000 62,320 1,73,180 Year 2 (December 31) 27,709 1,00,000 72,291 1,00,889 Year 3 (December 31) 16,142 1,00,000 83,858 17,031[2] 17. In practice, in allocating the finance charge to periods during the lease term, some form of approximation may be used to simplify the calculation. 18. A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each accounting period. The depreciation policy for a leased asset should be consistent with that for depreciable assets which are owned, and the depreciation recognised should be calculated on the basis set out in Accounting Standard (AS) 6, Depreciation Accounting. If there is no reasonable certainty that the l....
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....nder non-cancellable subleases at the balance sheet date; and (f) 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 determined; (ii) the existence and terms of renewal or purchase options and escalation clauses; and (iii) restrictions imposed by lease arrangements, such as those concerning dividends, additional debt and further leasing. Provided that a Small and Medium Sized Company, as defined in the notification, may not comply with sub-paragraphs (c), (e) and (f). Operating Leases 23. Lease payments under an operating lease should be recognised as an expense in the statement of profit and loss on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user s benefit. 24. For operating leases, lease payments (excluding costs for services such as insurance and maintenance) are recognised as an expense in the statement of profit and loss on a straight line basis unless another systematic basis is more representative of the time pattern of the user s benefit, even if the payments ar....
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....reduced from both the principal and the unearned finance income. 30. Estimated unguaranteed residual values used in computing the lessor s gross investment in a lease are reviewed regularly. If there has been a reduction in the estimated unguaranteed residual value, the income allocation over the remaining lease term is revised and any reduction in respect of amounts already accrued is recognised immediately. An upward adjustment of the estimated residual value is not made. 31. Initial direct costs, such as commissions and legal fees, are often incurred by lessors in negotiating and arranging a lease. For finance leases, these initial direct costs are incurred to produce finance income and are either recognised immediately in the statement of profit and loss or allocated against the finance income over the lease term. 32. The manufacturer or dealer lessor should recognise the transaction of sale in the statement of profit and loss for the period, in accordance with the policy followed by the enterprise for outright sales. 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. ....
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....ii) later than one year and not later than five years; (iii) later than five years; (b) unearned finance income; (c) the unguaranteed residual values accruing to the benefit of the lessor; (d) the accumulated provision for uncollectible minimum lease payments receivable; (e) contingent rents recognised in the statement of profit and loss for the period; (f) a general description of the significant leasing arrangements of the lessor; and (g) accounting policy adopted in respect of initial direct costs. Provided that a Small and Medium Sized Company, as defined in the Notification, may not comply with sub-paragraphs (a) and (f). 38. As an indicator of growth it is often useful to also disclose the gross investment less unearned income in new business added during the accounting period, after deducting the relevant amounts for cancelled leases. Operating Leases 39. The lessor should present an asset given under operating lease in its balance sheet under fixed assets. 40. Lease income from operating leases should be recognised in the statement of profit and loss on a straight line basis over the lease term, unless another systematic basis is more representat....
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....r each of the following periods: (i) not later than one year; (ii) later than one year and not later than five years; (iii) later than five years; (c) total contingent rents recognised as income in the statement of profit and loss for the period; (d) a general description of the lessor s significant leasing arrangements; and (e) accounting policy adopted in respect of initial direct costs. Provided that a Small and Medium Sized Company, as defined in the notification, may not comply with sub-paragraphs (b) and (d). Sale and Leaseback Transactions 47. 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. The lease payments and the sale price are usually interdependent as they are negotiated as a package. The accounting treatment of a sale and leaseback transaction depends upon the type of lease involved. 48. If a sale and leaseback transaction results in a finance lease, any excess or deficiency of sales proceeds over the carrying amount should not be immediately recognised as income or loss in the financial statements of a seller-lessee. Instead, it should be deferred and amortised ....
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....s that Result in Operating Leases The Illustration does not form part of the accounting standard. Its purpose is to illustrate the application of the accounting standard. A sale and leaseback transaction that results in an operating lease may give rise to profit or a loss, the determination and treatment of which depends on the leased asset s carrying amount, fair value and selling price. The following table shows the requirements of the accounting standard in various circumstances. Sale price established at fair value (paragraph 50) Carrying amount equal to fair value Carrying amount less than fair value Carrying amount above fair value Profit No profit Recognise profit immediately Not applicable Loss No loss Not applicable Recognise loss immediately Sale price below fair value (paragraph 50) Profit No profit Recognise profit immediately No profit (note 1) Loss not compensated by future lease payments at below market price Recognise loss immediately Recognise loss immediately (note 1) Loss compensated by future lease payments at below market price Defer and amortise loss Defer and amortise loss (note 1) Sale price above fair value (paragraph 50) ....