ICAI Notes- Unit 5: Assets Based Accounting Standards | Advanced Accounting for CA Intermediate PDF Download

 Page 1


 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.135 
 
LEARNING OUTCOMES 
 
 
 
 
UNIT 5: ACCOUNTING STANDARD  19 LEASES 
 
After studying this unit, you will be able to comprehend– 
? What is a lease  
? What are the parameters for Classification of Leases  
? Accounting for leases in the Financial Statements of Lessees  
• Finance Leases  
• Operating Leases  
? Accounting for Leases in the Financial Statements of Lessors  
• Finance Leases  
• Operating Leases  
? Sale And Leaseback Transactions 
? Disclosures required as per the standard. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
Page 2


 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.135 
 
LEARNING OUTCOMES 
 
 
 
 
UNIT 5: ACCOUNTING STANDARD  19 LEASES 
 
After studying this unit, you will be able to comprehend– 
? What is a lease  
? What are the parameters for Classification of Leases  
? Accounting for leases in the Financial Statements of Lessees  
• Finance Leases  
• Operating Leases  
? Accounting for Leases in the Financial Statements of Lessors  
• Finance Leases  
• Operating Leases  
? Sale And Leaseback Transactions 
? Disclosures required as per the standard. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 5.136 
5.1 INTRODUCTION 
Before, we start with the standard, let us lay down the coverage of AS 19 from the 
examination point of view as under: 
Areas covered by AS 19: 
The objective of AS 19 is to prescribe, for lessees and lessors, the appropriate 
accounting policies and disclosures in relation to finance leases and operating 
leases.
What is a Lease? 
A Lease is an agreement whereby the Lessor (legal owner of an asset) conveys to 
the Lessee (another party) in return for a payment or series of periodic payments 
(Lease rents), the right to use an asset for an agreed period of time.  
5.2 APPLICABILITY OF AS 19 [SCOPE] 
The standard applies to all leases other than: 
(a) lease agreements to explore for or use of natural resources, such as oil, gas, 
timber metals and other mineral rights; and 
(b) licensing agreements for items such as motion picture films, video 
recordings, plays, manuscripts, patents and copyrights; and 
(c) lease agreements to use lands 
Special Issue - Related to Lease Accounting 
Sale and Lease back Transaction 
Accounting of a Lease (Finance and Opearting)
Books of Lessee Books of Lessor 
What is a lease and how do we classify a lease (Finance or Operating)?
Lessee's point of view Lessor's point of view
© The Institute of Chartered Accountants of India
Page 3


 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.135 
 
LEARNING OUTCOMES 
 
 
 
 
UNIT 5: ACCOUNTING STANDARD  19 LEASES 
 
After studying this unit, you will be able to comprehend– 
? What is a lease  
? What are the parameters for Classification of Leases  
? Accounting for leases in the Financial Statements of Lessees  
• Finance Leases  
• Operating Leases  
? Accounting for Leases in the Financial Statements of Lessors  
• Finance Leases  
• Operating Leases  
? Sale And Leaseback Transactions 
? Disclosures required as per the standard. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 5.136 
5.1 INTRODUCTION 
Before, we start with the standard, let us lay down the coverage of AS 19 from the 
examination point of view as under: 
Areas covered by AS 19: 
The objective of AS 19 is to prescribe, for lessees and lessors, the appropriate 
accounting policies and disclosures in relation to finance leases and operating 
leases.
What is a Lease? 
A Lease is an agreement whereby the Lessor (legal owner of an asset) conveys to 
the Lessee (another party) in return for a payment or series of periodic payments 
(Lease rents), the right to use an asset for an agreed period of time.  
5.2 APPLICABILITY OF AS 19 [SCOPE] 
The standard applies to all leases other than: 
(a) lease agreements to explore for or use of natural resources, such as oil, gas, 
timber metals and other mineral rights; and 
(b) licensing agreements for items such as motion picture films, video 
recordings, plays, manuscripts, patents and copyrights; and 
(c) lease agreements to use lands 
Special Issue - Related to Lease Accounting 
Sale and Lease back Transaction 
Accounting of a Lease (Finance and Opearting)
Books of Lessee Books of Lessor 
What is a lease and how do we classify a lease (Finance or Operating)?
Lessee's point of view Lessor's point of view
© The Institute of Chartered Accountants of India
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.137 
 
5.3 DEFINITIONS 
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. 
The lease term is the non-cancellable period for which the lessee has agreed to 
take on lease the asset together with any further periods for which the lessee has 
the option to continue the lease of the asset, with or without further payment, 
which option at the inception of the lease it is reasonably certain that the lessee 
will exercise. 
The inception of the lease is the earlier of the date of the lease agreement and 
the date of a commitment by the parties to the principal provisions of the lease. 
Minimum lease payments are the payments over the lease term that the lessee 
is, or can be required, to make excluding contingent rent, costs for services and 
taxes to be paid by and reimbursed to the lessor, together with: 
(a) in the case of the lessee, any residual value guaranteed by or on behalf of 
the lessee; or 
(b) in the case of the lessor, any residual value guaranteed to the lessor: 
(i)  by or on behalf of the lessee; or 
(ii)  by an independent third party financially capable of meeting this 
guarantee. 
However, if the lessee has an 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 that, at the inception of the lease, is reasonably certain to be 
exercised, the minimum lease payments comprise minimum payments payable 
over the lease term and the payment required to exercise this purchase option. 
© The Institute of Chartered Accountants of India
Page 4


 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.135 
 
LEARNING OUTCOMES 
 
 
 
 
UNIT 5: ACCOUNTING STANDARD  19 LEASES 
 
After studying this unit, you will be able to comprehend– 
? What is a lease  
? What are the parameters for Classification of Leases  
? Accounting for leases in the Financial Statements of Lessees  
• Finance Leases  
• Operating Leases  
? Accounting for Leases in the Financial Statements of Lessors  
• Finance Leases  
• Operating Leases  
? Sale And Leaseback Transactions 
? Disclosures required as per the standard. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 5.136 
5.1 INTRODUCTION 
Before, we start with the standard, let us lay down the coverage of AS 19 from the 
examination point of view as under: 
Areas covered by AS 19: 
The objective of AS 19 is to prescribe, for lessees and lessors, the appropriate 
accounting policies and disclosures in relation to finance leases and operating 
leases.
What is a Lease? 
A Lease is an agreement whereby the Lessor (legal owner of an asset) conveys to 
the Lessee (another party) in return for a payment or series of periodic payments 
(Lease rents), the right to use an asset for an agreed period of time.  
5.2 APPLICABILITY OF AS 19 [SCOPE] 
The standard applies to all leases other than: 
(a) lease agreements to explore for or use of natural resources, such as oil, gas, 
timber metals and other mineral rights; and 
(b) licensing agreements for items such as motion picture films, video 
recordings, plays, manuscripts, patents and copyrights; and 
(c) lease agreements to use lands 
Special Issue - Related to Lease Accounting 
Sale and Lease back Transaction 
Accounting of a Lease (Finance and Opearting)
Books of Lessee Books of Lessor 
What is a lease and how do we classify a lease (Finance or Operating)?
Lessee's point of view Lessor's point of view
© The Institute of Chartered Accountants of India
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.137 
 
5.3 DEFINITIONS 
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. 
The lease term is the non-cancellable period for which the lessee has agreed to 
take on lease the asset together with any further periods for which the lessee has 
the option to continue the lease of the asset, with or without further payment, 
which option at the inception of the lease it is reasonably certain that the lessee 
will exercise. 
The inception of the lease is the earlier of the date of the lease agreement and 
the date of a commitment by the parties to the principal provisions of the lease. 
Minimum lease payments are the payments over the lease term that the lessee 
is, or can be required, to make excluding contingent rent, costs for services and 
taxes to be paid by and reimbursed to the lessor, together with: 
(a) in the case of the lessee, any residual value guaranteed by or on behalf of 
the lessee; or 
(b) in the case of the lessor, any residual value guaranteed to the lessor: 
(i)  by or on behalf of the lessee; or 
(ii)  by an independent third party financially capable of meeting this 
guarantee. 
However, if the lessee has an 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 that, at the inception of the lease, is reasonably certain to be 
exercised, the minimum lease payments comprise minimum payments payable 
over the lease term and the payment required to exercise this purchase option. 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
 
 
 
 5.138 
The above definition can be summarized as under: 
Note: The definition can be seen separately from the point of view of Lessee and 
Lessor.  
From the point of view of Lessee 
Case I – Lessee will return the asset 
at the end of the lease term 
Case II – Lessee will retain the asset 
at the end of the lease term (as he 
has option to buy the asset and it is 
reasonably certain that he will exercise 
the option) 
Payments over the lease term that 
the lessee is, or can be required, to 
make excluding: 
(a) contingent rent. 
(b) costs for services and 
taxes to be paid by and 
reimbursed to the lessor. 
+  
Any residual value guaranteed by or 
on behalf of the lessee. 
Payments over the lease term that the 
lessee is, or can be required, to make 
excluding: 
(a) contingent rent. 
(b) costs for services and taxes 
to be paid by and 
reimbursed to the lessor. 
+  
Payment required to exercise the 
purchase option. 
 
From the point of view of Lessor 
Case I – Lessee will return the asset 
at the end of the lease term 
Payments over the lease term that 
the lessee is, or can be required, to 
make excluding: 
(a) contingent rent. 
Case II – Lessee will retain the asset 
at the end of the lease term (as he 
has option to buy the asset and it is 
reasonably certain that he will exercise 
the option) 
Same as Lessee given above 
© The Institute of Chartered Accountants of India
Page 5


 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.135 
 
LEARNING OUTCOMES 
 
 
 
 
UNIT 5: ACCOUNTING STANDARD  19 LEASES 
 
After studying this unit, you will be able to comprehend– 
? What is a lease  
? What are the parameters for Classification of Leases  
? Accounting for leases in the Financial Statements of Lessees  
• Finance Leases  
• Operating Leases  
? Accounting for Leases in the Financial Statements of Lessors  
• Finance Leases  
• Operating Leases  
? Sale And Leaseback Transactions 
? Disclosures required as per the standard. 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
ADVANCED ACCOUNTING 
 
 
 
 5.136 
5.1 INTRODUCTION 
Before, we start with the standard, let us lay down the coverage of AS 19 from the 
examination point of view as under: 
Areas covered by AS 19: 
The objective of AS 19 is to prescribe, for lessees and lessors, the appropriate 
accounting policies and disclosures in relation to finance leases and operating 
leases.
What is a Lease? 
A Lease is an agreement whereby the Lessor (legal owner of an asset) conveys to 
the Lessee (another party) in return for a payment or series of periodic payments 
(Lease rents), the right to use an asset for an agreed period of time.  
5.2 APPLICABILITY OF AS 19 [SCOPE] 
The standard applies to all leases other than: 
(a) lease agreements to explore for or use of natural resources, such as oil, gas, 
timber metals and other mineral rights; and 
(b) licensing agreements for items such as motion picture films, video 
recordings, plays, manuscripts, patents and copyrights; and 
(c) lease agreements to use lands 
Special Issue - Related to Lease Accounting 
Sale and Lease back Transaction 
Accounting of a Lease (Finance and Opearting)
Books of Lessee Books of Lessor 
What is a lease and how do we classify a lease (Finance or Operating)?
Lessee's point of view Lessor's point of view
© The Institute of Chartered Accountants of India
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.137 
 
5.3 DEFINITIONS 
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. 
The lease term is the non-cancellable period for which the lessee has agreed to 
take on lease the asset together with any further periods for which the lessee has 
the option to continue the lease of the asset, with or without further payment, 
which option at the inception of the lease it is reasonably certain that the lessee 
will exercise. 
The inception of the lease is the earlier of the date of the lease agreement and 
the date of a commitment by the parties to the principal provisions of the lease. 
Minimum lease payments are the payments over the lease term that the lessee 
is, or can be required, to make excluding contingent rent, costs for services and 
taxes to be paid by and reimbursed to the lessor, together with: 
(a) in the case of the lessee, any residual value guaranteed by or on behalf of 
the lessee; or 
(b) in the case of the lessor, any residual value guaranteed to the lessor: 
(i)  by or on behalf of the lessee; or 
(ii)  by an independent third party financially capable of meeting this 
guarantee. 
However, if the lessee has an 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 that, at the inception of the lease, is reasonably certain to be 
exercised, the minimum lease payments comprise minimum payments payable 
over the lease term and the payment required to exercise this purchase option. 
© The Institute of Chartered Accountants of India
 
 
ADVANCED ACCOUNTING 
 
 
 
 5.138 
The above definition can be summarized as under: 
Note: The definition can be seen separately from the point of view of Lessee and 
Lessor.  
From the point of view of Lessee 
Case I – Lessee will return the asset 
at the end of the lease term 
Case II – Lessee will retain the asset 
at the end of the lease term (as he 
has option to buy the asset and it is 
reasonably certain that he will exercise 
the option) 
Payments over the lease term that 
the lessee is, or can be required, to 
make excluding: 
(a) contingent rent. 
(b) costs for services and 
taxes to be paid by and 
reimbursed to the lessor. 
+  
Any residual value guaranteed by or 
on behalf of the lessee. 
Payments over the lease term that the 
lessee is, or can be required, to make 
excluding: 
(a) contingent rent. 
(b) costs for services and taxes 
to be paid by and 
reimbursed to the lessor. 
+  
Payment required to exercise the 
purchase option. 
 
From the point of view of Lessor 
Case I – Lessee will return the asset 
at the end of the lease term 
Payments over the lease term that 
the lessee is, or can be required, to 
make excluding: 
(a) contingent rent. 
Case II – Lessee will retain the asset 
at the end of the lease term (as he 
has option to buy the asset and it is 
reasonably certain that he will exercise 
the option) 
Same as Lessee given above 
© The Institute of Chartered Accountants of India
 
 
 ASSETS BASED ACCOUNTING STANDARDS 
 
 
 
 
    
 
 5.139 
 
(b) costs for services and taxes to 
be paid by and reimbursed to 
the lessor. 
+  
Any residual value guaranteed: 
(a) by or on behalf of the lessee; or 
(b) by an independent third party 
financially capable of meeting 
this guarantee. 
 
Fair value is the amount for which an asset could be exchanged or a liability 
settled between knowledgeable, willing parties in an arm’s length transaction. 
Economic life 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 of a leased asset 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. 
Note: The economic life is always greater than the useful life of the asset. Useful 
life represents the depreciable life of an asset whereas, economic life represents 
the total life during which an asset is capable of generating economic benefits.  
Residual value of a leased asset is the estimated fair value of the asset at the end 
of the lease term. 
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 
© The Institute of Chartered Accountants of India