AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
Leases
X X X X Extracts X X X X
X X X X Extracts X X X X
....plies to agreements that transfer the right to use assets even though substantial services by the lessor may be called 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 &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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. 3.11 Residual value of a leased asset is the estimated fair value of the asset at the end of the lease term. 3.12 Guaranteed residual value 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 (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. 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....echnological 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 realisation of residual value. 6. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership. 7. Since the transaction between a lessor and a lessee is based on a lease agreement common to both parties, it is appropriate to use consistent definitions. The application of these definitions to the differing circumstances of the two parties may sometimes result in the same lease being classified differently by the lessor 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 transfe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d recognise the lease as an asset and a liability. Such recognition should be at an amount equal to the fair value of the leased asset at the inception of the lease. However, if the fair value of the leased asset exceeds the present value of the minimum lease payments from the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payments from the standpoint of the lessee. In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee s incremental borrowing rate should be used. Example (a) An enterprise (the lessee) acquires a machinery on lease from a leasing company (the lessor) on January 1, 20X0. The lease term covers the entire economic life of the machinery, i.e., 3 years. The fair value of the machinery on January 1, 20X0 is Rs. 2,35,500. The lease agreement requires the lessee to pay an amount of Rs. 1,00,000 per year beginning December 31, 20X0. The lessee has guaranteed a residual value of Rs. 17,000 on December 31, 20X2 to the lessor. The lessor, however, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the economic resources and the level of obligations of an enterprise are understated thereby distorting financial ratios. It is therefore appropriate that a finance lease be recognised in the lessee s balance sheet both as an asset and as an obligation to pay future lease payments. At the inception of the lease, the asset and the liability for the future lease payments are recognised in the balance sheet at the same amounts. 14. It is not appropriate to present the liability for a leased asset as a deduction from the leased asset in the financial statements. The liability for a leased asset should be presented separately in the balance sheet as a current liability or a long-term liability as the case may be. 15. Initial direct costs are often incurred in connection with specific leasing activities, as in negotiating and securing leasing arrangements. The costs identified as directly attributable to activities performed by the lessee for a finance lease are included as part of the amount recognised as an asset under the lease. 16. Lease payments should be apportioned between the finance charge and the reduction of the outstanding liability. The finance charge should be all....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er the inception of the lease. 21. To determine whether a leased asset has become impaired, an enterprise applies the Accounting Standard dealing with impairment of assets^[3], that sets out the requirements as to how an enterprise should perform the review of the carrying amount of an asset, how it should determine the recoverable amount of an asset and when it should recognise, or reverse, an impairment loss. 22. The lessee should, in addition to the requirements of AS 10, Accounting for Fixed Assets, AS 6, Depreciation Accounting, and the governing statute, make the following disclosures for finance leases: (a) assets acquired under finance lease as segregated from the assets owned; (b) for each class of assets, the net carrying amount at the balance sheet date; (c) a reconciliation between the total of minimum lease payments at the balance sheet date and their present value. In addition, an enterprise should disclose the total of minimum lease payments at the balance sheet date, and their present value, for each of the following periods: &....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (iii) later than 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 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 l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to that which would apply if a commercial rate of interest were charged. Initial direct costs should be recognised as an expense in the statement of profit and loss at the inception of the lease. 33. Manufacturers or dealers may offer to customers the choice of either buying or leasing an asset. A finance lease of an asset by a manufacturer or dealer lessor gives rise to two types of income: (a) the profit or loss equivalent to the profit or loss resulting from an outright sale of the asset being leased, at normal selling prices, reflecting any applicable volume or trade discounts; and (b) the finance income over the lease term. 34. The sales revenue recorded at the commencement of a finance lease term by a manufacturer or dealer lessor is the fair value of the asset. However, if the present value of the minimum lease payments accruing to the lessor computed at a commercial rate of interest is lower than the fair value, the amount recorded as sales revenue is the present value so computed. The cost of sale recognised at the commencement of the lease term is the cost, or carrying amount if different, of the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (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 representative of the time pattern in which benefit derived from the use of the leased asset is diminished. 41. Costs, including depreciation, incurred in earning the lease income are recognised as an expense. Lease income (excluding receipts for services provided such as insurance and maintenance) is recognised in the statement of profit and loss on a straight line basis over the lease term even if the receipts are not on such a basis, unless another systematic basis is more representative of the time pattern in which benefit derived from the use of the leased asset is diminished. 42. Initial direct costs incurred specifically to earn revenu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts 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 over the lease term in proportion to the depreciation of the leased asset. 49. If the leaseback is a finan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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) &....